In another volatile week, the Dow (-1.2%), NASDAQ (-2.8%) and S&P 500 (-1.2%) all fell. Meanwhile, also in a very volatile week, taxable bonds gained bout 0.5% - 1.0%, but tax-free municipal bonds fell about 0.2% - 0.4%. Taxable bonds gained, as global fears and flight to safety won the tug-of-war over inflation last week.
The markets have continued to respond to the two topics leading the headlines – the Ukraine conflict and inflation – the latter of which is most noticeable with the rapid rise of gasoline prices that are visible to everyone on a daily basis. The biggest “fears” associated with the Ukraine conflict is the concerns that Russia could escalate this into a war with NATO countries, and most notable the US. There are also concerns that Russia could or would use nuclear weapons and if they did, everything will likely be vastly different in the future, anyway. There was also an initial concern when Russia took over a nuclear power plant that had been hit by a missile, but fears of a widespread nuclear leak were quickly debunked. So long as the conflict remains with Russia and Ukraine, we can expect volatility in the markets.
From a fundamental perspective, the recent drop in the markets and rising corporate earnings have caused the market PE ratio to move lower, and more consistent with historical values. That implies that the markets are more fairly priced, and some pundits even think they are approaching a point where they may be under priced. The US reported strong economic data last week, as the US gained 678,000 jobs in February, far more than expected. Further, the US manufacturing data came in very strong in February, another signal that the economic impacts of the COVID virus may be going away. The Fed is expected to raise interest rates at its meeting next week, but by “only” 0.25%, which is less than what Wall Street had expected only a week earlier. That was met as good news for the markets, but masked by the Ukraine conflict.
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