This Week's Market Commentary, 2/19/17

Kevin Garrett |

On Wednesday, the Dow, Nasdaq and S&P 500 all closed at all-time highs. For the first time in 25 years, the three indexes made five consecutive new highs together. While I've expected some pull-back in the market this quarter in the near-term, I've been happy to see that my views so far have not been accurate. The big news this was that in January, inflation had its biggest surge in four years. Last month, consumer prices rose at an annualized rate of 6.8%—and it wasn’t all due to gasoline. That’s twice what economists had been expecting. In the last year, inflation has been running at 2.5%. About half of the increase was due to higher gasoline prices, but there are other factors as well. Clothing prices, for example, rose strongly last month. If we look at “core inflation,” which strips away our food and energy prices, then we see that inflation rose by 0.3% last month, or 3.76% annualized. Still, that’s the highest rate in more than 10 years. Does this mean that inflation is on the upswing? I think its it’s too early to say. I like to look at a trend in numbers as opposed to a single data point and while I am doubtful that this is a beginning of a much higher inflationary period, more data needs to come in to confirm that sense one way or the other. By the way, the increase in inflation essentially nullified the Fed’s December rate hike and its now running ahead of the Fed's 2% target rate, At this point, I would expect their next rate increase to come in June. Fortunately, the long-end of the bond market is still relatively calm, with the yield on the 10-year Treasury climbed 2.5% after the CPI report. Earlier this week, the yield on the one-month Treasury got up to 0.53%. While that's not much, its still a nine-year high. The message is clear that interest rates are on the way up, but we’re a long way from them being real competition to stocks. Other interesting economic news this week is that small-business optimism continues to rise. We saw big jumps after the election, and it’s now at a 12-year high. Retail sales did well last month. We saw a seasonally adjusted increase of 0.4%. Interestingly, the figure for December was revised higher to 1% growth. That’s very good for one month. The stock market will be closed on Monday for President's Day. Next week is pretty quiet with not much in the way of economic news. The existing home-sales report is on Wednesday. Then in Friday, the new homes sales report comes out. Have a great weekend!