Crossing Wall Street Review – November 17, 2017
By Eddy Elfenbein, editor of Crossing Wall Street and portfolio manager of the AdvisorShares Focused Equity ETF (Ticker: CWS)
Wall Street has been in a slightly sour mood lately. Of course, I mean this in a relative sense. Volatility is still low—very low, in fact.
Until last week, the S&P 500 had climbed for eight weeks in a row. So within that context, four daily drops in five days does seem to stand out. The damage was a little over 1%. Again, that’s barely a speck, but it seems like more when compared to the serene market we’ve had since late August. This week, the S&P 500 snaps a streak of 54 days in a row of closing within 1% of its all-time high. That was the longest such streak in half a century. That’s what investing is like in 2017.
The Federal Reserve will almost certainly raise interest rates next month, but what about after that? As I’ve said before, I’m not terribly worried about the first few rate increases, but I do think the Fed has less room to work with than they may realize. The futures market currently thinks another hike will happen by June (and possibly by March).
There continues to be little to worry about on the inflation front. This week, we learned that inflation was calm last month. The CPI rose by just 0.1%, and the “core rate,” which excludes food and energy prices, also rose by 0.1%. In the last year, core inflation is running at 1.8%. That’s still below the Fed’s target of 2%. Bottom line: I just don’t see what the Fed is so worried about. The jobs market is humming, and prices are steady.
But here’s what worries me. The spread between the two- and 10-year Treasuries narrowed to just 65 basis points this week. The spread hasn’t been that narrow in ten years. I would expect to see the spread tighten after the rate increases. Historically, when the 2/10 spread gets to 0%, economic weakness isn’t far behind.
So, I feel any trouble is off in the distance, but it’s there. The overall market and economy are doing fairly well. For example, this week we learned that retail sales rose 0.2% in October. In the last year, they’re up 4.6%. Taking out gasoline, retail sales rose by 0.4% last month. The industrial production report showed an increase of 0.9% for October. Economists had been expecting a rise of 0.5%.
I expect a calm market for the rest of the year. This is a good time for investors to make sure they’re well-diversified, and that they hold high-quality stocks.