Markets Sharpest Rally Since 2020; Bonds Continue to Lag

We couldn’t have ended the winter much better, as the market soared in their final week.  The Dow (+5.5%), NASDAQ (+8.2%), and S&P 500 (+6.2%) each erased two weeks of losses, as they had their strongest weekly gains since November 2020.  Conversely, bonds continued their tailspin, as taxable bonds fell about 0.3% - 0.5%, and tax-free municipal bonds fell 0.5% - 0.8%, continuing to react to inflationary pressures and anticipated rising interest rates.

The Fed raised short term interest rates last week by 0.25% as expected, but investors typically focus more on what the Fed says, and the Fed’s forecasts were not good.  The Fed forecasted higher inflation and lower GDP growth, so they estimated a total of seven rate hikes in this cycle.  The Conference Board released the February Leading Economic Index (LEI) last week, and actually showed growth over January, with 7 of the 10 indictors being positive.  A big concern should be that consumer sentiment has remained negative since August 2021.  It should also be noted that the Conference Board stated that the February LEI did not reveal the full impact of the Russia / Ukraine conflict, which could signal a lower than expected growth for the first half of 2022.  In the face of all this negative economic news, why did the markets go up so much last week?  Beats me, but one report says it was a rally from investors previously calling for a recession too early.  I’m not a believer in last week’s market rally, but I’m not complaining, either.

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About the Author: Michael Menninger, CFP®️