By: Jeff Anderson, CFA
This Week: To say that the US equity markets were volatile would be an understatement. The S&P 500, Nasdaq and Russell 2000 all had intra-day moves of more than 4% during the week. Investors continue to construe a new year in which inflation will continue to run well above the Fed’s 2% mandate. Consequently, the Fed is now forced to accelerate bond purchase tapering, while embarking on a more aggressive rate hiking path than originally estimated.
The economy, however, is in good shape, yet it is projected to slow versus 2021 growth. Consensus estimates for the S&P 500 earnings per share is $222, meaning the S&P is trading at just under 20 times earnings vs 26 in 2021. Still above the long-term average of 17, but not absurdly expensive. Of course, consensus estimates may be wrong.
Inflation and the Russia-Ukraine conflict sent Crude Oil higher, closing near $87 per barrel, up 2.5 % for the week, and 15.3% year-to-date. Do not expect lower gas prices soon.
US Labor Costs Grew at Fastest Pace in Two Decades:
A tight labor market coupled with accelerating inflation has forced employers to spend 4% more on wages and benefits. This increase is still almost 1% shy of the Fed’s preferred measure of inflation, the core personal-consumption expenditures index, which rose 4.9%. Higher prices are pushing wages up which, in turn, pushes prices higher, thus creating a virtuous cycle of higher prices. Economists estimate that higher wages reduce turnover and increase productivity, leading to company margin expansion. Time will tell.
The Two Things to Do When the Stock Market Gets Crazy:
If you have a Wall St Journal subscription, you have likely read Jason Zweig’s “Intelligent Investor” column.
Mr. Zweig’s piece in Friday’s journal was particularly poignant re: The Recent Stock Market Volatility. In the article, he makes two important points. One important point: put the market’s recent pullback into a long-term perspective. And two: recognize what kind of investor you are. The type of investor you are, matters more than the actual investments you own. The article included a chart showing the number of declines of 1% or more since 2008 (chart below). Volatility is unavoidable.
Warren Buffet’s mentor, Ben Graham, gave a speech in 1963 that had a particularly important quote. He said, “In my nearly 50 years of experience in Wall Street I’ve found that I know less and less about what the stock market is going to do, but I know more and more about what investors ought to do.” Could not have said it any better.