The Post-Brexit Global Stock Rally Continues
Inflation for the next year or so is likely to be higher than most investors and the markets are expecting. Once investors realize this, there will be changes in market prices on investments such as for longer-term bonds because today’s prices are based on expectations that inflation won’t increase for years.
We’ve probably seen the start of that change in longer-term bond pricing in the last two weeks. I don’t expect a sharp rise in inflation, but I think inflation, for the next few years, is going to be less than the post-World War II average.
Yet, there are cyclical pressures that are likely to push inflation higher than it has been in the last few years. Indeed, I expect inflation to rise more than markets currently seem to be anticipating.
The problem is that after several years of expecting inflation and interest rates to spike, many investors have given up on that scenario. They expect the future to be much like the recent past. Market prices indicate investors expect little or no increase in inflation or interest rates for the next five years or longer.
At the same time, many of the trends that brought us to the recent low levels of inflation and interest rates are abating. The dollar no longer is rising sharply. Commodity prices aren’t collapsing, and many are rising. Manufacturing appears to be forming a bottom. The labor market has improved enough that wage increases are exceeding the 1% to 2% annual range they’ve been in since the financial crisis. Service sector inflation continues to rise, as shown in the August issue of Retirement Watch, which is now available on the website. Housing prices are increasing.
In the last few years, the rising dollar, weak wage increases and falling commodity prices have offset segments of the economy in which prices were rising. That trade off is ending, just when investors no longer expect it to. Absent another economic shock that reignites deflation fears, inflation is likely to be higher than it is currently priced into the markets. That will lead to price declines in inflation and interest-rate-sensitive assets.
The Data
A lot of economic data was released in the last week.
We continue to see signs that inflation reached a low in the United States and is now in a slow, steady rise. The Consumer Price Index rose 0.2% in the last month and is up only 1.0% for 12 months. But when food and energy are excluded, the 12-month increase is 2.3%. The recent Producer Price Index increased more, and those numbers soon could show up in the Consumer Price Index (CPI).
Retail sales had a solid increase, despite soft vehicle sales. The previous month’s sales increase was revised down to only 0.2%. But retail sales continue to increase steadily as the labor market improves.
Manufacturing continues to deliver mixed news. The Empire State Manufacturing Survey reported only a fractional increase after posting three solidly positive reports in the previous four months.
The Philadelphia Fed Business Outlook Survey was a negative 2.9, following last month’s positive 5.0. Yet, the details of the survey were very strong, such as a sharp increase in new orders.
But Industrial Production increased more than expectations after declining last month. The manufacturing component of the report also registered a solid increase. Some of the increase was due to higher utilities output, which is very dependent on the weather. But business equipment had a solid increase, perhaps indicating that businesses are ready to invest for growth.
Housing continues its slow, steady improvement. The Housing Market Index from NAHB declined slightly due to less optimism about future new home sales. But the index still is in the same solid growth territory where it’s been for a while.
Housing starts and permits both rose well above expectations. We had a 4.8% rise in starts and 1.5% in permits. Unlike recent months, both single-family homes and multi-family housing had solid increases for the month.
Existing home sales increased again to register the highest monthly rate since February 2007. The median price rose 3.7% for a 12-month price increase of 4.7%. There continue to be more potential buyers than there are homes for sale, which holds back sales, but helps increase prices.
The FHFA House Price Index, which covers only single-family homes and only those purchased with conventional mortgages securitized by Fannie Mae or Freddie Mac, showed only a 0.2% price increase for the month and 5.6% for 12 months. This is one of the weakest months for this index in the recovery.
The mid-month Consumer Sentiment flash report, as measured by the University of Michigan, dropped four points to 89.5. The decline was due mostly to a large drop in the expectations component, which is at one of the lowest levels in two years. This is the first sentiment survey since the Brexit vote in which U.K. citizens chose to leave the European Union. That sentiment survey dip could reflect the initial reaction to that vote. The overall index is still strong, but solidly below recent highs.
The Leading Economic Indicators compiled by The Conference Board increase 0.3% after declining last month.
New unemployment claims declined 1,000 to keep the weekly number and four-week average near historic lows.
The Markets
The global stock rally continued, with emerging market stocks again leading the way. Most other investment assets lost value.
Emerging market stocks rose 1.59% for the week ended with Wednesday’s close. The All-Country World Index gained 0.82%. The S&P 500 gained 1.01%. The Dow Jones Industrial Average returned 1.26%. The Russell 2000 led the major indexes with a 0.70% increase.
Long-term bonds lost 2.38% for the week. Investment-grade bonds lost 0.48%. Treasury Inflation-Protected Securities (TIPS) lost 0.61%. High-yield bonds followed stocks more than bonds, as usual, gaining 0.33%.
The dollar gained 0.80%, while Energy-based commodities lost 1.62%. Broad-based commodities slid 2.78% and gold fell 2.24%.
Bob’s News & Updates
We’re about a month away from the MoneyShow San Francisco. I’ll be making several presentations, as will several of my colleagues at Eagle Financial Publications, plus a number of other financial experts. We’ll be at the Marriott Marquis from Aug. 23-25. Free registration is available by calling 800-970-4355 (please mention priority code 041205) or go online to RobertCarlson.
There were two more five-star reviews in the last two weeks for my new second edition of “The New Rules of Retirement.” As the latest review points out, the book is for both those planning for retirement and those already in retirement. Order your copy today.
Some Reading for You
The wisdom of crowds often isn’t that good, according to this article.
This article presents the history of planned obsolescence, including the Great Light Bulb Conspiracy.
Very few investors earned the great returns attributed to Peter Lynch, former manager of Fidelity Magellan, according to this analysis.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
