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The large-cap indexes recorded their second consecutive weekly loss to start the year—and the technology-heavy Nasdaq Composite its third—as the unofficial start of earnings season began. Financials shares came under pressure last week, as JPMorgan Chase and Citigroup, typically among the first major companies to release results, reported lower profits in the fourth quarter. Utilities, real estate, and health care shares were also weak within the S&P 500 Index. Energy shares outperformed, with oil prices continued their climb back to late-October highs. Technical factors, such as inflows from retail investors, drove some of the week’s volatility.
Perhaps the biggest factors on the near-term horizon are inflation and concerns about rising interest rates. Stocks started the week on a down note on news that more Wall Street analysts were expecting the Federal Reserve to hike rates four times in 2022—a consensus implied in futures markets. In his renomination hearing before Congress on Tuesday, Fed Chair Jerome Powell assured lawmakers that the central bank would not hesitate to contain inflation. Investors seemed to take the news in stride, but follow-up comments from other Fed officials over the next two days shook up the markets. In particular, Fed Governor Lael Brainard, President Joe Biden’s nominee for vice chair of the central bank and a noted inflation “dove,” broke away from her normal stance and repeated Powell’s assurances for strong action if needed in her nomination hearing.
The week’s inflation data did little to calm fears, but came in largely in line with expectations. On Wednesday, the Labor Department reported that overall consumer prices had risen 7.0% over the past year—the largest gain on a 12-month basis since June 1982. Core inflation (excluding food and energy) rose 5.5%—the most since February 1991. Core producer prices, reported Thursday, rose 8.3%—the most in records going back to 2011. Although the consensus among analysts and policymakers is that much of 2021’s inflation spike will prove temporary, talk seemed to increase of a possible wage-price spiral—in which higher prices cause workers to demand higher wages, which in turn leads companies to raise prices.
Other data offered mixed signals about the possibility of such a 1970s-style spiral. The week’s biggest surprise, arguably, was a 1.9% drop in retail sales in December—a decline that would be magnified by excluding the volatile auto market and adjusting for inflation. Many analysts pointed to caution over the Omicron variant of the coronavirus in restraining shoppers, but online sales also fell sharply. Relatedly, retail inventories rose 1.3% in November, the biggest increase since February and perhaps an indication of easing supply challenges. Import and export prices also reversed course and fell during the month, while industrial production contracted slightly.
Weekly jobless claims rose unexpectedly to 230,000, the highest number since mid-November. Continuing claims fell more than expected to 1.56 million, however—the lowest number since June 1973, when the civilian labor force was just over half (55%) its current size. The University of Michigan’s index of consumer sentiment ticked down to a new pandemic-era low of 73.2, with many surveyed citing inflation worries. Facing a near-term future where such inflation and hawkish policy at the Fed might push parts of the market downward, we are reminded of a peculiar parallel in God’s words to Job. “Is it by your understanding that the hawk soars and spreads his wings toward the south?” (Job 39:26). Of course, the verse speaks of the power, wisdom and manifold works of God that remain beyond our comprehension, and we may find that the market’s “south”ward reaction to these pressures abates earlier than our own understanding would lead us to believe.
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