Stock market begins to slip, fear indicators are higher. As of February 24, 2023, the major stock markets, which have held their ground, have begun to slip over the past three weeks. The S&P 500 and Nasdaq composite stayed relatively steady throughout early 2023, driven by positive corporate earnings reports and the continuation of slowing down rate hikes by the Federal Reserve Bank. Unfortunately, concerns over rising inflation and the hotter than expected reading on the personal-consumption expenditures price index have led to increased market volatility and caution among investors. More options betting that the Volatility Index (VIX) will rise have changed hands on an average day in February than at any time since March 2020. The VIX is commonly referred to Wall Street’s fear gauge and rose to above 23 last week, as readings below 20 typically signify complacency, while those above 30 signal that investors are looking for protection.

Key economic data indicates inflation still persistent. The U.S. Bureau of Labor Statistics recently released its CPI data for January of 2023, which increased 0.5% for the month and rose 6.4% over the last 12 months. The index for shelter was by far the largest contributor to the monthly all items increase, accounting for nearly half of the total increased. The food index increased 0.5% over the month and the energy index increased 2% in January. These numbers were much higher than expectations and increased market volatility following the release.

Investors cautiously optimistic about future FED policy decisions. Chairperson Jerome Powell has emphasized the importance of patience and data-driven decision making, noting that the Fed will prioritize its mandate of maximum employment and price stability in determining the appropriate path forward. During the January rally, it looked like the economy could glide through a tightening cycle without any damage to the real economy, but that sentiment seems to be fading more and more each day. Fed officials have floated the idea of resuming 0.5% interest-rate increases to cool the economy, which has led the 10-year and 2-year yield to sit at 3.9% and 4.8% respectively, further threatening stock market performance.

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