For the 2nd consecutive week, investors struggled to digest comments from the Fed. In his testimony on Tuesday before the Senate, Fed Chairman Powell mentioned the possibility of a 4th rate hike in 2022. Several key analysts and banking experts, including Jamie Dimon (J.P. Morgan CEO), have since speculated the possibility of more than 4 hikes. We believe much of this is hyperbole and not likely to occur, unless the Fed wishes to intentionally sink the economy into recession. Given past performance, I highly doubt the Fed would attempt such an undertaking. Regardless, the investors are shifting from over-priced "growth" stocks to "value" stocks. Large, Mid, and Small cap Value stocks were positive last week, while all of the growth areas sold off. We expect more of the same.
On the economic front, the data continues to be soft as higher inflation is weighing on multiple sectors of the economy. Both the Consumer Price Index and the Producer Price Index showed no clear signs of waning.
Both inflation metrics hit multi-decade highs on a year-over-year basis. What's worse, wages are not keeping pace with the rise in inflation. This phenomenon will likely force consumers to make difficult spending choices between discretionary and non-discretionary items. Consumers had a reprieve in November and December as gas prices receded.
However, since year-end, the average price of gas has increased 3%, while the price of oil jumped 6.5% last week and doesn't appear to be easing. Filling up the tank and purchasing groceries will likely become a priority for consumers, while non-essentials may be forgotten temporarily.
Meanwhile, simultaneously, interest rates are headed higher. The yield on the 10-year Treasury is higher by 34 basis points. The 30-year mortgage rate has increased substantially and is now at a 2-year high. Should we see considerable movement in the Prime Lending Rate, consumer loans could decline along with new mortgage applications.
There was positive news on the jobs front as Continued Claims reached the lowest point since before the pandemic, but according to many retailers, there are still labor shortages. From McDonalds, to Starbucks, to Chipotle, hours of operation are being reduced due to a lack of workers. And while the shipping crisis continues, there is a new threat potentially on the horizon that the train unions could force a strike, which would further disrupt delivery of goods in a timely manner. The lack of supply for consumer demand has led to some of the rise in inflation. Reducing goods even further is likely to prevent inflation from receding anytime soon.