February market recap: Choppy trading with eyes on inflation rates

By Craig Birk, CFP®

Stocks and bonds both surrendered a portion of their January gains last month. Most of the damage was done in the last two weeks following an inflation print that was higher than expected. Consumer prices rose 6.4%, marking another decline since peaking at 9.1% last June, but disappointing many expecting a larger reduction. Recent activity extends a year-long pattern in which stock prices seesaw based on inflation reports and the resulting implications for Fed reaction.

Expectations on interest rates

Implied yields on federal funds futures contracts show markets now expect three more quarter point hikes, which would bring short rates up from the 4.50% - 4.75% range to 5.25% - 5.5%. Long rates have also ticked higher, but the U.S. yield curve remains inverted. Most market participants believe the Fed will start cutting rates in the second half of the year. This implies continued widespread expectation of recession, but also upside potential if actual recession remains elusive.

A word on earnings reports

With almost all S&P 500 companies having reported earnings, Q4 will mark the first quarterly decline since 2000. This is not terribly surprising given inflationary pressures companies face as well as a continued strong labor market. Even so, stocks are cheaper than they were a year ago and earnings overall are higher.

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Craig Birk, CFP®

Contributor

Craig Birk is the Chief Investment Officer for Empower Personal Wealth. A CERTIFIED FINANCIAL PLANNER™ professional, he is responsible for Empower’s retail investment portfolio, providing strategic and executive direction to drive the optimal management of client assets.

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