Through the Fog

After another volatile week, the large-cap indexes ended the week lower, while the S&P MidCap 400 and small-cap Russell 2000 indexes recorded modest gains. The technology-heavy Nasdaq Composite fared worst and ended the week down roughly 15% from its recent peak, which is still considered “correction” territory. The tug of war between healthy earnings growth and fears over monetary tightening (i.e. raising interest rates) continued to dominate sentiment and create a dense fog on the horizon. Warnings from U.S. officials that a Russian invasion of Ukraine might be imminent also contributed to a late-week selloff.

Declines in mega-cap technology stocks—including Facebook’s parent, Meta Platforms, Microsoft, and Google’s parent, Alphabet—weighed on the broader indexes on Monday, but they regained their footing at midweek. Shares in restaurants, hotels, casinos, air and cruise lines, and online travel agency stocks all rallied.

Highly anticipated inflation data on Thursday unwound almost all gains, however. The Labor Department reported that the headline consumer price index (CPI) advanced 7.5% over the past 12 months, more than consensus expectations and its highest annual gain since February 1982. Core prices, which exclude food and energy purchases, rose 6.0%—the most since August 1982.

Inflation worries were reflected in the University of Michigan’s preliminary gauge of consumer sentiment in February, released Friday morning. At 61.7, the index reading came in well below expectations of roughly 67 and hit its lowest level since October 2011. The survey’s chief researcher termed the drop “stunning” and pointed out that nearly half of all consumers are expecting declines in their inflation-adjusted incomes during the year ahead. According to FactSet, roughly three out of four S&P 500 companies that have reported earnings have referred to inflation in their earnings calls, but net margin estimates for the current quarter have fallen only slightly, suggesting that many businesses are successfully passing on higher input costs to customers.

The University of Michigan data seems to indicate that consumers were not especially comforted by improving COVID-19 trends and the removal of some restrictions. Several states, including California and New York, announced the rollback of mask mandates and vaccine requirements during the week. Amazon.com, the country’s largest private employer alongside Wal-Mart, also announced that workers would no longer have to wear masks in its warehouses if they were vaccinated.

As more and more information becomes available, the picture of the true financial health of the economy is beginning to take shape. That said, the view ahead is still very opaque. History is an excellent guide surrounding what we might expect, as the fog lifts and the picture becomes clear, but as Proverbs 14:29 reminds us, driving too fast or turning too soon could prove much more costly than waiting for more clarity: “Whoever is patient has great understanding, but one who is quick-tempered displays folly.”

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