Market Commentary for the week of February 14, 2022

ECONOMIC REVIEW[1]

• Consumer Price Index (CPI) data for the month of January was released on Thursday, and both readings exceeded forecasts substantially (Headline CPI Forecast: 0.4% Month-over-Month; 7.2% Year-over-Year).
  • Headline CPI came in at 0.6% Month-over-Month, and 7.5% Year-over-Year.
  • Core CPI came in at 0.6% Month-over-Month, and 6.0% Year-over-Year.
• St. Louis Fed President James Bullard and others have suggested these results could push the Fed to raise rates by 0.50% in March, rather than the current expectation of a 0.25% increase.

INSIGHT: Inflation continued to surge higher last month, accelerating to 7.5% year-over-year as measured by the headline consumer price index (CPI). The reading is the highest level of inflation since February 1982, above December’s 7.0% and considerably higher than the pre-pandemic annual rate of 1.8%. Price increases were broad-based as food, vehicles, electricity, and shelter, all moved up substantially in January. These effects have even begun to show in the services sector. As a result, Goldman Sachs and Bank of America now expect as many as seven rate hikes this year, and St. Louis Fed President James Bullard wants to see both a 0.50% raise in March and full percentage point increase by the start of July. Conversely, the more dovish Fed presidents in Atlanta, Richmond, and San Francisco are tempering those aggressive outlooks, instead preferring to move gradually and scrutinize how markets absorb initial interest rate increases. We anticipate that the Fed will continue their track-record of transparency and assess how unprecedented fiscal and monetary stimulus along with strong consumer demand and continuing (and hopefully subsiding) pandemic-related supply disruptions are affecting the economy, and subsequently relay their intentions to markets without continuing to disrupt risk-appetite.

    A LOOK FORWARD¹

• Producer Price Index (PPI) for the month of January will be released on Tuesday, the expectation is for producer prices to increase 0.5% on a month-over-month basis.
• Retail Sales for the month of January will be released on Wednesday, the median forecast among economists is an expected increase 1.8% on a month-over-month basis.
• Building permits for the month of January will be released on Thursday, the expectation is for building permits to decrease by -7.5% on a month-over-month basis.

INSIGHT: Following another hotter than expected inflation print in CPI the story turns to producer prices to see if inflation continues to be more widespread than initially thought. PPI may be poised to increase even more for the prior month due to the greater weighting of energy and commodity costs in PPI than CPI. With the next Fed meeting in March just now around the corner, each Fed decision over the next few months will be under the microscope. Next, while the previous month for retail sales saw a sharp miss to the downside, the expectation for this month is a strong increase attributed to waning Omicron Variant cases and a buildup in consumer savings. Lastly, in the wake of rising interest rates it is to no surprise to see building permits see a sharp decrease. With interest rates historically low for the last two years, the supply of real estate construction coming to market was quite high. As the housing market begins to adjust to the Fed’s action moving forward, there may be some stabilization in home prices and rents.

MARKET UPDATE

    OBSERVATIONS

• U.S. equities moved lower this week as indicated by the S&P 500 which was down -1.79% on the week.
• In the U.S., smaller sized companies outperformed their larger-sized counterparts, as the Russell 2000 index increased by +1.42% on the week.
• International stocks as measured by the MSCI EAFE were positive on the week, up +1.42%, outperforming domestic stocks.
• Emerging market stocks were up on the week with the MSCI EM increasing +1.60%.
• U.S. investment grade bonds were negative last week with the Bloomberg Barclays U.S. Aggregate Bond index down -0.41%.

• BY THE NUMBERS

BIG SHOES - There are 505 individual stocks in the S&P 500.  The 41 largest capitalized stocks in the index as of the close of trading last Friday 2/11/2022 had a larger collective market cap than the remaining 464 stocks.  Since the S&P 500 is a cap-weighted index, the largest capitalized stocks carry a disproportionate impact on the index’s performance calculation.  The S&P 500, consisting of 500 stocks chosen for market size, liquidity, and industry group representation, was used as the stock measurement.  It is a market value weighted index with each stock's weight in the index proportionate to its market value (source: BTN Research).  

TREASURY NOTE - The yield on the 10-year Treasury note closed at 2.03% last Thursday 2/10/2022, ending a streak of 633 trading days of closing yields for the 10-year note below 2%, i.e., 8/01/2019 through 2/09/2022.  From 1946 to 9/06/2011, the yield on the 10-year Treasury note did not close below 2%.  10-year Treasury notes have been traded in the United States since 1790, i.e., 232 years of trading (source: Treasury Department).  

NO GASOLINE NEEDED - Electric vehicle sales globally increased by +112% in calendar year 2021, rising from 3.0 million to 6.3 million worldwide (source: Benchmark Mineral Intelligence).  

FINALLY IN THE BLACK - The US government ran a $119 billion surplus in January 2022, breaking a streak of 27 consecutive months of deficits, and its first surplus month during the pandemic (source: BTN Research). 

Reprinted with permission from BTN. Copyright © 2022 Michael A. Higley.

Economic Definitions

CPI (headline and core): Consumer prices (CPI) are a measure of prices paid by consumers for a market basket of consumer goods and services. The yearly (or monthly) growth rates represent the inflation rate.

Producer Prices - PPI (headline and core): Producer prices (output) are a measure of the change in the price of goods as they leave their place of production (i.e. prices received by domestic producers for their outputs either on the domestic or foreign market).

Retail Sales: Retail sales (also referred to as retail trade) tracks the resale of new and used goods to the general public, for personal or household consumption. This concept is based on the value of goods sold.

Building Permits: This concept tracks the number of permits that have been issued for new construction, additions to pre-existing structures or major renovations. These statistics are based on the number of construction permits approved.

Index Definitions

S&P 500: The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

NASDAQ: The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Russell Mid-Cap: Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index.

Russell 2000: The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The real-time value is calculated with a base value of 135.00 as
of December 31, 1986. The end-of-day value is calculated with a base value of 100.00 as of December 29, 1978.

MSCI EAFE: The MSCI EAFE Index is a free-float weighted equity index. The index was developed with a base value of 100 as of December 31, 1969. The MSCI EAFE region covers DM countries in Europe, Australasia, Israel, and the Far East.

MSCI EM: The MSCI EM (Emerging Markets) Index is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

Bloomberg Barclays US Agg Bond: The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

Bloomberg Barclays High Yield Corp: The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition,
are excluded.

Bloomberg Barclays Global Agg: The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.

Disclosures

Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance cannot guarantee future results.

Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect again loss. In general, the bond market is volatile; bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed-income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds or high-yield bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.

The statements provided herein are based solely on the opinions of the Ladenburg Thalmann Asset Management (Ladenburg) Research Team and are being provided for general information purposes only. Neither the information nor any opinion expressed constitutes an offer or a solicitation to buy or sell any securities or other financial instruments. Any opinions provided herein should not be relied upon for investment decisions.

Certain information may be based on information received from sources the Ladenburg Research Team considers reliable; however, the accuracy and completeness of such information cannot be guaranteed. Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial information. Any opinions, projections, forecasts and forward-looking statements presented herein reflect the judgment of the Ladenburg Research Team only as of the date of this document and are subject to change without notice. Ladenburg has no obligation to provide updates or changes to these opinions, projections, forecasts and forward-looking statements. Ladenburg is not soliciting or recommending any action based on any information in this document.

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