The markets have grown 5.11% year to date, and this last week helped that along. Economic data, however, did not support the surge.
Housing for December was not promising as new housing starts fell 107K. The move, if it proves to be longer term, could be bad for construction employment. Yes, one month does not make a trend and it also happens to come in December, a historically weak month.
December headline CPI (Consumer Price Index) increased to 2.1%, in line with the Federal Reserve Board’s (FRB) target of 2%. Auto prices drove the increase in the second half of 2017 after hurricane activity. As inflation becomes more prevalent, the likelihood of additional rate hikes in the future become more likely. Additional hikes mean tighter monetary policy, which should be a strain on markets.
The looming government shutdown has caused the dollar to weaken and interest rates to rise as buyers become leery. The rising rate environment creates further concern that an accelerating economy may be moving forward too quickly. This lends further credence to the FRB raising rates at a higher pace in 2018 than originally thought.
Regardless of the headwinds, equities pushed forward. We are two weeks into 4th quarter earnings and they are going well, justifying the push. The forward-looking indicators, however, don’t show promise for 1st quarter earnings, but that data is being overlooked. It may be the expectation that tax savings will offset the fall in production, or it may be expected that once tax reform is felt in paychecks that production will increase. Whatever the reason, the blind bull market in progress, warrants watching with a concerned eye.
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