November 2016 Insight
Adam E Bray CFP®
Chief Investment Officer
The S&P 500 Index closed at an all-time high 2,190 on August 15 (St. Louis Federal Reserve). We then preceded to close within 3% of the all-time high for the next 54-straight business days ending October 31 (St. Louis Federal Reserve). That’s the longest streak since 1928, according to LPL Research.
The sheer boredom in this broad-based index of 500 larger companies contrasts sharply with the circus that has unfolded. You know, the 2016 presidential election. Let's take a look at the year to date numbers.
Table 1: Key Index Returns
||3 - Year* %
|Dow Jones Industrial Average
|S & P 500 Index
|Russell 2000 Index
|MSCI World ex-USA**
|MSCI Emerging Markets**
Source: Wall Street Journal, MSCI.com
MTD returns: Sep 30, 2016—Oct 31, 2016
YTD returns: Dec 31, 2015—Oct 31, 2016
**in US dollars
Tune into well-known economists and Federal Reserve officials and you’ll hear that one reason interest rates have been slow to rise has been a rate of inflation that’s too low. Yes, you heard it right, prices aren’t rising fast enough.
While some of you are thinking about the cheap price of gasoline, others can’t help but point to everything from college and health insurance costs, the latest rise in your cable bill, or even the cost of popcorn at the movies.
Key measures of pricing, such as the Consumer Price Index (CPI) and the lesser known PCE Price Index (the one the Fed prefers), have held below the Fed’s inflation target of 2% for over three years (BLS, BEA).
I readily acknowledge that everyone’s monthly basket of goods and services is unique. A person who puts 6,000 miles on her Prius each year won’t benefit nearly as much from lower gasoline prices as the person who racks up 25,000 on her SUV. Still, the major price gauges really do a good job of monitoring the overall price level.
And here lies the disconnect. From an investment perspective, markets (including the stock and bond markets), the Fed, and economists are going to key in on the major indexes such as the CPI and the PCE. That said, the CPI is beginning to detect rising inflation in parts of the economy. In particular, the price paid for services is advancing at a moderate clip, up 3.0% from a year ago (BLS)
Notably, medical care has started to rise at a much faster pace, up nearly 5% over the past year, and the cost of shelter (primarily rent as actual home prices aren’t included in the CPI), have accelerated to almost 3.5%.
Despite important pockets of the economy which are experiencing pricing pressures, it is unlikely that we will see much reaction from the Federal Reserve. The Fed’s focus remains on overall economic growth.You see, the Fed wants to keep interest rates low in order to squeeze extra job growth out of the economy. Unfortunately for savers, any interest rate hikes are likely to be gradual unless overall inflation rises sharply.
I know that for some of you, this year’s election has been particularly difficult. You are rightly concerned about the direction of the nation, and you fear the leadership that will take the helm next year won’t be in the country’s best interest.
I won’t comment on the many pressing issues of the day, nor will I suggest how to vote.
I will leave you with something I wrote just a couple of months ago, and something I wholeheartedly subscribe.
In his 2015 letter to shareholders, Warrant Buffett said, “For 240 years it's been a terrible mistake to bet against America, and now is no time to start. America's golden goose of commerce and innovation will continue to lay more and larger eggs (Bloomberg – Warren Buffett’s 2015 Shareholder letter, Annotated).”
A growing economy fueled by innovation and entrepreneurship has been the biggest driver of stocks over the many decades. As Buffett emphasized, betting against America isn’t a winning hand. And he didn’t qualify his remarks based on the outcome of the upcoming election.
I hope you’ve found this review to be educational and helpful. As I always emphasize, it is my job to assist you. If you have any questions or would like to discuss any matters, please feel free to give me or any of my team members a call.
These are the opinions of Chief Investment Officer Adam E Bray CFP® and not necessarily those of Cambridge. The views expressed herein are for
informational purposes only and should not be construed or acted upon as individualized investment advice. Indices mentioned are unmanaged and cannot be invested
into directly. Past performance is not a guarantee of future results.