Stocks and Bonds Whacked on Inflation Fears

The Dow (-1.9%), NASDAQ (-2.3%), and S&P 500 (-1.9%) fell sharply last week.  Similarly, taxable bonds and tax-free municipal bonds fell about 0.9%, as the 10-year Treasury yield spiked 0.17%, closing the week at 4.77%.

Last week was the convergence of “good news is bad news” and “bad news is bad news”.  From the good news department, the Institute of Supply Managers (ISM) Service report showed overall strength, including the forward-looking New Orders component.  Additionally, the US economy added 250,000 jobs in December, and the number of unemployment claims fell last week.  These data demonstrate that the US economy and job market continue to remain strong, which can also be considered inflationary.  The bad news?  Well, in addition to the strong economic data, the prices component of the ISM report showed a surprisingly large increase.  Plus, the Fed meeting minutes were released and showed that several members of the Fed committee were on the fence as to cutting rates in December (they did cut rates), and that the committee is at the point of slowing the pace of rate cuts.

In short, investors are fearing that inflation is rearing its ugly head again, causing a selloff in both stocks and bonds.  Thus, the odds of an interest rate cut in the first half of the year have dropped significantly, and the bond market is now pricing in only one rate cut in 2025.  Worse yet, some investors are concerned that the Fed may consider raising rates again, albeit unlikely.  We all saw what happened in 2022 on the heels of nasty inflation and when the Fed raised rates aggressively – both stocks and bonds were down sharply.  We don’t think that is the case here, so it seems that we are just giving back some of the lofty gains that were seen over the past two years.  This week could throw a log onto the fire, or it may throw some water on it, as two key inflations gauges are being released.  Then, we have the new President taking office next Monday and the start of corporate earnings season.  A lot going on for the remainder of January.  Strap on the boots!

Have a great day and terrific week.

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