Market Update 02/14/22

Katerina Berezovsky

Prevailing concerns over sustained inflation, interest rate hikes and geopolitical uncertainty provoked a volatile week from Feb. 8 to Feb. 14.

Stocks began the week with a rally from Monday to Wednesday with the S&P gaining 2.3%, the Nasdaq Composite gaining 3.4% and the Dow Jones gaining 1.9%.

The rally swiftly ended, however, on Thursday following a report by the Labor Department showcasing that the CPI for January has risen 7.5% yearoveryear, the highest U.S. inflationary surge in over 40 years. The surge is a consequence of pandemic-related global supply constraints and labor shortages that are failing to meet booming consumer demand.

Immediately following these unwavering statistics was a stock sell-off, with the S&P 500 dropping 1.8% and the Nasdaq Composite falling 2.1%. Additionally, the yield on the 10-year treasury pushed up to 2% for the first time since mid-2019. The gradual yield increases this year reflect concerns over the growing possibility of strict interest rate hikes by the Federal Reserve.

“We believe that today’s print endorses the Fed to move more quickly, and the market will likely encourage the Fed to hike 50 basis points at the next meeting,” Alexander Lin, an economist at Bank of America Securities in New York said.

While Thursday was marked by a bond-selloff, Friday was met with a rush to safe government assets as tensions between Russia and Ukraine intensified. On Friday morning, The White House urged the immediate withdrawal of all diplomatic presence in Ukraine, stating that invasion was imminent. The troublesome news pushed the 10-year Treasury yield down to 1.95%, where it settled on Monday at 1.986%.

Oil prices reacted by climbing on Friday where they closed at $94.44 a barrel, the highest settlement since September 2014.

This steep increase comes as investors worry that war could diminish the supply of Russian Crude. In addition to oil, Russia and Ukraine dominate the supply of many other key commodities whose prices could skyrocket if their supply chains are to be disrupted.

“By pushing energy prices even higher, a Russian invasion would likely exacerbate inflation and redouble pressure on the Fed to raise interest rates,” Chief Economist for Comerica Bank Bill Adams said.

Since interest rates are a fundamental component of equity valuations, investors will likely spend the next week watching for any telling guidance by the Fed regarding their plans for hiking interest rates to combat the widespread inflation. Additionally, investors will likely keep an eye out for updates regarding war between Russia and Ukraine so that they may predict the implications.