Stocks Notch 5th Week Higher

Highlights of this Week’s Update:

1. The major U.S. stock indices finished the week higher, logging a five week winning streak.
2. Interest rate eased lower, while both gold and oil prices rose.
3. Is inflation really just 1.7% for the past year as reported?
4. Central Banks in China and Europe make moves on Friday that fueled stocks.
5. OPEC meets this week which could make for volatile oil prices.

Read on for Further Details……………………………………………………..

The Markets:

Last week saw the major U.S. stock indices continue to inch higher, with the Dow gaining .99% and the S&P 500 rising 1.16%.  This ran their winning streak to five week. For the year, the Dow is now up 7.44%.  Interest rates fell slightly while oil rose by .80 per barrel to end the week at $76.72.  Gold rose back above $1,200 per ounce, gaining $34.75 to end Friday at $1,203.5 per ounce. (U.S. Treasury, MarketWatch, CNBC, Energy Information Admin.)

Mortgage rates fell today, with the national average for a 30 year fixed rate mortgage at 4.06% and the 15 year fixed rate is now at 3.17%. (Bankrate.com)

What’s up – or not – with Inflation?

Mention the word “inflation” and you may get one of many responses. What goes through your mind when you see a story on the low rate of inflation in the U.S.? All official measures (U.S. Bureau of labor Statistics (BLS)/Bureau of Economic Analysis) point to inflation that’s running below 2% per year.

Without a doubt, it’s easy to point to anecdotal examples of outsized price increases. In the case of food, rising prices have outstripped the broader gauges, including the most recent data on inflation from the BLS. In this case, it’s the Consumer Price Index (CPI).  Healthcare and higher education are also areas that far exceed the current stated rate of inflation.

While food costs as measured by the CPI rose just 0.1% in October (BLS), price hikes at your local restaurant and in the grocery aisle have accelerated this year – see Figure 1.

Since the start of the year, the rate of increase in all food (black line in Figure 1) has nearly tripled.

Shelter costs, which make up nearly one-third of the CPI (BLS), have been increasing at roughly 3% per year, according to BLS data. Yes, modest inflation is being reflected in parts of the economy. But the broader measure of inflation remains benign. Last month, the CPI was unchanged, as energy fell 1.9%, including a 3.0% decline in gasoline prices (BLS). Strip out oil and food, and the core rate of inflation rose 0.2%.

Year-over-year, the CPI is up 1.7% and the core CPI is up 1.8%. Historically, that’s pretty mild, and it’s below the 2.0% target established by the Fed.

For the most part, core inflation has held within a narrow range since early 2013 – see Figure 2. Based on what’s happening to wholesale prices (Producer Price Index per the BLS), there is little in the way of inflation building in the pipeline at the present time.

Based on the minutes released on the Fed’s website from its late October meeting, most Fed officials believe inflation is “likely to edge lower in the near term, reflecting the decline in oil and other commodity prices and lower import prices.” But these participants continue “to expect inflation to move back to the (Fed’s) 2% target over the medium term.”  If the Fed is wrong and the rate of price hikes begins to slip, it may delay an interest rate increase, which most analysts believe will probably occur in middle of next year.

Global Central Banks Act

On Friday – China’s Central Bank unexpectedly cut key rates for the first time in over two years as it hopes to support growth (Wall Street Journal). Meanwhile, European Central Bank President Mario Draghi sharpened his tone regarding a new round of stimulus (Wall Street Journal, Bloomberg).  Both these moves helped support global stock markets for the week.

It’s a bad news (slower global economy) is good news (stocks) scenario. Just as the Fed is eyeing a rate hike next year in the U.S., global central banks are looking to take up the slack, which has been a tailwind for U.S. stocks.

Eyes on OPEC

With oil prices at multiyear lows, OPEC will be meeting this Thursday (Bloomberg) when many of us are celebrating Thanksgiving. What the oil cartel does, or does not do, can and does affect the price oil. It’s all about probabilities. No one’s really sure what OPEC will do, but options range from: announce a production cut, announce no cuts but stricter compliance, or maintain the status quo. But it’s expected that we will probably see some volatility in prices following the meeting.

We wish all of you a blessed and safe and joyous Thanksgiving holiday with family and friends!

God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc.

 

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