Market Commentary: Inflation, Potential Rate Hikes, Russia-Ukraine Tensions Weigh Heavily on Markets

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Inflation continues to move sharply higher. The Consumer Price Index (CPI) rose 0.6% last month and is up 7.5% in the last 12 months. The annual gain is the highest since February 1982. Big gains in energy and food helped fuel the outsized price hikes. Core CPI, which excludes food and energy, increased 0.6% as well.

Key Points for the Week

  • Consumer prices jumped 0.65% in January, pushing their climb to 7.5% in the last year.
  • S&P 500 earnings are expected to grow more than 30% in the fourth quarter. Future earnings growth is expected to slow as comparisons become more challenging.
  • Investors are wrestling with concerns over higher interest rates and a potential Russian invasion of Ukraine.

High inflation prompted James Bullard, president of the St. Louis Federal Reserve Bank, to call for interest rates to be increased 1% by mid-year. The comments and strong inflation data helped ratchet up the Fed’s plans to raise rates. News that Russia seems ever closer to attacking Ukraine also increased market concerns.

Fourth quarter earnings continued the strong quarterly trend. S&P 500 earnings are expected to increase just more than 30%. If final earnings growth is above 30%, it will be the fourth straight quarter that earnings growth surpassed 30%. Some companies are experiencing tougher comparisons to previous quarters and the rapid growth they experienced during the pandemic.

The concerns about interest rates and Ukraine pressured markets. The S&P 500 declined 1.8% last week. The MSCI ACWI edged down 0.4%. The Bloomberg U.S. Aggregate Bond Index shed another 0.4%. Russia’s intentions toward Ukraine will be watched closely. U.S. retail sales and a host of international inflation releases lead key news events this week.

(Figure 1)


Moving on Up

The last time inflation was this high, the Jeffersons, with its familiar theme song, “Movin’ on Up,” was the highest-rated comedy show on television. Moving on up is a good description for recent inflation trends. The Consumer Price Index soared another 0.6% last month and has climbed 7.5% in the last 12 months.

Diving into the data shows some familiar themes. Energy prices continue to jump higher. Food prices have accelerated in recent months and matched energy’s 0.9% increase. The broad climb in prices across the economy caused core CPI to increase 0.6% as well. Continued rapid price increases in used cars are contributing to inflation gains. Used car prices rose 1.5% last month and have now jumped more than 40% in the last year.

Moving on up is an apt description for not only inflation, but also for interest rate expectations. The odds of a 0.5% increase in rates for the March Fed meeting are now roughly even with the odds of an increase half that size. One month ago, the odds of a 0.5% increase were only 3%. James Bullard, a voting member of the Federal Open Market Committee, called for four interest rate hikes in the next three meetings. That is faster than what was embedded in market expectations.

Earnings have been strong for a while and seem to be leveling off. At this point, 72% of S&P 500 companies have reported earnings, and once again analysts have underestimated earnings and revenue growth for companies they cover. So far, 77% of companies have reported earnings above analysts’ estimates, which is slightly above the average of 76%, and the average earnings beat is right at the average of 8.6%. At this point, the estimated full quarter earnings growth rate is 30.3%, which would be the fourth consecutive quarter of earnings growth at about 30%. If the trends holds up, the full year 2021 earnings growth rate will be 47.4%.

Inflation isn’t just affecting consumers. Seventy-three percent of companies’ Q4 earnings calls have mentioned the word “inflation.” The average number of companies over the past five years is 29%, so it’s obviously on the minds of corporate executives. What will be interesting to see is the degree to which companies are able to pass the higher costs they’re experiencing to customers.

A potential Russian invasion of Ukraine is a rapidly increasing risk factor. Russia’s 2014 incursion into Ukraine did not move markets much in the U.S., although European markets did experience a larger decline. The reaction to an attack is likely to be greater given the large scope and higher potential for human casualties. Russian stocks would also likely decline. If Russia invades, the severity and enforceability of any sanctions will be an important part of the market reaction. Based on the statements from the U.S. and European countries, NATO appears very unlikely to commit troops to the region.

The situation in Ukraine is an unfortunate reminder that market reaction to an event doesn’t equate to the true human cost.

This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.


The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.


The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.

Bloomberg U.S. Aggregate Bond Index

The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.

Russell 1000 Growth

The Russell 1000® Growth Index measures the performance of the large cap growth segment of the US equity universe. It includes those Russell 1000 companies with relatively higher price-to-book ratios, higher I/B/E/S forecast medium term (2 year) growth and higher sales per share historical growth (5 years).

Russell 1000 Value

The Russell 1000® Value Index measures the performance of the large cap value segment of the US equity universe. It includes those Russell 1000 companies with relatively lower price-to-book ratios, lower I/B/E/S forecast medium term (2 year) growth and lower sales per share historical growth (5 years).

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