Global stocks surged last week as concerns over inflation moderated. The S&P 500 soared 4.3% and produced gains every trading day. The MSCI ACWI also rose 4.3%. The Bloomberg BarCap Aggregate Bond Index gave up another 0.2% on higher inflation news and is now down 2.1% this year.
Are we back to smooth sailing after a sudden squall?
After weathering a sharp market decline, last week’s rally offered a welcome respite. While it is possible markets will return to the steady gains of 2017, we expect them to retain some of the volatility we experienced in recent weeks because the economic, policy, and fundamental environments are changing in ways that will increase uncertainty.
- Economic — Wage numbers, which served as catalysts for the correction, and higher-than-expected inflation show economic data points are becoming more difficult to predict as the U.S. economy continues to grow.
- Policy — Economic uncertainty in the U.S. and improved economic growth overseas increase the odds of multiple central banks tightening monetary policy more rapidly than markets expect.
- Fundamentals — Investors continue to reward a narrow range of growth companies, while many existing businesses are experiencing growing competitive pressure.
Last week’s rally provides another good opportunity to reassess portfolios, particularly given our outlook for choppier markets and continued risk of sudden storms.
Key points for the week
- U.S. stocks were positive every day last week.
- Markets shrugged off higher-than-expected inflation.
- Markets will remain choppy as uncertainty has climbed.
What are we watching?
Inflation continues to be an important factor shaping the market. In the aftermath of the 2008 financial crisis, investors were primarily concerned about the economy growing too slowly. In that environment, bonds tend to diversify the risk of holding more economically sensitive stocks. In an inflationary environment, bonds face pressure from the loss of purchasing power and stocks face pressure from the risk of higher rates and greater uncertainty. Concerns over inflation were a key catalyst for the recent decline.
It was surprising investors were able to shrug off additional inflation concerns last week and send the market higher. On Wednesday, the Labor Department reported the Consumer Price Index rose more than expected in January, yet markets finished higher for the day. We continue to see inflation as a key risk worth watching in a strengthening economy.
Fun story of the week
Olympic athletes are some of the most determined people in the world. They follow rigorous training schedules in the hopes of winning medals for their country. But U.S. slope snowboarder Red Gerard is so good, he figured, why bother? Gerard overslept the morning of his competition after binge-watching Netflix. He also lost his coat. But his roommate let him borrow his, and Gerard won gold for the U.S. anyway. USA! USA! USA!
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.