Favorable Market Outlook for Stocks, Bonds

09/21/2017 1:26 am EST

Focus: STOCKS

Marvin Appel

President, Signalert Asset Management LLC

Stable rates suggest the markets are not worried about the impact of the Federal Reserve starting to unwind its $4.46 trillion balance sheet, which could potentially force long term rates higher, asserts Marvin Appel, MD, PhD, of Signalert Asset Management. 


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State of the Market:  Inflation stays the course despite the jump in gasoline prices in August, weakening the dollar and helping support stocks.

On Sept. 14 the government released inflation data for August.  Consumer prices jumped 0.4% last month, driving mostly by a 6.3% jump in gasoline prices due to Hurricane Harvey. 


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The trailing 12-month gain in consumer prices was more reasonable, at 1.9%.  The core inflation index, which excludes food and energy, rose 0.2% in August and 1.7% within the past twelve months. 

The markets are acting as if this will give the Federal Reserve license to go slowly with further interest rate hikes:

The U.S. dollar is close to its weakest level of the year, retesting its recent lows. 

10-year Treasury note yields also hit a new low of 2.06% for the year before recovering to the 2.2% area where they appear to be stabilizing, unaffected by the inflation report.  This is still at the low end of the range of interest rates over the past nine months, suggesting that markets see muted inflation pressures going forward. 

Stable rates also suggest that the markets are not worried about the impact of the Federal Reserve starting the process of unwinding its $4.46 trillion balance sheet, which could potentially force long term rates higher.   

chart 1

The implications for stocks and bonds are favorable. 

Bond holders will continue to collect interest, modest but steady. 

Equity investors should enjoy gains commensurate with growth in profits, which so far are going well.

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