Investment & Economic Talking points
- As expected, the FED raised rates .25% last week. This was Janet Yellen’s last committee meeting before Jerome Powell takes over as chairman in February. Despite some early concerns, Powell is largely expected to continue Yellen’s policies.
- With this rate hike, the FED is now paying banks 1.50% on their reserve balances. As of right now, the FED is projecting three more rate hikes in 2018 which would mean banks would earn 2.25% on their reserves. This is essentially a built-in earnings increase for banks, most of which has been priced in for months in our opinion.
- The Producer Price Index (PPI) increased 0.4% in November, above the 0.3% consensus expected number. Perhaps more importantly PPI is now up 3.1% from a year ago, the largest 12-month increase since 2012. No matter how you dis-aggregate this number the data is clear – inflation is on the rise. Whether or not we need to be concerned about it is yet to be determined.
- The Consumer Price Index (CPI) also rose 0.4% in November, matching consensus expectations. CPI is up 2.2% from a year ago. One may be lead to believe that PPI leads to CPI, but due to variations in the data collected that is not necessarily the case. The rise in CPI essentially “sealed the deal” on last weeks FED rate hike since the FED wants to control inflation, but this should be seen as a fairly benign number.
- Finally, retail sales increased 0.8% in November, crushing the 0.3% expected gain. In addition, prior months were revised higher. “Core” sales, which excludes autos, building materials, and gas are up 4.3% from a year ago. Based on these numbers the American consumer is very, very healthy.
It’s getting harder and harder to find any fault in the economy right now. As long as earnings continue to grow, valuations should remain under control. To be fair, most valuation measures are higher than their historical norms, but no where near “bubble” like in our opinion. Corrections during bull markets are common, because we know that the average intra-year decline on the S&P 500 is 14.1% since 1980 (according to JP Morgan).