Hope you are all doing well. After recording two positive weeks in a row, the major U.S. stock indexes slipped, extending their shaky start to a year that began with three consecutive weekly declines. Oil stocks continue to do well, energy has been the top-performing S&P 500 sector of early 2022—and by a wide margin, with a nearly 24% year-to-date price gain as of Friday. Though it is technology companies that continue to produce the best actual results even if the share prices might not reflect it. Technology has the highest earnings beat rate with 87% beating expectations 10% higher than the average S&P company. With Valentine’s day coming up I broke down this week’s news using quotes from Romeo and Juliet.
The markets fell further on Friday as the situation in Ukraine worsened. Like the apothecary in Romeo and Juliet, Putin, seeks to profit by violating the world’s law. Unlike the apothecary who is selling poison, Putin’s drug is power. Putin wants power and the respect the Soviet Union commanded on the international stage. He sees an opportunity with the West divided on the US’s role in the world after the Afghanistan withdrawal and the U.S. nuclear submarine deal that caught France off guard. Ultimately, I don’t think this will end with the U.S. getting engaged in armed conflict. More importantly for stocks, I don’t think Putin will ever return to communism because capitalism has been very good to him and made him extraordinarily wealthy.
The Federal Reserve needs to rein in inflation like the Friar, who tries to rein in young Romeo, they understand the risk if they don’t. The government reported that inflation accelerated at a 7.5% annual rate in January—the highest since 1982. Higher food, electricity, used car and housing prices led the gains, signalling that price pressures are spreading beyond a few items that continue to be impacted by the supply-chain disruptions. Rents, the largest weight in the consumer-spending basket, are accelerating. Rent increases are likely to prove sticky as rental vacancy is at its lowest level since 1984. The return to more moderate price increases will likely take longer than central banks are willing to tolerate, and St. Louis Fed president James Bullard said this week that he sees the Fed raising rates by full percentage point by July. Even though inflation will likely remain above the Fed’s target for some time there is reason for optimism. Expect that price increases will peak soon (possibly February, or March) and moderate more meaningfully in the second half of the year. Shipping costs have been declining since mid-November, and supplier delivery times have been improving, both indicating that bottlenecks are starting to clear. With the omicron-variant surge subsiding, this trend of improvement could further gain steam as spending shifts away from goods.
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