Putting the massive swings from earlier in the week behind them, the three major U.S. indices calmed on Friday. By the closing bell, the Dow Jones Industrial Average gained 565 points for the day, though it still lost 461 points for the week. The S&P 500 and Nasdaq each made substantial gains on Friday — by 105 points and 417 points, respectively — but similarly lost for the week.
Since the beginning of the year, however, all three markets are down substantially, with the Dow having declined 1,596 points, the S&P 500 347 points, and the Nasdaq a whopping 1,962 points since trading resumed on January 3.
The lift on Friday was due mostly to good news from corporate earnings, most notably from Apple, Microsoft and Caterpillar. For Apple, revenue increased significantly, to the tune of 11%, or almost $124 billion, during its first 2022 quarter, the highest in company history. Microsoft also beat forecasts with its revenue increase, which topped $51 billion and was 20% better than a year ago. For Caterpillar, sales and revenue jumped 23% last quarter, hinting that supply-chain issues may be starting to loosen up.
Markets are also still chewing through the statements on Wednesday by the Federal Reserve, which on Wednesday began to lay the groundwork for finally raising the federal funds interest rate after its March meeting.
Nearly all experts predict the first interest rate to hit when the Fed meets in mid-March, but some analysts are worried about a “Rate-a-geddon,” in which the central bank jacks up rates several times throughout the year. In an investor’s note, researchers at Bank of America predict the Fed could raise rates each time the Federal Open Market Committee meets the rest of the year for a total of seven rate hikes. If that happened, the federal funds interest rate would go from the range of 0%–0.25% to at least 1.75%.
Fed Chair Jerome Powell has made it very clear that the central bank intends to remain, as he says, “nimble” and keep its options open, both in terms of how fast it raises interest rates and how quickly it unloads the massive $9 trillion in assets on its balance sheet. Powell also noted it would be unlikely that the Fed would kick off its series of interest rate hikes with a 0.5% increase.
In the meantime, inflation remains the primary concern for markets. As prices have risen 7% in the last year, inflation has become the dominant worry for many on both Wall Street and Main Street. Glassdoor, which posts reviews of employers on its website, noted a 684% year-over-year increase of employee reviews mentioning the word “inflation.”
Inflation continues to ding consumer sentiment, as well. According to the monthly index by the University of Michigan, Americans are more pessimistic about the economy since late 2011, with the university’s consumer sentiment index falling 3.4 points to 67.2. The survey has shown a steady decline in consumer sentiment the last few months.
Richard Curtain, the chief economist for the survey, noted that price increases remain a major worry despite the best efforts by government officials to ease consumers’ minds. “The Fed is about to raise interest rates to tame inflation,” Curtain said in a statement. “The danger is that consumers may overreact to these tiny nudges, especially given the uncertainties about the coronavirus and other heightened geopolitical risks.”
Besides inflation, growth has started to needle at analysts’ minds, some promising data from the last quarter notwithstanding.
On Thursday, the Bureau of Economic Analysis stated that gross domestic product grew by 6.9% in the fourth quarter of 2021, much better than the 5.5% experts had forecast. For the entirety of last year, U.S. real GDP grew by 5.7%, the largest annual jump since 1984.
At first glance the report was great news, but some analysts viewed it as mixed and said the data were actually less impressive than it appeared.
“The headline gain was much stronger than we had been expecting, but that mainly reflected a record-high $174 billion surge in inventories, which added a huge 4.9% to growth and will be partly reversed in the first quarter [of 2022],” wrote Andrew Hunter, senior U.S. economist at Capital Economics.
Most of the increase was attributed to private inventory investment, exports, personal consumption expenditures and nonresidential fixed investments. “The rest of the report was weaker than we had expected, with real final sales to domestic purchasers rising by only 1.9% annualized,” Hunter wrote, forecasting that growth will dip below the 2.7% consensus for 2022.
Other data hint at growth slowing. Earlier in the week, the International Monetary Fund published its yearly global growth forecast, in which it downgraded its growth forecast from 4.9% to 4.4%, a marked decline from the 5.9% growth seen last year. The organization cited the surge in Covid-19 cases due to the omicron strain, elevated and persistent inflation, the troubled path of the Biden administration’s Build Back Better legislation, and financial stress in China.
“The global economy enters 2022 in a weaker position than previously estimated,” the report states, predicting that global growth will slow to 3.8% in 2023 while inflation will likely average about 3.9% in advanced economies but should eventually wane later this year.
The IMF predicts gross domestic product in the United States will grow 4% this year before shrinking to 2.6% next year, a similar drop in the group’s forecast from last October.
“Risks to the global baseline are tilted to the downside. The emergence of new Covid-19 variants could prolong the pandemic and induce renewed economic disruptions,” the report states. “Other global risks may crystallize as geopolitical tensions remain high, and the ongoing climate emergency means that the probability of major natural disasters remains elevated.”
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