News headlines continued to drive market returns for the first half of February, even if market performance seemed counterintuitive to the news. One example: The February 4th jobs report showed 457,000 new jobs were created for the month of January, despite the surge of Omicron and other concerns. That number greatly exceeded economist expectations and “far outpaced even the most optimistic forecasts.” Looking longer range, revisions to job creation totals in 2021 show higher numbers than initially expected. What does that mean? The economy had more momentum than expected entering 2022.
How did the markets respond to this good news? A steep decline, of course!
Some volatility was to be expected as new job creation could increase the likelihood and degree to which the Federal Reserve (Fed) increases interest rates. However, this disconnect where good economic news equates poor market returns is noteworthy. These can be the times of greatest opportunity for investors.
In other headlines, unemployment edged up, from 3.9% -- 4.0%, however this is likely related to more people looking for work.
A key inflation report released on February 10th indicated a faster-than-expected rise in prices. The Consumer Price Index (CPI) showed year-over-year rise of 7.5%, the largest gain since 1982. While this will likely begin falling in the coming months, a high inflation rate results in the markets fearing a more aggressive interest rate hike – driving a short term market sell-off. “With another surprise jump in inflation in January…markets continue to be concerned about an aggressive Fed. While things may start getting better from here, market anxiety about potential Fed overtightening won’t go away until there are clear signs inflation is coming under control, “ according to Barry Gilbert, asset allocation strategist for LPL Financial.
The current game on Wall Street is predicting what the Fed will do at their next regularly scheduled meeting in March. Currently, the market has priced in a 100% confidence that the fed will raise interest rates by ½ of a percent (50 basis points). Currently, there is a 61% chance that the fed will raise rates 7 times this year – which would equate to an interest rate increase at each regularly scheduled meeting for the year.
As for international headlines, we would be remiss not to address the continuing tensions in Ukraine. While we believe an all-out war between Russia and NATO forces is extremely unlikely, the market hates uncertainty – which seems to be Vladimir Putin’s strategy. Continued uncertainty, or smaller skirmishes within Ukraine will likely fuel short-term volatility.
As of February 15th, the markets all posted fractionally negative returns for the first half of the month. The Dow Jones Industrial Average (Dow) fell 143 points (0.14%), the S&P 500 dropped by 44 points (0.99%) and the NASDAQ lost 100 points (0.70%).
Barry Gilbert quote: Inflation surges 7.5% on an annual basis, even more than expected and highest since 1982.Cnbc.com.2/10/2022
Rate hikes: Seven hikes? Fast-rising wages could cause the Fed to raise interest rates even higher this year.Cnbc.com.2/7/2022