Stocks and Bonds Fall on Inflation Reports

The Dow (-2.4%), NASDAQ (-0.5%), and S&P 500 (-1.5%) all fell sharply for the week.  Similarly, taxable bonds fell about 0.7% and tax-free municipal bonds fell about 0.1%.  The 10-year Treasury yield jumped by 0.13% to end the week at 4.52%, its highest level since the peak in late 2023.

Two sets of key inflation data were reported last week, and both of them came in higher than expected, and also higher than the previous month.  The most recognized metric, Consumer Price Index (CPI), rose by 3.5% year over year (Y/Y) and 0.4% month over month (M/M), while the Producer Price Index (PPI) rose 2.1% Y/Y, the highest since April 2023.  These elevated inflationary readings have subsequently reduced the chances from 56% to 30% that the Fed will cut interest rates in June.  This will also likely reverse the trend that mortgage rates have been taking lately, as those rates had been decreasing.  In short, these inflationary readings had negative impacts on both stocks and bonds.

Over the weekend, there was an attack on Israel by Iran, but thankfully most of the attacks were effectively defended, so casualties were limited.  However, the threat of more widespread conflicts in the Middle East continues to be on the rise.  To my surprise, stock futures are up this morning, but they seem to be responding to strong earnings by Goldman Sachs, as the first wave of corporate earnings are rolling in.  In the coming weeks, the spotlight will be on corporate profits and their future projections, as we are now entering earnings season.  Many investors and economists will be eying results from bellwether retailers like Walmart, Target, and Home Depot, but they won’t be reporting until May.  Those large retailers tend to reflect how consumers are doing, as the consumer represents about 68% of the US economy.   With interest rates rising, earnings season now underway, and increased tension in the Middle East, the markets have good reason to be volatile for a while.  We will continue to be observing these situations and their potential impacts on portfolio performance, but we also want to impress that this volatility is not something that should keep you up at night.

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