Stocks Indices and Bonds Fall on Inflationary Pressure

The Dow (-0.1%), NASDAQ (-1.3%), and S&P 500 (-0.4%) were all down last week in what I would consider a strange week, as the broad market was actually up, as evidenced by most mutual funds, ETFs, and portfolios that contained a majority with stocks.  Meanwhile, taxable bonds lost about 0.6% and tax-free municipal bonds lost about 0.1%, as the 10-year Treasury yield rose 0.12% to 4.29%.

Last week was a pretty rough week for economic data.  Two sets of inflation data – the Consumer Price Index (CPI) and Producer Price Index (PPI) both came in higher than expected, raising concerns that inflation hasn’t gone away yet.  That put pressure on the markets on both days these data were reported.  Additionally, retail sales and industrial production for January were also below expectations, indicating there may be pressure on the overall economy.

These sets of data are closely monitored by the Fed.  Mainly because of the inflation data, the chance of the Fed lowering interest rates at it March meeting have dropped sharply.  Of course, our CFA consultants always like to remind us that one data point doesn’t constitute a trend, but all that data is certainly worth considering.  The Fed raises rates to combat inflation, as it causes economic growth to slow down.  This last set of data puts the Fed into a conundrum, as economic activity is slowing, but inflation still exists.  I don’t envy Jerome Powell with his job as the Fed Chairman!

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