The week in review
Just as was expected last week, the news focused on Ms. Yellen’s press conference. The announcement of a 0.25% increase came on Wednesday afternoon and the markets reacted favorably. The S&P 500 almost made it back up to its high set at the beginning of the month but is still down a bit for the month and appears to be stuck in a fairly narrow range at the moment. Of course, Ms. Yellen said that the economy is improving and used that as the rationale for the increase. The Fed left unchanged the expectation that we will likely see a couple more increases this year, but the language is contingent enough to leave some wiggle room. It is important to recall that the Fed has a mandate to control inflation (and they usually raise rates to trim inflation) but in recent years have been working hard to try to get it up to 2.0%. That remains their target.
I turn our attention to four other indicators of the economy: the dollar (measured by Symbol:UUP), Gold (measured by GLD), Oil (measured by USO), and longer term treasuries (measured by TLT). So how did each of these react to Ms. Yellen’s comments? The dollar dropped by 1% within an hour of her press conference implying that the currency market doesn’t think the economy is doing a lot better. In response, the price of Gold was up 2.56% by Thursday’s open. This could have been caused by the fear that the Fed will actually let inflation go to levels well above 2%; or simply a reaction to increased uncertainty. Oil had actually already seen a sharp decline in the previous week and continued to float sideways. Finally, we saw a bit of rally in the price of bonds as the long term rates ticked lower after the Fed’s announcement–the prices of the bonds went higher. TLT, the 20+ year Treasury ETF, has perhaps found some support this week after falling a bit. The difference in short term rates and long term rates, referred to as “the spread,” had begun to widen in the fall, indicating that the bond market felt that the economy was improving. That appears to no longer be the case as we have seen spreads between 2 and 10 year Treasuries begin to narrow. Maybe the Fed committee can see things that we cannot, but none of these other factors indicate a strengthening economy in my book.
As also expected, news pundits focused last week on job creation and were quick to point out that “wages are on the rise.” But where? On Wednesday, the Bureau of Labor Statistics reported that real average hourly earnings were unchanged from February 2016 to February 2017. That combined with a decrease in the average workweek spells a 0.3% decrease in real average weekly earnings. Finally, the Atlanta Fed reported a drop in its first quarter GDP forecast to 0.9% from 1.2%.
On Friday, I visited The HomePlace at Midway and enjoyed a delightful St. Patrick’s Day luncheon with some wonderful people there. I believe that the HomePlace is a clear example of how long term care should be provided. It is a Green House Community and worth your look if you or a loved one will need long term care. Sadly, the waiting list is long.
A look ahead
This week enjoys a fairly light week of economic reports. We will see some real estate reports on Tuesday, Wednesday, and Thursday. Durable goods orders will be reported on Friday. Many managers are looking toward the end of the quarter and are already making adjustments to their portfolios in anticipation. The stock market begins the week looking to find some direction, having been in a narrowing up-trend in recent weeks. The 50 day exponential moving average is above the 200 day on all the major indices, but momentum seems to struggling a bit. We will watch these things as they unfold this week.
Later in the week, I plan to release a bit of research that I have been doing on the lack of wage growth and how that relates to spending as inflation picks up. Since the largest percentage of the GDP is comprised of consumer spending, I think this can be a significant macro development, but it affects us all very personally and has implications for our financial plans. I will let you know when it is ready.