Stocks Hit New Highs
In an abbreviated week, U.S. equities reached all-time highs. Optimism around ongoing economic momentum spurred by potential tax reductions kept concerns about higher valuations at bay and elevated a market environment already benefitting from improving corporate earnings.
In the coming week, the market will get a key indicator of inflation that may give clues to the Federal Reserve’s (Fed) future path. I do expect the Fed, under Jerome Powell’s leadership, to be very data-driven, especially considering inflation continues to stubbornly run below the Fed’s target of 2%. Any indication of the future path of inflation will be closely scrutinized. On Wednesday, the Personal Consumption Expenditures (PCE) index for the third quarter will be released. Expectations are for an increase of 1.5% year-over-year, well below the 2% target. The PCE is the Fed’s preferred inflation gauge, which gives the data increased importance.
The markets odds for a December rate increase are at almost 90%. Despite the high odds, I do think weak inflation and a flattening yield curve could cause the Fed to, at a minimum, readjust its outlook for interest rate hikes in 2018.
In this environment, I am still bullish on equities and cautious on fixed income assets. Within fixed income, Treasury Inflation Protected Securities (TIPS) have been well bid over the past few weeks and appear to offer good value.