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Growing concerns about further interest rate hikes, prompted by fresh economic data, reversed early-week gains and left stocks mixed for the week.

The Dow Jones Industrial Average slipped 0.13%, while the Standard & Poor’s 500 fell 0.28%. The Nasdaq Composite index advanced 0.59% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, gained 0.52%.1,2,3

Rate Concerns Weigh on Stocks

Stocks opened last week higher on investor hopes that a continued cooling in inflation might support a more dovish Fed. A higher-than-expected rise in the Consumer Price Index (CPI) and strong retail sales in January initially did little to dent that enthusiasm, as stocks posted solid gains through Wednesday’s close.

But that optimism faded on Thursday as a surprising rise in producer prices and another decline in initial jobless claims triggered worries the Fed would stay the course for longer. Comments from two Fed officials supporting a more aggressive rate hike stance added to the unease, erasing much of the week’s gains. Stocks ended mixed on Friday, capping a choppy week.

Inflation Moderation Pauses

Consumer prices climbed 0.5% in January, fueled by rising shelter costs and energy prices. The increase in the CPI was higher than the 0.1% rise in December and slightly above the consensus estimates of 0.4%. The year-over-year inflation number (6.4%) came in lower than December’s 12-month rise of 6.5%, making it the seventh consecutive month of declining year-over-year inflation.⁴

January’s product price report showed a surprise 0.7% increase, higher than the 0.4% rise expected by economists and the biggest jump since June. Year-over year, producer prices rose 6.0%, a slight improvement from December’s number.⁵

Footnotes and Sources

1. ^{The Wall Street Journal, February 17, 2023}
2. ^{The Wall Street Journal, February 17, 2023}
3. ^{The Wall Street Journal, February 17, 2023}
4. ^{The Wall Street Journal, February 14, 2023}
5. ^{CNBC, February 16, 2023}

Every year, IRS-certified volunteers help people file their tax returns accurately. This volunteer opportunity is perfect for people who want to learn more about tax preparation, need to earn continuing education credits, or want to give back to their community.

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Tip adapted from IRS.gov⁵

Footnotes and Sources

5. ^{IRS.gov, October 20, 2022}

Stocks drifted lower as a week of mixed earnings reports and resurgent worries over Fed monetary policy dragged on investor sentiment.

The Dow Jones Industrial Average slipped 0.17%, while the Standard & Poor’s 500 declined 1.11%. The Nasdaq Composite index lost 2.41%. The MSCI EAFE index, which tracks developed overseas stock markets, dipped 0.30%.^1,2,3

Rally Stalls

Stocks struggled last week, weighed down by rising bond yields, a firming U.S. dollar, geopolitical tensions, and generally unimpressive corporate earnings reports. Perhaps the most consequential overhang was the potential direction of monetary policy.

Initially, traders were relieved by comments made by Fed Chair Jerome Powell earlier in the week that he had not struck a more aggressive tone following the strong employment report released after the Federal Open Market Committee (FOMC) meeting. The relief was short-lived, however, as anxieties over future monetary policy resurfaced, exacerbated by comments by one Fed governor who suggested restrictive monetary policy would be necessary for a few years to tamp down inflation.

Powell Repeats Himself

Investors were particularly eager on Tuesday to hear Powell’s first comments following the strong employment report the previous Friday. The concern was that the surprise job number would change Powell’s outlook coming out of the last FOMC meeting.

Powell instead repeated his post-FOMC meeting remarks, which were that a disinflationary trend was underway, and there remained a distance to travel before the measures taken tamed inflation. The Fed would be data-dependent in making future rate decisions. Powell also pointed out that the robust job growth showed why it might take so long to reduce inflation to the Fed’s target level.⁴ 

Footnotes and Sources

1. ^{The Wall Street Journal, February 10, 2023}
2. ^{The Wall Street Journal, February 10, 2023}
3. ^{The Wall Street Journal, February 10, 2023}
4. ^{The Wall Street Journal, February 7, 2023}

Stocks were mixed last week following better-than-expected corporate reports and increasing optimism over a slowdown in interest rates.

