Sign up to create alerts for Instruments,
Economic Events and content by followed authors
Free Sign Up Already have an account? Sign In
Timochin Khan
Nov 12, 2020 11:36PM ET
Excellent report...
1
0
Quotes
All Instrument Types
- All Instrument Types
- Indices
- Equities
- ETFs
- Funds
- Commodities
- Currencies
- Crypto
- Bonds
- Certificates
Please try another search
🚨 Our Pro Data Reveals the True Winner of Earnings Season Access Data
Inflation, Employment And Interest Rates
www.investing.com/analysis/inflation-employment-and-interest-rates-200544458
Inflation, Employment And Interest Rates
By Michael Gouvalaris | Nov 12, 2020 03:47PM ET Low inflation keeps the Fed in play. I’ve heard the “Fed is out of bullets” argument for over 10 years. Inflation is really the only thing that can hinder the Fed. The dual mandate is full employment and inflation averaging above 2% for “some time”. Neither criteria is close to being met.
Low inflation is also supportive of higher stock valuations. Growth stocks tend to outperform in low inflation, while value and dividend stocks tend to outperform during periods of above average inflation. This is not an exact science however.
The above chart of weekly unemployment claims shows part of the reason for low inflation. Weekly unemployment claims continue to trend lower, but at 709K, it’s still about 3x more than the pre-COVID average.
Continued claims ticked down to 6.786 million, but still above the highs during the 2008 recession. While the odds of a return to normal by this time next year are increasing every day, the current situation is moving in the wrong direction. Additional restrictions would obviously put downside pressure on economic growth and employment, which would only be exacerbated without some fiscal stimulus. I do expect a scaled down fiscal stimulus package to be agreed upon during the “lame duck” session of Congress. Time will tell.
In a normal interest rate environment, I’d expect to see the 10-year in the range of 3-4%. We were headed in that direction. The 10-year hit 3.25% in late 2018, until the trade war and COVID pushed rates back to record low territory.
The chart setup above shows the key swing high just reached at 0.957%. Rates moved up a bit after some of the election uncertainty was taken off the table. But given low inflation and high unemployment, I think there is a good chance this will prove to be resistance in the near term. A break above however, would put a target of 1.336% to 1.429% in play. I just can’t see rates getting higher than that until there is a return to normalcy. But who knows.
The yield curve (difference between two-year treasury rates and 10-year treasury rates) has moved up to 80 basis points, which is a level not seen since 2017. A higher spread between the two rates is healthy. Generally this favors the financials, but I still can’t bring myself to put that much money to work in that sector. I own JPMorgan Chase (NYSE:JPM) and Berkshire Hathaway (NYSE:BRKa) currently, with Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) on my watch list. Otherwise I still like Tech and Discretionary, with a bit of industrials and basic materials. I’m increasing my exposure to health care as well (I’ll elaborate on this during Monday’s earnings update).
Summary: Inflation is still low, and unemployment is still high. The Fed remains in play and some fiscal stimulus is likely coming within the next few months. Economic growth is moderating from the record Q3 results, but still growing. Rising cases puts the threat of disruption at the forefront. I don’t foresee this as being enough to push the economy into a double dip recession. But there is much outside of anyone’s control.
Because there is such a wide range of potential outcomes, it is important to remain well diversified. This is not the time to pile into the areas of the market that have outperformed. Remember, the markets are cyclical. The outperformers eventually turn into the underperformers (and vice versa). The key to successful long term investing is to not get too excited when things are good, and not get too pessimistic when thing
Related Articles
'Soft Landing' Crowd One Big Step Closer to Winning the Battle
By Mike Zaccardi, CFA, CMT - Feb 06, 2023
3
WALL STREET WAS stunned Friday morning by the strength of the jobs market. While technology company layoffs have lately hijacked the fear-mongering media’s narrative, the...
Dollar soars, stocks dive after NFP shock; yen skids on BoJ rumours
By Trading Point - Feb 06, 2023
Jump in payrolls halts tech rally, revives dollar bulls; Fed speakers eyed nextYen tumbles on reports that Kuroda successor will be architect of BoJ’s ultra-easy policyGold...
S&P 500: No Fear Can Cause an Unexpected Drop in Stocks
By Gregor Horvat - Feb 06, 2023
Last week, we saw some nice bounce in S&P 500 after the fed rates decision, when they hiked rates by 25bps, but it looks like they are preparing to finish the hawkish cycle in the...
Inflation, Employment And Interest Rates
Comments (1)
Lee Bettis
Nov 12, 2020 11:36PM ET
I agree.
0
0
Add Chart to Comment
Confirm Block
Are you sure you want to block %USER_NAME%?
By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.
%USER_NAME% was successfully added to your Block List
Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.
Report this comment
I feel that this comment is:
Comment flagged
Thank You!
Your report has been sent to our moderators for review
Add a Comment
We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:
Enrich the conversation, don’t trash it.
Stay focused and on track. Only post material that’s relevant to the topic being discussed.
Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.
Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.