Could Good News Become Bad Again Soon?
To be sure, inflation does not appear to be a major threat to the economy at this point in time. And as a quick aside, when I began in the business in early 1980, the "problem" was too much inflation, not too little. Thus, I've found all the hand wringing about inflation failing to meet central bankers' targets amusing for some time now. (In my opinion, this has merely been a smoke screen for the Fed to focus on something it's not supposed to - i.e. the state of the economy.)
One of the most important lessons to learn about the stock market game is the drivers of the action are always changing. And the inflation expectation component is a perfect example. During the 1980's a war was waged to keep inflation from ruining the country. Now it's about keeping the economy out of a Japanese-style deflationary spiral.
So far, so good on that score. And I think we all owe a big "thank you" to Mr. Bernanke for that one.
From a macro picture, the economy is improving. The job market is strong. Corporate profits continue movin' on up. Rates are low. Inflation has remained in check. As a result, the stock market has been hitting fresh all-time highs with regularity lately. What's not to like, right?
But, as I mentioned yesterday, one of my nagging concerns about the current "Goldilocks" environment is that wage inflation could pick up if the economy continues to improve. And in my experience, once that ball starts rolling, it is tough for any politician or central banker to stop.
I have expressed some concern about the $1,000 bonuses paid to employees of AT&T, Fifth Third Bancorp, Wells Fargo, Boeing, American Airlines, and Southwest Airlines. My worry is that if this trend continues, the wage data could very easily pop up into the inflationary zone quickly. This "could" (key word) cause yields to move up, which, in turn, could cause profits to slow a bit. And this could (there's that word again) create a raison d'etre for stock market bears.
Sure, this is merely speculation and my inflation models aren't waving any yellow flags yet, let alone a red one.
However, given that the current bull market is going to celebrate a birthday next month, and that the average cyclical bull doesn't tend to last much more than a couple years, I think it is prudent for those of us in the risk management business to be on the lookout for potential problems down the road.
This brings me back to the subject of inflation, which, is really all about wages and the job market. This morning, we got a report from Challenger, Gray & Christmas that showed U.S. employers planning to cut the fewest number of jobs seen since 1990.
And according to CNBC, employers are planning to hire more than 1.1 million new workers in 2018, which is up 27% from 2017.
The bond market appears to have noticed the report as the yield on the 10-year is moving higher in early trade. And it is worth noting that the trend of the 10-year has been moving higher since the early-September low.
Yet, from a big-picture standpoint, yields remain in check and inflation isn't a concern. So, there is a decent chance that I am worrying about nothing here.
At the same time though, with valuations suggesting stocks are priced for "perfection" (or at the very least, a continuation of all the good stuff that has been happening), any bump in the road could be a problem.
So, with stocks opening at another new high this morning, there doesn't appear to be any reason to take profits or raise cash here. But since my job is to keep portfolios in line with conditions and risk levels, I'm going to continue to keep my eyes peeled for any sign of trouble ahead.
Thought For The Day:
Life is about laughing and living in good & bad times. Getting through whatever comes our way and then looking back with a smile. -Unknown
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of the Economy
2. The State of Fed Policy
3. The State of Earnings Growth
Wishing you green screens and all the best for a great day,
David D. Moenning
Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none.
Note that positions may change at any time.
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