Markets Drop on High Inflation Data
The Dow (-0.2%), NASDAQ (-1.6%), and S&P 500 (-0.9%) each fell for the week. Meanwhile, taxable bonds gained about 0.7% and tax-free municipal bonds extended their streak to 5 consecutive weeks of gains, rising about 0.2%. The gain in bonds was mainly because the 10-year Treasury yield dropped from about 3.1% to 2.93%.
Last week was a very choppy week, and would have been far deeper into negative territory, if not for a 2% gain on Friday. The 800-pound gorilla has not left the room – inflation persists and is actually getting worse. On Wednesday and Thursday, the two most significant measures of inflation were released for the month of June. The Consumer Price Index (CPI) rose by 9.1% and the Producer Price Index (PPI) rose by 11.3%. Both of these inflationary measures are the highest in over 40 years. After the release of that data, speculation began swirling that the Fed may raise interest rate by a full 1.0% at its meeting later this month, causing markets to drop even more. However, the retail sales report released on Friday showed a rise in consumer spending of 1.0% in June, causing the markets to rally. But wait – inflation was up 1.3%, so real consumer spending actually went down a little bit. Nevertheless, this report was stronger than expected and gave a hint that we are not in a recession.
We now head into the teeth of corporate earnings season. About 7% of the S&P 500 companies have already reported, and results have been mixed so far. Of those companies, 60% exceeded expectations, but the growth rate was -8.2%, compared to the +4.8% expected. It’s still too early to tell, as most of the big companies are still yet to report, but I don’t like those results so far.
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About the Author: Michael Menninger, CFP®️