The Dow (+1.1%), NASDAQ (+2.4%), and S&P 500 (+1.6%) each gained for the second straight week, reversing the sharply downward trend since the beginning of the year. Conversely, taxable bonds continued their slide by losing close to 1%, but tax-free municipal bonds reversed their recent trend by gaining almost 0.5%.
The two main drivers of the markets right now are corporate earnings reports and the Fed’s expected response to inflation by raising interest rates. As for corporate earnings, we are in the height of the earnings season, and we were greeted with mixed results from two tech giants, but overall very good earnings. Meta (parent company of Facebook) reported disappointing earnings while Amazon reported strong earnings, and the stock markets reacted accordingly. A series of very strong jobs data were also reported last week, as unemployment claims were lower than expected, and the number of jobs gained in January (and revised upward from December) were well above expectations.
On the surface, good jobs data is indicative of a strong economy. However, it is also a metric closely watched by the Fed, because strong jobs data allows the Fed more room to raise interest rates to help combat inflation. On that specific note, all eyes will be on Thursday’s report of January’s Consumer Price Index (CPI) which is the most important measure of inflation. If that continues to remain high, that paves the way for the Fed to raise interest rates in March at its next meeting. Raising rates tends to adversely impacts stocks and bonds, but those lower prices may already be baked in.
Investors should be receiving their January statements, and they won’t be pretty, as they can expect drops in values of about 4% - 8%, depending on their level of risk. Investors should also be receiving tax documents, but should also know that tax documents for their non-retirement accounts may not arrive until mid- to late February.
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