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March 9 2018

Should We Worry About Inflation?

Maria Alcoke Investment Ideas inflation, interest rates, sell-off

Below is a synopsis of this investment report:

The markets sold off in February on concerns that the strong economy may overheat, inflation may spike, and the Federal Reserve (Fed) may then raise interest rates more aggressively to try to combat higher inflation.
Inflation has been below the Fed’s target of 2% for years, and the Fed gave little hint in its latest report to Congress that it is prepared to raise U.S. interest rates more aggressively in 2018.
Investors should focus on indicators such as consumer spending, economic growth as measured by Gross Domestic Product (GDP), corporate earnings results, and the Fed’s monetary policy – all of which currently point to the economy’s ability to digest price increases. Inflation and resulting price increases need not be significant concerns if we have a healthy and growing economy.

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February 9 2018

Recent Market Moves

Maria Alcoke Smart Money Blog market moves, market volatility, sell-off

This week has seen a dramatic decline in the market indexes. The Dow, the S & P and international market indexes are down double digits. As I am writing this, the Dow is just approaching its value on Jan 1 of 2018. So while we have seen a dramatic decline over the last several days, we are only back to where we started just 4 and a half weeks ago.

What is driving this volatility? Here are a few key points to keep in mind:

Part of the reason for the current volatility in the stock market is the prospect that the Federal Reserve – the central bank of the United States – could potentially raise U.S. interest rates as many as four times this year. This would effectively slow the flow of money, since higher interest rates make it more expensive for individuals and companies to borrow money.
At the same time, the bond market has seen rising yields since 10-year U.S. Treasury notes hit a low point in July 2016, mainly due to investors being increasingly concerned about inflation. Rising yields are traditionally seen as negative for stocks as they increase companies’ borrowing costs.

Now let’s refocus on the facts:

Investors have enjoyed two years’ worth of returns in a span of just three or four weeks. Those are not sustainable price moves, so this kind of volatility is normal and should not come as a surprise to investors. It is also important to note that the volatility index (VIX)*, which is a popular measure of the stock market’s expectation of 30-day volatility, has been running well below normal and, like a compressed spring, it could abruptly return.
To speak to the larger point, market returns are typically driven largely by corporate earnings and broad economic growth. Global growth continues to be strong, while companies around the globe have reported strong results in their most recent earnings reports.

This week’s ‘sell-off’ does not change this fact; we expect strong earnings growth to continue, and anticipate that the Federal Reserve and other central banks around the world will be careful to avoid raising interest rates to the point where they hinder further economic growth.