Week in Review: Large-Caps Falter

Week in Review: Large-caps falter amid rate-hike fears and geopolitical angst 

Large-cap indices struggled this week, as risk sentiment was pressured by increased rate-hike expectations and fears of a Russian invasion of Ukraine. The S&P 500 fell 1.8%, the Nasdaq Composite fell 2.2%, and the Dow Jones Industrial Average fell 1.0%. The Russell 2000, however, rose 1.4%.

Eight of the 11 S&P 500 sectors closed lower, led by the communication services (-3.9%), information technology (-2.9%), real estate (-2.8%), and consumer discretionary (-2.3%) sectors. The materials (+1.1%) and energy (+1.8%) sectors ended the week with decent gains.

The real action started midweek when more U.S. states announced plans to relax mask mandates amid improving COVID-19 trends and an observation from Dr. Fauci that the U.S. is heading out of the “full blown” pandemic phase. That catalyzed a broad-based advance, which was upended on Thursday following the Consumer Price Index (CPI) report for January.

Briefly, total CPI increased 0.6% month-over-month in January, and so did core CPI, which excludes food and energy. On a year-over-year basis, they were running at their highest levels since 1982 at 7.5% and 6.0%, respectively.

After the report, St. Louis Fed President Bullard (FOMC voter) told Bloomberg that he supports the Fed hiking rates by 100 basis points by July 1, including one hike being 50 basis points. The market, which had brushed off the negative reaction to the CPI report, rolled over following these comments.

The CME FedWatch Tool assigned the probability of a 50-basis-point hike in March to 93.8% on Thursday. More noteworthy, the 2-yr yield spiked 22 basis points to 1.56% in one day — its largest increase since the financial crisis.

Stocks weakened further on Friday after National Security Advisor Jake Sullivan acknowledged there was a “distinct possibility” that Russia could invade Ukraine before the end of the Olympics. Oil prices rose modestly while Treasury yields fell.

Rate-hike fears were somewhat tempered, though, after a Bloomberg report suggested that the Fed is unlikely to issue an emergency hike in between policy meetings and that a 50-basis-point hike is not a given. The probability for a half-point hike in March decreased to 50.2%, according to the CME FedWatch Tool.

At week’s end, the 2-yr yield was up 20 basis points at 1.52%, and the 10-yr yield was up three basis points to 1.96%. The U.S. Dollar Index rose 0.6% to 96.03.

Week in Review provided by Briefing Investor