The Dow Jones Industrial Average edged lower, slipping -0.15%. The Standard & Poor’s 500 rose 1.62% while the Nasdaq Composite index led, picking up 3.31%. The MSCI EAFE index, which tracks developed overseas stock markets, increased by 1.16%.1,2,3

Rally Continues

Strong earnings reports and encouraging inflation data lifted stocks ahead of the Federal Open Market Committee’s (FOMC) decision on Wednesday to hike interest rates by 25 basis points. Markets rallied following the announcement, relieved that the increase was in line with expectations and buoyed by post-meeting comments in which Fed Chair Jerome Powell acknowledged the disinflationary forces in place.

Fresh earnings reports fueled further gains, with positive earnings surprises from several big-name technology companies that benefited the larger universe of Nasdaq-listed high-growth companies. Disappointing earnings from three mega-cap tech companies and a strong employment report triggered a Friday pull-back, paring the week’s gains.

Another Rate Hike

The Federal Reserve raised interest rates by 0.25%, signaling to the financial markets that it would likely hike rates by another 25 basis points at its next meeting in late March. Fed officials said the slowdown in rate hikes might provide time to assess the impact of the accumulated rate hikes. The Fed retained language in its post-meeting statement that future rate hike plans were unchanged to discourage investors’ hopes of an imminent pause in the rate-hike cycle.⁴

In his post-meeting press conference, Fed Chair Powell reiterated the Fed’s commitment not to declare victory on inflation prematurely but acknowledged that a disinflationary trend was underway.⁵

Footnotes and Sources

1. ^{The Wall Street Journal, February 3, 2023}
2. ^{The Wall Street Journal, February 3, 2023}
3. ^{The Wall Street Journal, February 3, 2023}
4. ^{The Wall Street Journal, February 1, 2023}
5. ^{CNBC, February 1, 2023}

Just like how Goldilocks had to try the porridge that was too hot and then the one that was too cold before she found one that was just right, you need to find the amount of tax withholding that’s not too much or too little for your circumstances. No one wants a bad surprise when Tax Day comes, and having the proper withholding can help you avoid these surprises.

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Tip adapted from IRS.gov⁶

Footnotes and Sources

6. ^{IRS.gov, November 2, 2022}

Stocks Advance

With the backdrop of earnings reports and conflicting economic data, stocks climbed higher on cooling inflation, continued economic resilience, and fourth-quarter corporate earnings results that, while underwhelming, did not appear as bad as many had feared.

There was enough new economic data to support both the “recession is coming” and the “soft landing” camps. It was corporate results and continued labor market strength, along with a solid, if weakening, fourth-quarter Gross Domestic Product (GDP) growth number, however, that raised investors’ hopes that a potential recession may be mild and likely pushed out to later in the year.

GDP Report

The U.S. economy expanded at a 2.9% annualized rate in the fourth quarter, slightly exceeding consensus estimates of 2.8% but down from the third quarter’s 3.2% growth rate. Consumer spending, which accounts for over two-thirds of GDP, rose 2.1%. Increases in private inventory investment, government spending, and nonresidential fixed investment also contributed to the fourth quarter’s growth. Weakness in housing and a drop in exports subtracted from the quarter’s result.⁴

Beneath the headline number, the personal consumption expenditures price index (the Fed’s preferred measure of inflation) rose 3.2%. That was lower than the third quarter’s 4.8% increase, though it remains above the Fed’s 2% inflation target rate.⁵ 

Footnotes and Sources

1. ^{The Wall Street Journal, January 27, 2023}
2. ^{The Wall Street Journal, January 27, 2023}
3. ^{The Wall Street Journal, January 27, 2023}
4. ^{CNBC, January 26, 2023}
5. ^{CNBC, January 26, 2023}

The employee retention credit (ERC) is a refundable tax credit for businesses that continued paying employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020–December 31, 2021. While this tax credit can be a great benefit for employers, there have been third parties promoting improper ERC claims.

