What a week! Not only did the worst hurricane in 25 years hit the U.S., causing widespread devastation, but the financial markets also weathered their own storm of sorts. After reaching new high levels last month, the key stock indices plummeted five percent over two days. Stock investors suddenly became afraid of rising interest rates and the prospect of lower corporate earnings. Historically, the stock market tends to act in an anticipatory manner, trading on expectations that may not happen for months or years. Soon after the Presidential election in 2016, stocks ratcheted higher on prospects of strong economic growth.
Now the markets are doing the opposite – pulling back and taking gains on fears of slower economic growth, brought on by high interest rates and trade tariff issues. The fall began to spiral out of control once a $2 billion sale order came through. After a day and a half of falling stock prices, the bond market finally got involved as the safe harbor in the storm. The 10-year Treasury yield collapsed 10 basis points, and the two-year note yield gave up five basis points.
As if that were not enough, the Federal Reserve's monetary policy came under scrutiny after President Donald Trump voiced his not-so-favorable opinion of Chairman Jerome Powell and his team. Trump said the "the Fed has gone crazy," believing the fall in the stock market was caused by the Federal Reserve increasing interest rates too fast. Trump added that even though he feels the Fed is making a mistake by continuing to raise rates, he has no plans to fire Powell. It was the first time in decades a U.S. President has made public comments about the Federal Reserve. Many economists feel Trump's comments, while representing his personal opinion, were undermining the independent nature of the institution.
Key Indicators this Week:
Inflation – Producer and consumer prices were on divergent paths last month. PPI increased the most in three months, with almost all layers of the index higher than the previous reading. The year-over-year core measure was 2.5 percent, one of the higher measures this year. A sharp rise in transportation prices and services costs pushed the index higher. Despite rising wholesale costs, consumer prices remain tame. CPI increased 0.1 percent, the smallest increase since June. The year-over-year core measure remained at 2.2 percent. A stand-out in the index was a three percent drop in used auto prices, the largest drop in 15 years. The question and concern is how long it will take for wholesalers to be able to pass on higher costs to consumers. So far, it does not seem to be occurring.
World Forecast – The International Monetary Fund (IMF) sent out a warning message this week about global economic growth, suggesting fatigue is setting in. The IMF lowered its forecast for global expansion for the first time in two years, citing the trade dispute between the U.S. and China, as well as problems in the emerging markets. The revised estimate calls for 3.7 percent global growth this year and next, down by 0.2 percent from the previous forecast. The IMF also cut its outlook for the U.S. by 0.2 percent to 2.5 percent in 2019. It left its projection for 2018 growth at 2.9 percent.
Between the Numbers:
Social Security recipients will get a 2.8 percent increase in their benefits beginning January 2019. This is the largest cost of living adjustment in seven years.
Sarina Freedland – Senior Investment Officer