THE WEEK ON WALL STREET
New messaging from the Federal Reserve on interest rates and inflation last week led to a broad retreat in stock prices. The Dow Jones Industrial Average dropped 3.45% while the Standard & Poor’s 500 lost 1.91%. The Nasdaq Composite index slipped 0.28% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, fell 0.64%.
The Federal Reserve’s announcement on Wednesday that interest rate hikes may likely occur sooner than expected and that it had underestimated the pace of inflation unsettled investors. The hardest hit groups were cyclical stocks, like energy, materials, and industrials, as well as financials and consumer staples. Losses accelerated into the week’s close on comments by St. Louis Fed President James Bullard that the first rate hike could be as soon as 2022. The bond yield curve flattened, as short-term interest rates rose in anticipation of rising rates and longer-term rates declined, reflecting a view of an eventual economic slowdown.
THE FED’S SURPRISE
Last week’s FOMC meeting announcement took investors by surprise as the Fed indicated that two rate hikes in 2023 were likely. It was as recent as March that the Fed had signaled that rates would remain unchanged until 2024. The Fed also raised its inflation expectations to 3.4%, up from its March projection of 2.4%, though it continues to believe that price increases will be transitory in nature. The Fed provided no indication of when and by how much it might begin tapering its monthly bond purchase program.
THE WEEK AHEAD: KEY ECONOMIC DATA
Tuesday: Existing Home Sales.
Wednesday: PMI (Purchasing Managers Index) Composite Flash. New Home Sales.
Thursday: GDP (Gross Domestic Product). Durable Goods Orders. Jobless Claims.
Friday: Consumer Sentiment.
THE WEEK AHEAD: COMPANIES REPORTING EARNINGS
Wednesday: KB Home (KBH).
Thursday: FedEx Corporation (FDX).
Friday: Carmax, Inc. (KMX).
We tend to forget the economy is fast reacting to a pent-up consumer demand from the pandemic induced shutdown, and perhaps sell short our corporate leaders to adapt and shift gears rapidly to increase production and meet the growing demand.
Perhaps a simple commonsense argument is easier to digest. Common sense dictates that buyers of 10-year Treasury Notes at 1.44% show no sign of a panic run to the exit door. Perhaps increasing capital spending beginning to rise at a 15% pace, and GM and Ford announcing new plants to accommodate their new electric transportation platforms are a positive sign there is more than government stimulus checks to sustain our economic recovery. Just maybe, as the unemployment assistance dwindles, the laid-off work force returns to new jobs, at a higher hourly rate, thanks to the Fed's stoking of inflation above the 2% average historic standard. In the near term the markets may remain range-bound and highly reactive to headline news, but the long-term trend line remains, in our opinion, bullish.