Article Category: Inflation

Please Be Patient, Janet

The Fed raised its key benchmark rate by a quarter point last Wednesday, and both the stock and bond markets took it in stride. This is largely because expectations for a rate hike were at nearly 100%, making it "business as usual" for this stage of an economic expansion.

But a slew of data suggests that perhaps the Fed should show a bit more restraint in future meetings, as it may begin compromising its ability to meet its own objectives. The main concern, as you might expect, has to do with inflation.

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Posted in: Federal Reserve Inflation Interest Rates Momentum Psychology

What’s Up With Tech?

Leadership is an important consideration in any type of market, bull or bear. When market leadership is thin, and quickly changes direction, it can signal a shift in the tone of the overall market.

The rally that has unfolded in recent months has been changing in character. Originally, the thrust began as a reflation trade, as signs of disinflation/deflation began to fade and global bond yields crept higher. The timing of this coincided with the election, which brought with it hopes of tax cuts, deregulation and infrastructure spending. This boosted the prospects (and share prices) of cyclical companies - those that need an improving economy to do well.

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Posted in: Corrections Inflation Interest Rates Market Breadth Volatility

Corporate Earnings, Bond Market Sending Mixed Signals

As is often the case, two major areas of interest are sending mixed signals with regard to where the equity market heads next. Corporate profits (as well as revenues) are suggesting more gains lay ahead, while the bond market, in all its infinite wisdom, is pointing towards a slower growth environment.

Which one will ultimately be correct? Let's find out, beginning with corporate earnings.

It's no secret that major corporations posted strong results in Q1. With 99% of the S&P 500 having reported, the blended earnings growth rate for the first quarter stands at 14.0% (FactSet). This is the strongest earnings growth we've seen since Q3 2011, when profits rose by 16.7%.

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Posted in: Dollar Federal Reserve Inflation Interest Rates Momentum

The Implications of Quantitative Tightening

The secret's out. The Fed wants to shrink the size of its balance sheet, and they want to begin the process sometime this year. What does this mean for investors? And what does it mean for key variables such as interest rates, inflation and economic growth? Let's find out.

For those who may not recall, in the midst of the financial crisis the Fed embarked on a bond-buying spree known as quantitative easing. This process involved the purchase of trillions of dollars' worth of long-term Treasuries and mortgage-backed securities in an attempt to 1) suppress long-term rates, 2) inject liquidity into the financial system and 3) remove toxic assets from the balance sheets of public and private institutions.

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Posted in: Bonds Federal Reserve Inflation Interest Rates

Unrealistic Expectations

We all know that investing is a game of expectations. The market "prices in" certain information, and then we adjust our outlook and positions as those expectations change. A key operating rule of this "game" is that when the best that can be seen ahead is fully discounted, the market tops out.

A perfect example of this in action (on a micro scale) is the classic "beat and raise." When a company reports earnings, the best thing possible - at least for those who are long the stock - is for the company to beat earnings expectations for the prior quarter, then raise their guidance for subsequent quarters.

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Posted in: Bonds Earnings Economy Federal Reserve Inflation

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