Globally, stocks sold-off even as oil prices came down from elevated levels In the United States, the Dow Jones slipped 2.0% while the S&P 500 dropped 2.9%. The tech-heavy NASDAQ tumbled 3.5% as the 10-year U.S. Treasury yield jumped 26 basis points to close the week at 1.99%. Overseas, European stocks experienced a counter-trend rally and finished the week up 2.6%. Emerging markets were the notable laggard with the MSCI Emerging Market Index down a sharp 5.1% as the MSCI China index plunged 9.2% on renewed concerns about the technology sector.
In 1970, energy goods and services accounted for about 13% of total U.S. consumption. Now, that number is just about 4.8% as the U.S. economy has become less energy intensive. That should help to mitigate the economic damage of higher energy costs. However, investors need to consider just how aggressive the Federal Reserve will be in its attempt to combat inflation that is largely derived from supply chain disruptions.
The Federal Reserve will very likely raise interest rate by 25-basis points at their March 16th meeting. The question facing investors, is just how far will the Federal Reserve go? Currently, the market is predicting the equivalent of seven rate hikes by the end of 2022. However, we can’t help but wonder if the Federal Reserve will be forced to eventually reassess given that it is embarking on a new tightening cycle amid an economic slowdown and potential supply shock.