Markets Fall for Sixth Straight Week on Continued Inflation Concerns

The Dow (-2.1%), NASDAQ (-2.8%), and S&P 500 (-2.4%) each lost for the 6th week in a row, with the Dow sliding a 7th consecutive week for the first time in decades.  Thanks to a mid-day rally on Thursday and strong day on Friday, the S&P 500 escaped reaching bear market territory (a drop of 20% since its recent high).  Meanwhile, taxable bonds reversed course, showing a gain of about 0.5% last week.  Unfortunately, the same wasn’t true for tax-free municipal bonds, as they continued their slides over 1% last week, sending their YTD losses into double digits that are worse than the Dow and close to that of the S&P 500.  We haven’t seen bonds perform this poorly since the 2008 global financial crisis.  With pressure on both stocks and bonds, the traditional 60/40 stock/bond portfolio hasn’t seen this kind of dual attack in recent history, except for 2008 and 1987.

So, what’s the problem?  Inflation, inflation, and inflation.  Key measures of inflation were released last week in the Consumer Price Index (CPI) and Producer Price Index (PPI).  The CPI came in at 8.3%, which was slightly less than the prior month of 8.5%, but still above consensus estimates of 7.9%.  The PPI came in at 11%.  Inflation hurts the consumer, and consumer spending represents 68% of the US economy.  Inflation can also hurt businesses, as they absorb the increased cost of goods while many cannot pass them on to the consumer, so that adversely impacts their profits.  While these numbers are very bad for the economy, there seems to be some silver lining.  Supply chain disruptions seem to be subsiding, and some of the core inflation components are actually coming down.  In other words, there seems to be a glimmer of hope that inflation may subside a bit, and the bond market rally last week comes as a result of the belief that the Fed may not raise interest rates fewer times this year than previously expected.

If you haven’t read it yet, I would encourage you to read our economic outlook published last week.  I also had the pleasure of interviewing Gene Goldman, CFA, Chief Investment Office / Director of Research for Cetera Investment Management on my TV show, as we reviewed the economy and the markets.   These were fascinating interviews and those shows will air this week and next week on YouTube, social media, and my website.

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