The Week Ahead – “Hello, is it me you’re looking for?” – Volatility

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

Well that was quite an interesting week! More record breaking in the world of investments. Let’s start with 1,175. That’s the amount the Dow Jones Industrial Average closed down on Monday, the largest point drop ever and the first time ever above 1,000. It didn’t take long for us to see the second 1,000 point drop, which occurred on Thursday. Intra-day trading on Monday saw the Dow Jones Industrial Average down almost 1,600 at one point, hitting a record -1,597. What was also interesting was that fixed income wasn’t a safe place to hide, as we saw the 10-year U.S. Treasury yield hit a four-year high of 2.88%. Gold closed lower for the week as well. Cash was king. While this bump of volatility has been surprising in its magnitude, the underlying reason of higher inflation expectations shouldn’t have been. The fixed income market realized that the economy was continuing to improve and re-priced accordingly in January, with the Bloomberg Barclays Aggregate Bond Index down a little under 1% for the month. It took equity investors another week (and some nudging from the Fed’s hawkish comments/ wage growth report) to process that inflation could be higher than many had expected.

Now the last record for the largest point drop for the Dow was 777, seen on September 29. If you recall, September 2008 had quite a few market worries: Fannie and Freddie were nationalized, Lehman Brothers went bankrupt, Merrill Lynch was sold to Bank of America before it went under, Goldman Sachs and Morgan Stanley converted from investment banks to bank holding companies, AIG failed and was nationalized, multiple money market funds broke the buck and the U.S. Treasury had to come in and offer temporary insurance, short selling of financial stocks were suspended by the SEC, and the initial TARP program was rejected by Congress (on September 29^th). This time around the fear isn’t recession… but rather have we moved from reflation to inflation.

Now on to a more positive record – Southern California native Mirai Nagasu became the first American woman (and third overall) to land a triple axel in the Olympics!

With investors laser focused on inflation, the week ahead will have the Consumer Price Index (CPI) reporting for January. An overly strong report may further spook markets as inflation expectations get re-adjusted over the next few years.

Data deck for February 10 – February 16: