Stocks and Bonds Fall on 40-Year High Inflation Data

The Dow (-0.4%), NASDAQ (-3.9%), and S&P 500 (-2.1%) all fell again last week, extending their losses for the year. Similarly, taxable and tax-free municipal bonds each lost about 1% for the week, also extending their losses for the year. The story driving both stocks and bonds downward continues to be inflation and the Fed’s intentions of raising interest rates to (hopefully) pare back inflation. The bigger story behind bonds is the mass exodus, but many economists think that taxable corporate bonds may have reached their low. Rising interest rates have also impact the tech-heavy NASDAQ index, which has fallen far more than the Dow and S&P 500 for the year.

In economic news last week, the Consumer Price Index (CPI) reported that inflation rose by 8.5% over last year, the highest rate of inflation in 40 years. With that, the Fed may raise interest rates by 0.5% at their next meeting in May, which is what caused the markets to tumble. That said, many economists believe that gas prices may have reached their peak, and that the year-over-year inflation may begin to slow down in the coming months. Further, the CPI report also noted that used car prices were down 3.8% since last month. Yay!

As just noted, not all the news was bad, despite the high inflation data. Michigan’s consumer sentiment report was well above expectations, and retail sales actually rose last month, demonstrating that the consumer seems to be somewhat resilient to the inflationary pressures. Remember that almost 70% of the US economy is driven by the consumer, so economic growth may not be hampered by inflation as bad as feared. Further, corporate earnings estimates are rising at the same time the markets are falling, so the market’s PE ratio is coming back to earth again. We are now heading into the teeth of corporate earnings season, so let’s hope for favorable reports and future projections.

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