Markets Drop on Inflationary Pressures and Russia / Ukraine Conflict

In another tumultuous week for the markets, the Dow (-1.9%), NASDAQ (-3.5%), and S&P 500 (-2.8%) dropped, sending the Dow into correction territory (10% below its peak) and the NASDAQ into bear market territory (20% off its peak).  The best performing sectors were energy and utilities, along with high-quality and dividend paying stocks.  Bonds also got crushed, as taxable and tax-free municipal bonds each lost nearly 2% for the week, as they continue to respond adversely to inflationary pressures.

The Consumer Price Index (CPI - the primary measure of inflation) increased 7.9% in February, the third month in a row of 40-year inflation records.  Sadly, that doesn’t even include the recent and rapid rise in gasoline prices the past two weeks.  Higher prices at the pump are weighing on consumer sentiment, and the University of Michigan Consumer Sentiment Index hit a 10-year low last week.  These data come in at the precise time that the Fed will be meeting this week, and is expected to raise interest rates by 0.25%.  On a positive (?) note, pundits believe the Fed may not raise rates as many times this year, as there is concern of an economic slowdown in the US due to inflationary pressures to businesses and the consumer.  Thus, the Fed is walking a tight rope between combatting inflation and sending the economy into a recession with too many rate hikes.

Rather than sounding the doom and gloom alarm, the fundamentals of the US economy have been fairly strong, as employment numbers have been increasing over 500K jobs per month the last three months.  The US Leading Economic Index is also still in very positive territory, and with the recent drops in the markets, forward PE ratios are coming back to earth again, as they now sit at about 18.2.  The key moving forward is seeing how resilient the US economy will be to inflation, and also assuming that the US doesn’t get dragged into a Russia / Ukraine conflict that seems to be escalating.

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