Last week, the Dow (-0.1%), NASDAQ (-2.4%), and S&P 500 (-1.1%) had modest losses. Similarly, taxable bonds fell a little more than 1% while tax-free municipal bonds fell a little less than 1%. Stock and bond prices fell last week for the same basic reason – inflation and interest rate concerns.
During the week, several members of the Fed (including Chairman Powell) gave speeches and interviews warning the markets of the possibility of further rate hikes and keeping interest rates higher for longer than the markets may be expecting. Of course, this sends both the stock and bond markets down, but only modestly. The concern for higher interest rates was further justified by a strong unemployment report on Friday. Key inflation indicators this week (CPI on Tuesday and PPI on Thursday) will attract the attention of investors and economists, so the markets can be expected to respond to those reports.
Corporate earnings season is winding down, and earnings have been roughly in line with expectations. However, corporations are warning of reduced profits in the coming months and quarters. While still profitable, corporate earnings are about 5% lower than the same quarter a year earlier. Earnings growth of S&P 500 companies is estimated to be a tepid 4% for 2022 and 2.4% for 2023. This provides evidence that the interest rate hikes and tight monetary policy are working their way into the economy.
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