Stocks are again off to the races, setting fresh all-time high records once more. The financial markets have long past the economic recession that still has many US workers fighting to regain their pre-recession level of pay. The lack of equality in the recovery has created massive wealth for equity holders (investors), while average hourly pay rates have lagged significantly behind the scale. The Trump-led tax reform plan could unleash one of the greatest drivers of economic growth we have seen in a long time. Unlike the Fed’s plan, which pushed most elements of the economy higher, except for wages, this tax reform bill can drive everything higher. However, since a rising boat that raises everyone doesn’t always happen in equal balance, and if corporations use the excess capital to buy back stock and pay dividends, the US worker could still find themselves the loser once again. Hopefully, this will benefit all levels of wealth, including the seemingly forgotten middle and lower class.
There are small indications of inflation showing up in certain reports. However, the consumer inflation reports continue to show inflation levels that are below the Fed’s desired level. Next week, we will get a reading from the Fed’s favorite gauge of consumer inflation via the Personal Consumption Expenditures report. With the tax reform bill almost a sure thing at this point, consumers may start to pick up their spending which will drive higher demand. Since inflation is based heavily on the balance of supply and demand, that could start pushing inflation levels higher.
One key consideration with long term inflation is the pace of technology. Advances in technology are allowing people and businesses to do more with less. This limits inflation and causes downward pressure on prices. The pace of technology is expected to continue to increase at a rapid rate. This makes a target level of 2% inflation hard to maintain long term.
With bonds beneath their 200-day moving average, and with the upward pressure of the stock market driving interest rates higher, we will maintain a locking position.