“When a stock goes up, sell it. If it doesn’t go up, don’t buy it.” — Mark Twain 

“Give me a one-handed economist.” — Harry Truman

“Making predictions is difficult, especially about the future.” — Yogi Berra

Perhaps the most important lesson investors can draw from history is that stock market behavior is unpredictable. The nature of human emotion often leads the market to swing in irrational and inconsistent ways and makes trying to predict the short-term movements an exercise in futility. As the big swings of the prior two weeks have demonstrated, this lesson should always be remembered.

The last two weeks shared a similar backdrop. The Good News included robust corporate earnings (20% gains!) and synchronized global economic growth. However, there was the Bad News that worked against the Good News: Early signs of faster inflation and tightening monetary conditions.

During the prior week, the Dow* and the S&P 500* suffered their worst week in over two years and plunged into correction territory, after the US monthly jobs report showed inflation was gathering momentum (although the Fed has been telling us that we need more inflation). The appearance of inflationary pressure and faster-than-anticipated Fed interest rate hikes sent shock waves through the market and helped unleash heavy volatility. The ‘VIX’ (a measure of market volatility) jumped from its normal price range of around 13-15 to more than 50! – that’s a volatile week!

New data this past week lent further evidence to the concept that inflation is accelerating, with a greater than expected rise in consumer prices in January and an uptick in producer prices. Yet, despite the persistence of higher inflation signals that had just sent the major indexes into a correction, the S&P 500 and NASDAQ enjoyed their best week since 2013 and 2011 respectively, with 4.3% and 5.3% gains, while the DJIA gained its most in two years with a 4.3% weekly advance. In contrast to the previous weeks, jitters about the threat of rising inflation gave way to the positive picture of strong global economic growth and healthy corporate earnings.

Taken together, the divergent movements of the past two weeks underscore the unpredictable nature of the markets and the importance of remaining disciplined in the midst of short-term volatility.

Market Minute 2/23/2018 – Inflation

Those of us who lived through the 80’s may still get chills when the headlines trumpet ‘Inflation is back’, and similar sentiments. As the 10-year treasury almost hit 3% this past month, markets reacted negatively – perhaps because a part of the investor population also remembers the 80’s and the negative markets that resulted when the Fed clamped down on inflation by raising interest rates. But is it different this time? Is there any chance that we’ll see the 12% inflation of the 80’s again?

While there is no doubt that inflation has certainly been more noticeable since the weakness of mid-2017, and the CPI (Consumer Price Index) managed to rise 0.3% in January, expectations at this time are for a possible rise of nearly 2% this year. If that expectation is realized, we would anticipate that the Fed will hike rates the 3 times they have projected. This will still give us a historically low interest environment. There is also the wage growth fear. But this may be over-stated. Sadly the media when reporting on wage growth very often conflates ‘wage growth’ and ‘wage inflation’. This can be rather misleading, as if any advance in wages is, in and of itself, inflationary. Of course, that is not true. If it were true than anyone working for wages could never advance their purchasing power.  

I feel that, given the fact that our labor-participation rate is still extremely low by historical standards, and there are still 6 million-plus unfilled jobs in our country, the recent bump in rates will likely settle down and give us a much more benign growth in rates and inflation. The result is most likely to be renewed confidence that the Fed will not spoil the party, and the market gains will most likely continue – at least for the near and intermediate term.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email please contact us at 602-252-8700 or by e-mail at lindaw(at)denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation. Information in this commentary is the sole opinion of Denk Strategic Wealth Partners. Past performance is no guarantee of future returns. All market related investments involve various types of risk, which include but are not restricted to, credit risk, interest rate risk, volatility, going concern risk, and market risk.

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*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.