Inflation and economic growth are key drivers of long-term rates, and rising rates can lead to higher borrowing costs for individuals and businesses, potentially impacting consumer spending and profit margins for businesses. Given the recent market volatility, the January Consumer Price Index (CPI) report, which will be released on Wednesday, February 14, could become a focal point for markets.
After an extraordinary two-year period of market calm, the major U.S. equity markets slipped into correction territory last week. A perfect storm of investor worries collided over the past six trading days, including inflation, monetary policy, and the unwinding of crowded, complex trades. The result was an unprecedented bout of market volatility, highlighted by 1,000-point swings in the Dow Jones Industrial Average and the fastest retreat ever (nine days) from a record level in the S&P 500 Index to a correction.
With rising rates making high-quality fixed income more attractive, many fixed income investors may be asking, why own bonds? Despite headwinds from rates, we believe bonds may still play play a vital role as a portfolio diversifier. As corporate earnings move higher and fiscal stimulus provides a further tailwind, the case for stock investing remains compelling, in our view.
January 2018 saw December’s trend of above-consensus economic reports taper off, though the data suggests strong underlying fundamentals in the U.S. economy, supported by solid consumer spending. Fourth quarter growth in real gross domestic product (GDP) of 2.6% fell short of the more optimistic 3.0% forecast by Bloomberg-surveyed consensus, dragged down largely by inventories and trade (faster growth in exports than imports).
The Portfolio Compass provides a snapshot of LPL Financial Research’s views on equity, equity sectors, fixed income, and alternative asset classes. This monthly publication illustrates our current views and will change as needed over a 3- to 12-month time horizon. Read recent issue...
OVER THE PAST EIGHT YEARS, extraordinarily accommodative monetary policy has served as the primary catalyst for spurring continued economic growth in the U.S. and around the globe. Although the economic expansion has delivered steady gross domestic product (GDP) growth, consistent returns for the broad stock market, and an improving job market, the expansion itself has been lackluster.
An important shift has taken place in this economic cycle. The Federal Reserve (Fed) was finally able to start following through on its projected rate hike path, raising rates twice in just over a three-month period. By doing so, the Fed showed increasing trust that the economy has largely met its dual mandate of 2% inflation and full employment, that the economy is progressively able to stand on its own two feet, and that fiscal policy may now provide the backstop to the economy that monetary policy has provided throughout the expansion.
Stock markets, bond markets, the economy, policy — some years they push and pull on each other lightly as markets follow their own path; in others, one influence, such as monetary policy, dominates. But sometimes, often following a period of change, understanding the pushes and pulls and how they interact becomes a key to reassessing market dynamics for the next year and beyond.
During any presidential election, you can expect a barrage of promises from the yard sign endorsements, bumper stickers, stump speeches, and media headlines. All pledge to improve the economy, provide better education for all, and preserve the environment.
The Economic Cycle - We believe we are in the mid-to-late stage of the current expansion, but we are still seeing some early cycle and late cycle behavior. Extended loose monetary policy, inflation, and employment growth are still exhibiting early cycle behavior, while some items relating to corporate profits are showing late cycle behavior, although they may be reset if profits improve.