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- In another choppy week, global equity markets were mixed. We saw global markets (represented by the MSCI All Country World Index) up 0.2% and domestic stocks (represented by the S&P 500 Index) down -0.3%. It was emerging markets (represented by the MSCI Emerging Markets Index) leading the pack, up 2.6% for the week.
- The consumer price index (CPI) report was the primary focus last week. The report showed that inflation rose 7% in December (from prices a year prior). If we exclude both food and energy, the rise was 5.5%. While these were the highest readings in 30 years, they came in right around market expectations. We expect inflation to peak in the coming months.
- With inflation rising, markets are starting to price in a more aggressive Federal Reserve for 2022. The 10-year bond yield has approached 1.8% after starting the year at 1.5%. Below is a graphic from Edward Jones and Bloomberg showing how these market expectations have shifted upwards over the last three months.
- The December retail sales report showed a monthly decline of -1.9%, which was a bigger fall than predicted. While some of this can be attributed to consumers spending earlier in the season (see October’s report), part of this is likely due to the rise in Omicron.
- As I mentioned last week, higher bond yields are the reason we’re seeing some market repricing at the sector and style level. For example, large cap value stocks are up 1% this year while large cap growth stocks are down over 5%. As interest rates (and expectations) rise, higher valuation stocks like technology can be hit in the short term. The reason for this is that their future earnings growth is longer into the future and impacted more by interest rates.
- I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.
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