Economic Update 2-14-2022

• In a light week for economic data, consumer price inflation came in higher than expected, again reaching new multi-decade levels. Consumer sentiment worsened, while jobless claims continued to show improvement.

• U.S. equity markets fell back with continued high inflation readings and an assumed hawkish Fed response in coming months; foreign equities were mixed for the week. Bonds fell back across the board, in keeping with higher interest rates in the middle part of the yield curve. Commodities gained again, led by higher prices for crude oil and metals.

U.S. stocks fell back generally, with the exception of small cap, which moved higher. Results were mixed by sector, with energy and materials experiencing gains, along with strong commodity prices. All other sectors fell back, led by nearly -2% to -3% declines in technology, communications, and consumer discretionary. Real estate also fell back by -3%.

On Thursday, in reaction to another record-breaking CPI report, Fed Governor Bullard noted that 0.50% as opposed to 0.25% per meeting hikes might be appropriate—with markets turning sharply negative in response. These inflation readings haven’t been far different from expectations, but the steady worry behind the scenes is how long the elevated releases will last before receding. Concerns over a more imminent Russian incursion into Ukraine also kept sentiment down by Friday, with supposed warnings to U.S. personnel to vacate. Covid cases by week continue to improve from peak levels, which appears to have injected more optimism into risk assets when inflation isn’t the main focus.

Small cap stocks, as represented by the Russell 2000 Index, have been notable underperformers as of late. Specifically, the index had entered -20% bear market territory by late January, while the S&P only dropped -10%. This is in keeping with tendencies for that size group to lag in periods where economic growth is positive but beginning to decelerate and a flattening yield curve, which occurs under those conditions. Additionally, profit margins for smaller firms are less than half (5%) of those for large caps (13%). The R2000 has more of a cyclical composition overall, compared to the tech-heavy S&P, which explains some of the economic sensitivity.

Foreign stocks were mixed, with declines in Europe and Japan offset by gains in the U.K., as discussion ramped up from the prime minister about a Covid restriction roll-back. Stronger earnings in Europe have been helping sentiment, although it’s been held back by inflation, growth challenges, and a closer proximity to Ukraine. With inflation less problematic, the ECB has been less ‘hawkish’ than other world central banks, with easier policy being bullish. Emerging markets were little changed on net, with gains in Brazil, Turkey, and Mexico offset by losses in India and Russia.

U.S. bonds fell across the board as a higher CPI resulted in higher interest rates in the 2-year to 5-year part of the curve, with the 2-year seeing its sharpest gain in over a decade, while the 10-year to 30-year segment was little changed on net, although the 10-year did approach 2% briefly. This in line with expectations for additional expected rate hikes over the next few years, as signaled by several Fed members. Interestingly, the recent auction of 10-year treasuries appeared to be oversubscribed by nearly 3x, as investors have been welcoming the higher yields for high-quality debt. Foreign bonds lost more ground than U.S. bonds in both developed and emerging markets, due to a stronger dollar.

Commodities saw minor gains on the week, with higher prices for agriculture, industrial metals, and precious metals. While natural gas prices fell back by nearly -15%, due to weather expected to be warmer than normal for the next several weeks. However, crude oil rose a percent on net to over $93/barrel, with a spike later in the week due to rumors picking up around a Russian invasion of Ukraine.

Period ending 2/11/2022	1 Week (%)	YTD (%)
DJIA	-0.96	-4.28
S&P 500	-1.79	-7.16
NASDAQ	-2.17	-11.80
Russell 2000	1.42	-9.51
MSCI-EAFE	1.42	-2.38
MSCI-EM	1.60	0.75
Bloomberg U.S. Aggregate	-0.41	-3.45

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2021	0.06	0.73	1.26	1.52	1.90
2/4/2022	0.23	1.31	1.78	1.93	2.23
2/11/2022	0.36	1.50	1.84	1.92	2.24

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT