Weekly Market Update for February 17, 2023

by Jim Ulland

The recovery in stocks and fixed income is based on the belief that inflation is trending down and that the Fed will stop raising rates if the trend continues. This week, the narrative of a continuous decline in inflation was brought into question. The January CPI report on Tuesday barely continued inflation’s downward trend. The year-over-year increase in prices was 6.4% in January vs. 6.5% in December. That slight downward drift was near what the market had expected, and the market responded positively.

The doubts about a continued decline in inflation surfaced Thursday with the release of the Producer Price Index (PPI). Producer prices can be thought of as wholesale prices, whereas the CPI is like retail prices. So, if wholesale prices go up faster than retail prices, economists would expect retail prices to follow them up in the future. In other words, wholesale prices drive up retail prices. If inflation reverses its trend and goes higher, the Fed is less inclined to stop raising interest rates. That fear is what brought the market down Thursday and Friday.

One more piece of negative news solidified the market performance for the week. Two weeks ago, the January Jobs Report said a lot more jobs were filled in January than expected. Each Thursday the unemployment claims filings are announced. This Thursday, claims were very low – below 200,000. That sounds like a lot, but historically claims have not been consistently below 200,000 since 1969. Concerns on wage inflation persist.

We continue to believe that the defensive posture for this market is to reallocate some funds invested in stocks and reallocation that cash to fixed income and US Treasuries. The 6 month and 1yr Treasuries pay about 5%, and we have a new strategy to capture this unusually high yield, Intelligent Fixed Income-Gov (IFI-GOV). If you would like to make a modest reallocation or put idle cash to work in Treasuries at these attractive rates, please contact us.

For the week, the S&P 500 was down -0.23% and the NASDAQ was up +0.59%. Monday the S&P 500 was up +1.14%, Tuesday -0.03%, Wednesday +0.28%, Thursday -1.38%, and Friday -0.29%. Market interest rates, as represented by the 10-yr Treasury, increased from 3.74% to 3.82% triggered by renewed inflation fears.

Next week, Monday is Presidents’ Day. We will be closed. From Tuesday on, all eyes will search news for clues on inflation. The final Q4 corporate earnings reports will be released.

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