Markets Drop Sharply on More Inflation Worries

The Dow (-3.0%), NASDAQ (-3.3%), and S&P 500 (-2.7%) all fell sharply for the week, and also took the Dow into negative territory for 2023.  Similarly, taxable bonds were down almost 1% while tax free municipal bonds were down about 0.5%.  Reflecting the loss in bond values, the 10-year Treasury also shot up to 3.94%, closing in on the milestone of 4%.

Last week featured a batch of better-than-expected economic growth data implying that inflationary pressure is not slowing at the pace that investors had hoped for.  As a result, both stocks and bonds reacted negatively.  Then on Friday, the Fed-favored inflation measure, Personal Consumption Expenditures (PCE) was released and went up 0.6% over the prior month.  Adding fuel to the fire, multiple members of the Fed were on record as saying they felt a 0.5% interest rate hike would have been justified (in lieu of the lesser rate hike of 0.25%) in February, raising the chances of a larger rate hike in March.  These reports followed hotter-than-expected inflation data from the prior week, causing more selling pressure on stocks and bonds last week.  The stock market just extended its losing streak to the 3rd consecutive week of declines. 

More economic data is expected to be reported this week, which will provide a clearer picture of January growth.  Many economists say that the unexpected growth in January was a result of the 8.7% cost of living increase for Social Security recipients and unseasonably warm temperatures.  I’m no meteorologist, but February seemed awfully warm, too.   That’s great for the economy, but not for inflation, which has caused the headwinds for the stock and bond markets for over a year now.

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