Nasdaq began last week rallying to the simple 200-day moving average before backing down. S&P 500 broke down below that average last Friday. Both indices reacted negatively to the U.S. January consumer price index figures.
The government reported a CPI of 7.5%, a hot figure that markets already expected. Media heightened fears by speculating on a full point (100 basis point) rate hike. Others like Bloomberg wrote that the Fed would not raise the rate by much.
Investors should watch the US bond market prices for direction. Bond prices fell further before rallying last Friday, Feb. 11. Chances are rising that prices will stabilize. Markets accept CPI figures will trend in the 8% range for the next few months. High energy prices are a major input to inflation. Prices topped $95/barrel over the weekend on fears of a U.S. conflict with Russia in Ukraine.
Energy prices tend to fall sharply after a major rally. This pattern could repeat, weakening inflationary pressures.
Your Takeaway
Investors who outperformed markets in 2020 only to give up gains in 2021 should remain wary of 2022 markets. Strong morning rallies end the day with declines. This pattern may continue in the month ahead. The Fed is not raising rates by any meaningful levels. The market needs to absorb at least a 100 basis point rise in the year ahead.
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