April 22, 2022,
We had a rough week in the market. On Monday James Bullard, President of the St. Louis Federal Reserve and a voting member of the Fed’s Open Market Committee, discussed the need to fight inflation more aggressively. He reminisced about the time in 1994 when the Federal Reserve raised rates by 75 basis points in one move. His comments caused some ripples among investors, but the market focused more on corporate earnings reports and stayed positive.
On Thursday morning, Federal Reserve Chair Jerome Powell continued the hawkish sentiment, saying that a 50-basis point rate increase was ‘on the table’ for the May meeting. This was hardly new news, but his comments inferred faster increases in the following months as well, and the markets reacted negatively. Charles Evans, Chicago Fed President, predicted that the Fed would not just get rates back to a neutral range, but would instead move past that to ‘restrictive’. Ouch.
As our colleague Ty Lang has said more than once lately, “The Fed presidents really DO NOT need to make statements every week.” We miss the days when investors tried to predict Fed policy by the size of past Fed Chair Alan Greenspan’s briefcase; in that era Federal Reserve members almost never commented outside of the formal meeting minutes.
As a result of increased concerns, the S&P 500 dropped 3% this week. The yield on the 10-year U.S. Treasury bond went from 2.83% to 2.91%; a big move for one week. Investors must believe the Fed will be effective against inflation because inflation-hedge stocks were among the hardest hit. Gold miners, for example, fell more than 10%. And although we are not owners of Netflix, its surprisingly bad earnings report and sharp fall had a ripple effect on other technology and communications companies that we do own.
The good news? Next week we will have corporate earnings reports at the pace of water from a firehose. We will hear from about twenty of the companies we own broadly, as well as several bellwether companies that have market impact. This should shift the focus back to the accomplishments of individual companies, which will hopefully come through with solid results. That said, a recent newsletter pointed out that the use of expletives in company earnings calls and investor presentations reached a five-year high recently. Inflation is getting to everyone!