Global stock markets continued their blazing 2018 pace. The S&P 500 climbed another 1.6% and is now up 4.2% for the year. Global stocks participated in the rally as the MSCI ACWI rose 1.2%. The Bloomberg BarCap Aggregate Bond Index slid 0.2% last week and is down 0.5% for the year. The risk-on approach by investors and greater optimism about the economy have pushed rates higher.
Our Weekly Take
The Federal Reserve has raised rates four times in the last 14 months. These hikes occurred even though inflation (as measured by the PCE Price Index) remained below the Fed’s 2% target for nearly all of 2017. Fed governors expect an additional three hikes in 2018. The Fed has shown concern that leaving rates at very low levels could create financial distortions and raise the risk of major market declines. Very low rates may not affect economic growth, but they encourage leverage and financial risk-taking. Given the stock market’s performance, there is little need to encourage investors to take more risk.
Source: Carson Group Partners, the Federal Reserve and the FRED Database
Key points for the week
- U.S. consumer prices increased by 0.3% in December.
- U.S. debt yields are increasing as higher inflation is expected.
- Fed will continue hiking to control inflation and financial risk-taking.
What are we reading?
Below are some areas of the market we paid particularly close attention to this week. For further information, we encourage our readers to follow the links.
U.S. consumer prices rose by 0.3% in December — the second sharpest increase in 2017. The main contributors to the gain were increased rental and health care costs. The tightening labor market and rising commodity prices paired with a weak dollar are leading economists to believe inflation will reach the Fed’s 2% target for 2018.
U.S. debt yields rose in response to higher consumer prices. The two-year Treasury yield finally reached 2%, which is the highest level it’s seen since 2008. These increases indicate future outlooks are changing as inflation is expected to be higher this year than last. Long-term rates have also been increasing, but at a slower rate. If long-term rates start increasing more rapidly, interest rates on mortgages will move higher, too.
Fun story of the week
The electronics section at Walmart is the most popular area in the store — and that is why it’s located at the back, so shoppers have to pass through aisles of other goods to get there. For the grocery store industry, rotisserie chicken is the electronics section. The smell and cheap price of rotisserie chicken lures customers in, enticing them to pick up extra items. So, even though the price of chicken has increased, Costco keeps its rotisserie chicken marked at $4.99. The wholesale giant prefers to reduce costs rather than raise prices. Who knew chicken could be such a draw?
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.