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* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

Tip adapted from IRS.gov⁷

Footnotes and Sources

7. ^{IRS.gov, November 7, 2022}

Stocks showed mixed results last week as recession fears resurfaced in response to weak economic data and a tepid start to a new corporate earnings season.

The Dow Jones Industrial Average skidded 2.70%, while the Standard & Poor’s 500 declined 0.66%. But the Nasdaq Composite index gained 0.55% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, lost 0.50%.^1,2,3

Mixed Economic Data

Stocks weakened to start the week amid discouraging corporate earnings and troubling economic data. Disappointing retail sales and manufacturing reports sparked concerns that the Fed may have gone too far in hiking rates, while a drop in initial jobless claims diminished chances of a near-term pause in rate hikes. Welcome news from two big technology names on Friday powered a strong rally that mixed significant indices.

The start of the earnings season was a drag on investor sentiment. While 69% of the S&P 500 constituent companies that reported earnings by Thursday (48 companies) exceeded expectations, the percentage of “beats” is below the three-year average. More concerning, however, was that average earnings declined by more than 2%.⁴

Consumers Retrench  

Retail sales fell 1.1% in December, capping an overall weak holiday shopping season. November retail sales were revised downward to -1.0%, from the earlier estimate of -0.6%. Compared to November-December 2021, sales increased by 5.3%, below the 6 to 8% increase expected by The National Retail Federation.^5,6

Many economists viewed these lackluster numbers as evidence of a weakening consumer. A more cautious consumer raises more concerns about a recession at some point this year since the primary driver of U.S. economic growth is consumer spending.

Footnotes and Sources

1. ^{The Wall Street Journal, January 20, 2023}
2. ^{The Wall Street Journal, January 20, 2023}
3. ^{The Wall Street Journal, January 20, 2023}
4. ^{The Earnings Scout, January 19, 2023}
5. ^{Census.gov, January 18, 2023}
6. ^{The Wall Street Journal, January 18, 2023}

Giving back to others feels good and is a great way to support your community and those in need, but it also has tax advantages. According to the IRS, most charitable contributions are deductible as an itemized deduction when you file your taxes, including cash and property contributions.

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* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

Tip adapted from IRS.gov⁶

Footnotes and Sources

6. ^{IRS.gov, November 15, 2022}

Stocks rallied last week thanks to fresh confirmation of inflation’s cooling trend and growing optimism that an inflation slowdown may provide the Fed with space to ease up on future rate hikes.

The Dow Jones Industrial Average gained 2.00%, while the Standard & Poor’s 500 advanced 2.67%. The Nasdaq Composite index surged 4.82% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, jumped 3.32%.^1,2,3

Improving Sentiment

Investor sentiment came into the new year weighed down by recession fears and concerns that Fed rate hikes may “go higher for longer.” Last week a different narrative emerged. Sustained declines in inflation, a rate hike cycle nearing an end, and a resilient economy that may avoid recession resulted in a broad-based rally.

Moderating inflation was evident in the Consumer Price Index (CPI) report released on Thursday, which, in combination with a strong labor report the previous Friday, gave investors confidence that the environment for stocks had improved. Stocks extended their gains to end the week as a few money center banks kicked off a new earnings season with upbeat reports.

Inflation’s Cooling Trend

December’s CPI report showed a 0.1% decline in prices from November and a 6.5% increase from a year ago. It was the sixth-consecutive month of decelerating year-over-year increases. Core prices (excludes food and energy) slowed to 5.7%, a decline from the previous month’s 6.0% year-over-year rise. For the last three months, core prices have risen at an annualized rate of 3.1%–the slowest pace in over a year.⁴

Falling gasoline prices (-9.4%) accounted for most of the monthly decline in the CPI. Used car prices (-2.5%) were another bright spot.⁵

Footnotes and Sources

1. ^{The Wall Street Journal, January 13, 2023}
2. ^{The Wall Street Journal, January 13, 2023}
3. ^{The Wall Street Journal, January 13, 2023}
4. ^{The Wall Street Journal, January 12, 2023}
5. ^{CNBC, January 12, 2023}