Except for the TSX supported by oil advancing 6.8% in the week, all major market indices trended down for the second week in the year. The TSX was up 1.30% for the week. The Dow was down less than one percent at 0.88%, the S&P 500 was slightly lower, down 0.33%, and the Nasdaq lost 0.28%. The S&P 400 Midcap index and the Russell 2000 were both lower -0.38% and -0.88% respectively in the week. Except for the UK FTSE 100, which gained 0.77%, the Europe indices followed the US, with all indices lower by week’s end. Inflation and rising rate concerns plagued market sentiment during the week, with many analysts suggesting four rate hikes rather than the three anticipated initially.
On Tuesday, two of the regional Fed presidents spoke in addition to Fed Chairman Powell at his confirmation. Cleveland’s Fed President Loretta Mester thought that if inflation continued on the current path, it would be appropriate for three one-quarter-point increases starting in March.1 The Fed President Esther George thought the Fed should reduce the $8.5 Trillion balance sooner.2 Chairman Powell, in his speech, said the Fed would “use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.” 3
The week’s economic data did little to change the course of investor sentiment. The Bureau of Labor Statistics released the consumer price index, which reported an increase in December of 0.5% after a 0.8% increase in November, bringing the year-to-date total to 7%. Shelter and used car prices continued to be the largest contributor to the seasonally adjusted increase. The latest increase in the CPI data is a 40 year high. Less food and energy, prices rose 0.6% in December. Food rose 0.4%, while energy fell 0.4% in December. For the twelve months, the CPI less food and energy is running at 5.5%, a 31 year high.4 Strong consumer demand along with supply shortages and a tight labor market are being considered for the elevated inflation reading.5 The initial unemployment claims took a surprising jump on Thursday, increasing 23,000 from the previous weeks’ adjusted level to 230,000.6 In a poll conducted by the Wall Street Journal, economists thought new claims would fall to 200,000. Continuing claims for all programs increased by 226,264 from the previous week to 19,377,528.7
On Friday, the US Census Bureau reported that retail sales and food services fell 1.9% in December. Retail sales are considered an indication of the strength of the economy. There were several factors thought to have negatively impacted or slowed consumer spending in the latest December reading, including higher prices and omicron. As infections rise, it may take months before consumers bounce back to their previous spending patterns. Industrial production also slipped 0.1% in December compared to a poll of economists predicting a 0.2% gain. Auto production falling 1.3% and manufacturing sliding 0.3% in December were attributed to the decline.8 Capacity utilization moved slightly lower to 76.5% from 76.6 in the prior month.9 To finish off the week, the University of Michigan preliminary consumer sentiment reading dropped to 68.8 from 70.6, while the sentiment for business conditions fell to 73.2 from 74.2 and the index of expectations fell to 65.9 from 68.3. In the report, it was noted that “confidence in government economic policies is at its lowest level since 2014.” Financially, 33% reported they were worse off than a year earlier.10
Ultimately consumer confidence in leadership is going to drive the economy forward. To date, voters from both sides of the aisle are starting to question the policies in response to Covid, inflation, and foreign affairs, to mention a few. While the issues will be resolved, the road to recovery will be choppy, and markets do not like uncertainty. As earnings seasons start in earnest in the coming weeks, estimates of future growth and earnings expectations may indicate hope later in the year.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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