“Hot Hot Hot” – Monday Morning Market Memo – February 14, 2022

“Hot Hot Hot” – Monday Morning Market Memo – February 14, 2022

Hot Hot Hot is both the name and key lyrics of a hit song from the 1980s most of you are probably familiar with, as it played frequently on cruise ships, at weddings, and other party occasions. The song was initially written and recorded by Montserratian Soca artist Arrow, then in 1987 Buster Poindexter covered the tune and scored his first hit song – according to Songfacts. The “hot” the financial markets focused on last week had nothing to do with a song however, but all to do with inflation.

On Thursday the U.S. Department of Labor reported the Consumer Price Index (inflation) surged 7.5% in January, compared with a year ago. This number was even higher than markets were expecting, and was the biggest increase since 1982 (which was coincidentally when Hot Hot Hot was first released). Bottom line, it has been a long time since we saw inflation this high. Stock prices were positive on the week ahead of the CPI report, but reversed course Thursday as the surging consumer prices increased the likelihood of the Federal Reserve hiking rates more aggressively to fight inflation.

St. Louis Fed President James Bullard said he was open to 50-basis point hike in March and wanted to see a full percentage point of hikes by July. With markets laser focused on a more aggressive Fed, the odds of a ½ percentage point increase in rates by the central bank next month is now up to 61.8%, according to the CME FedWatch Tool. It has been a long time since investors have had to deal with these kinds of interest rate fluctuations. Expect heightened volatility in the markets until things stabilize with rates/inflation/geopolitical.

During last week’s action, stocks appeared to be leveling off on Friday, until U.S. officials warned that Russia might invade Ukraine in a matter of days. On this news, the major stock market averages closed notably lower Friday – with the Dow Jones Industrial Average dropping over 500 points (about 1.4%) – the Standard & Poor’s 500 Index losing 1.9% – and the NASDAQ Composite shedding 2.8%.

For the week as a whole – the Dow ended down 1%, the S&P lost 1.8%, and the NASDAQ declined 2.2%. On the bright side last week, corporate earnings continue to come in, on average, better-than-expected. According to data from FactSet: for the fourth quarter of 2021 (with 72% of S&P 500 companies having reported actual results), 77% of companies have reported a positive EPS (Earnings Per Share) surprise, and 77% have reported a positive revenue surprise (both of which are above the 5-year average).

Speaking of earnings – we’ll get another notable batch of reports in the week ahead. Companies scheduled to report include Advance Auto Parts, Devon Energy, Boston Beer Company, Cisco Systems, Crocs, NVIDIA, Consolidated Edison, Kraft Heinz, Shopify, Walmart, and Deere & Company.