Market Digest – Week Ending 2/19
In a short holiday week, stocks posted their largest weekly gain since November. Early in the week, hints of oil supply constraint measures from Russia and OPEC countries boosted energy commodity prices and encouraged equity owners. Stocks, which are often negatively correlated with oil, continue to be highly correlated with to energy commodities so far in 2016. Rightly or wrongly, the crash in oil prices has stoked fear that economic growth is slowing and/or that energy related bankruptcies will create strain in the financial system.
S&P 500: 1,918 (+2.85%)
FTSE All-World ex-US: (+3.3%)
US 10 Year Treasury Yield: 1.75% (+0.00%)
Gold: $1,227 (-0.8%)
USD/EUR: $1.113 (-1.1%)
• Tuesday – Apple published an open letter stating why it is opposed to creating a tool to unlock the phone used by one of the San Bernardino attackers.
• Tuesday – Oil spiked on rumors of a deal between Russia and Saudi Arabia to freeze output. Most of the gains would evaporate over the remainder of the week.
• Thursday – Walmart announced lower than expected sales projections for 2016.
• Friday – CPI was flat in January, but core CPI, excluding food and energy, rose 0.3%, the largest gain since 2011.
• Friday – The OECD said developed nation GDP grew just 0.2% in the fourth quarter.
• Friday – Chinese leaders indicated they would fire a top securities regulator and took steps to detail how they would manage a restructuring of the economy while maintaining growth.
Core CPI (which excludes food and energy) rose 0.3% in January. It was the largest gain in the index since August, 2011. One month does not make a pattern, and this is probably little more than noise. With energy prices decimated and technology continuing to make production more efficient, inflation feels like the concern of another era and not something to think about now. And it may well be, but inflation tends to sneak up on countries – it doesn’t announce itself well in advance.
Traditional thinking suggests that when central banks raise interest rates it acts to stifle inflation. Lower rates are believed to encourage inflation. With rates in major developed countries close to or below zero for several years, traditional thinking would suggest we may have a nasty inflation situation ready to emerge. So far there is no sign of it. A stronger dollar will also keep things cheaper for at least a while.
So we don’t know if, or when, meaningful inflation will return. But we know that historically inflation is one of the biggest wealth-killers of all time, and we urge people not to be too complacent. There are many ways to hedge against inflation which are part of a good financial strategy to begin with. Owning a home is a good start. Owning stocks helps. Owning international stocks helps even more. Owning a modest allocation to gold and commodities can help. We think a modest portion of bond holdings should be in inflation protected bonds. The situation to be wary of is a portfolio almost entirely allocated to cash and US bonds, especially bonds with long duration.