Equity markets were lower across the board last week after hawkish rhetoric from the U.S. Federal Reserve Bank dispelled the notion of a dovish monetary policy pivot any time soon. For the week, the S&P 500 declined 2.05%, the DJIA lost 1.65%, and the tech-heavy Nasdaq dropped 2.70%. The Russell 2000 small-cap index slid 1.81%. International equity markets also finished in the red as developed (MSCI-EAFE) and emerging (MSCI-EM) markets gave back 2.13% and 2.09%, respectively. The price of oil (WTI) increased to $76.11 a barrel. The price of gold declined modestly on the week to $1,793 per ounce. Fixed income was the only asset class to provide a positive return last week as the Bloomberg/Barclays U.S. Aggregate returned 0.80% on the week. Interest rates were surprisingly lower across the yield curve as the 10yr yield settled on Friday at 3.48%.
The U.S. Federal Reserve Bank delivered the 50 basis-point increase that was widely expected at the conclusion of their December meeting. The markets were caught offsides when the committee delivered their forecast for the terminal federal funds rate and expectations for inflation. The median forecast for the federal funds rate was increased to 5.1% from 4.6% at their September meeting. Their outlook for core PCE inflation was adjusted to 3.5% from 3.1%, despite softer inflation readings in recent months. Futures markets remain skeptical that the Fed will hold true to their forecasts.
In other economic reports released last week, the Consumer Price Index (CPI) reading showed only a 0.1% month-over-month increase which was a better-than-expected deceleration for inflation. The year-over-year CPI number fell to 7.1%, down from 7.7% in October. Retail sales declined 0.6% last month spooking the markets, this after a much better-than-expected 1.6% increase in October.
There is no question that valuations for both equities and even fixed income are more appealing than they have been in recent years … and over a decade when it comes to most fixed income. Most institutional investors, CNBC talking heads and market forecasters are extremely pessimistic – normally a positive sign. Markets will remain volatile, as there is a lot of tax-loss harvesting and re-balancing affecting markets from now until early next year. We are continuing to remain patient by slowly investing in high-quality assets when attractive within a well-diversified portfolio.
“Investing is laying out money now to get more back in the future.” – Warren Buffet