ND&S Weekly Commentary 2.27.23 – Markets Wake up to Realities of This Inflation

Equities were choppy but were decidedly lower over the week. The market is becoming more realistic about how inflation is acting despite an aggressive Fed policy aimed to tame it. More data is indicating that inflation’s retreat will be sluggish, at times, and that it is certainly not linear. More investors are accepting interest rates will be “higher for longer” and that changes the market’s value calculus.

For the week, the DJIA gave back 2.97% and the S&P 500 dropped 2.66%. The tech-heavy Nasdaq fell 3.31%. International markets were also down as the MSCI EAFE Index (developed countries) was off 2.41% and emerging market equities (MSCI EM) declined 2.74%. Small company stocks, represented by the Russell 2000, shrunk 2.86% last week. Fixed income, represented by the Bloomberg U.S. Aggregate, declined 0.89% for the week as yields moved higher. The 10 YR US Treasury yield increased 13 basis points on the week closing at a yield of 3.95%. Gold prices were down about 1.2% and closed at $1,811/oz. Oil (WTI) prices were $3.10 lower on the week closing at $75.39.

The Fed released the minutes last week from their February FOMC meeting. They seemed to indicate that they were not pleased with the equity and bond rallies underway in early February and that tighter monetary policy may be required to offset this implied loosening of conditions. The PCE numbers (the Fed’s preferred measure of inflation) rose 4.7% year over year and were up 0.6% from the previous month. This is leading the market to price in three more 25 bps hikes over the next three Fed meeting and the probability that we have 50 bps hike at the next meeting was near 30%.

This week is light on major economic releases. There are reports on housing and inventory data as well as the release of the ISM manufacturing index. Investors are dialed in on any numbers that indicate the pace of the economy and in this odd configuration of the game piece on the board, hot is bad and cold is good.

“Uncertainty actually is the friend of the buyer of long-term values.” – Warren Buffett