Stocks Mixed on Inflation Concerns; Bonds Tumble

The Dow (-0.1%), NASDAQ (+0.6%) and S&P 500 (-0.3%) were mixed last week.  Meanwhile, taxable bonds lost about 0.5%, and tax-free municipal bonds got crushed, losing about 1.5% for the week.  Bonds are responding to a recent and rapid rise in interest rates, as the 10-year Treasury has gone from 3.4% to 3.8% in about 2 weeks.  That’s a big jump, and could also cause mortgage rates to trend back upward again.

The 800-pound gorilla remains in the room – inflation and the Fed raising rates to combat inflation.  As we have been saying for nearly a year, a rise in interest rates typically hurts BOTH the stock and bond markets, and we have experienced that since the beginning of last year.  That rise subsided in the 4th quarter of 2022, fueling a rally in stocks and bonds in hopes that the Fed will slow down, or better yet, stop their campaign of raising interest rates.  Unfortunately, key economic data was released last week that implied we’re not out of the woods yet.

The January Consumer Price Index (CPI) and the Producer Price Index (PPI) – 2 key measures of inflation – were released last week.  The CPI rose by 6.4% (year over year), down slightly from the prior month reading of 6.5%.   The PPI rose 6.0%, but more importantly 0.7% over the prior month, well in excess of the 0.4% rise expected by economists.  By contrast, US economic data for January came in very strong, likely due to unusually warm weather.  This increase in economic activity also tends to put pressure on inflation.  This was a heavy dose of bad news regarding inflation.

See below for a chart showing the monthly CPI over the last 20 years.  As you can see by the chart, inflation began to rise rapidly in early 2021 and throughout 2022, particularly in the first 6 months.  So, for those of you who are math geeks like me, last year’s rapid increase in inflation is actually the denominator in the equation for the year over year numbers being reported the next several months.  Because of that, we may see decreasing year over year inflation numbers, but don’t be fooled by them.  Inflation still persists, and will continue to do so until we see a downturn in the US economy.  That downturn could also result in a recession, which is being reflected in other economic data.  Note that when the Fed raises interest rates, it typically takes 1 – 2 years until they take full effect.  We are nearing the 1-year anniversary of the first of many rate hikes in 2022.

I hope this hasn’t been too gloomy, but just telling it like we see it.  Have a great day and week!

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