Stocks and Bonds Drop on Inflation Data

The Dow (-0.9%), NASDAQ (-0.3%), and S&P 500 (-0.3%) each lost less than one percent in a volatile week of trading.  Meanwhile, taxable bonds and tax-free municipal bonds lost about 0.2% - 0.5% last week.  Both the stock and bond markets have been trading in tandem as a result of the same news regarding inflationary pressures.

Two measures of inflation are the Consumer Price Index (CPI) and the Produce Price Index (PPI), and they were both reported last week.  For the month of December, the year over year PPI rose 9.7%, the highest since that metric began being measured in 2010.  The CPI rose 7.0%, the highest since June 1982.  The core CPI (excluding food and energy) rose 5.9%, which compares to a 10-year average of 1.9%.  To reiterate, the main concern for inflation to the markets is the expectation that the Fed will need to raise interest rates to combat inflation.  An increase in interest rates puts pressure on both the stock and bond markets.

We are also now heading into 4th quarter corporate earnings season, as we hope that robust earnings and forecasts can offset inflationary pressures.  So far, 12 of the 20 companies that have reported earnings have also noted that labor shortages have put a drag on their earnings.  More attention will likely be placed on the companies’ earnings forecasts than their prior quarter’s earnings.  We can expect more volatility over the coming weeks, but our biggest concern is the monthly inflation data, so we have another month before we see another set of that data that can hopefully show that inflation is slowing down like some economists are predicting.

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