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April 11th, 2022
Author: SteelPeak Wealth – Institute of Portfolio Management
Equity markets pulled back last week after three consecutive weeks of gains. The S&P 500 fell 1% while the interest rate sensitive Nasdaq fell 3.5%. The yield on the 10-year Treasury moved up to 2.75%, up from 1.5% at the end of last year. As a result, the bond market is suffering one of largest drawdowns in recent history. Prolonged COVID-19 lockdowns in China, and the ongoing war in Ukraine, continue to strain supply chains and put upward pressure on inflation. Crude oil is back in the low 90s after reaching a high of 130 last month.
This week, two key measures of inflation will be released: the Consumer Price Index on Tuesday, and the Producer Price Index on Wednesday. Inflation has been rising at its hottest pace in 40 years, and this data is not expected to show a deceleration. The spike in crude oil during March will likely push this month’s inflation data to another 40-year high. The chart below shows the Consumer Price Index going back to 1915.
The Fed is attempting to play catchup by signaling a sequence of interest rate increases and a reduction of its nearly $9 trillion balance sheet. The next Fed policy meeting is scheduled for May 4th, so this month’s inflation data will likely have a meaningful impact on its decisions in three weeks. Since the start of the year, the 10-year Treasury yield has risen from 1.5% to 2.75% and the 2-year Treasury yield has risen from 0.73% to 2.56%. The chart below shows the 2-year and 10-year Treasury yields over the last three years.
Bond prices move in the opposite direction of interest rates, and as a result, 2022 has been a challenging environment for fixed income. The chart below shows peak-to-trough decline for the US aggregate bond index since 2004. The current 10% drawdown just surpassed the decline experienced during the onset of the pandemic and is second only to the sharp selloff seen following the Lehman bankruptcy in 2008.
The current economic cycle is evolving much more rapidly than the post-2008 expansion. Back then, the Fed was struggling to create enough inflation and thus kept interest rates at zero for seven years. Today, inflation is running higher than expected and caused the Fed to raise rates after 2 years. Higher interest rates suppress economic activity, but the challenge is the impact often occurs with a significant lag. Markets will be watching economic data as well as corporate earnings for signs that inflation is peaking and/or the economy is decelerating.
T I P O F T H E W E E K
While well-meaning friends and family members may offer “advice” about your personal finances, remember that they may lack the education and perspective of a financial services professional.
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THE WEEK AHEAD: KEY ECONOMIC DATA
Tuesday: Consumer Price Index (CPI).
Wednesday: Producer Price Index (PPI).
Thursday: Jobless Claims. Retail Sales. Consumer Sentiment.
Friday: Industrial Production.
Source: Econoday, April 8, 2022
The Econoday economic calendar lists upcoming U.S. economic data releases (including key economic indicators), Federal Reserve policy meetings, and speaking engagements of Federal Reserve officials. The content is developed from sources believed to be providing accurate information. The forecasts or forward-looking statements are based on assumptions and may not materialize. The forecasts also are subject to revision.
THE WEEK AHEAD: COMPANIES REPORTING EARNINGS
Tuesday: CarMax, Inc. (KMX), Albertsons Companies, Inc. (ACI).
Wednesday: JPMorgan Chase & Co. (JPM), Delta Air Lines, Inc. (DAL), BlackRock, Inc. (BLK).
Thursday: UnitedHealth Group (UNH), The Goldman Sachs Group, Inc. (GS), Wells Fargo & Co. (WFC), Morgan Stanley (MS), The PNC Financial Services Group, Inc. (PNC).
Source: Zacks, April 8, 2022
Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Companies may reschedule when they report earnings without notice.
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Q U O T E O F T H E W E E K
“It has always seemed strange to me that in our endless discussions about education so little stress is laid on the pleasure of becoming an educated person, the enormous interest it adds to life.”
EDITH HAMILTON
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T H E W E E K L Y R I D D L E
When you take away the whole from this, you still have some leftover. What is it?
LAST WEEK’S RIDDLE: What do a shark, a zipper, and a comb all have in common?
ANSWER: They all have teeth.
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SteelPeak Wealth –
Institute of Portfolio Management
For more financial news and resources, visit our Insights page ⇒
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The forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.
The market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results.
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CITATIONS:
1. The Wall Street Journal, April 8, 2022
2. The Wall Street Journal, April 8, 2022
3. The Wall Street Journal, April 8, 2022
4. CNBC, April 6, 2022
