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October 18, 2016 Market Commentary


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The numbers:

DOW closed up .42% for the day, up 4.24% YTD S&P closed up .62%for the day, up about 4.71% YTD NASDAQ closed up .85% for the day, up about 4.81% YTD. This rally was mostly led by Netflix, which was up close to 20% for the day.

Crude Oil closed at $51.03, up 1.31% for the day Gold is at $1,261.70, up .58% for the day Silver is at $17.63, up .86% for the day. Treasury yields: 1- year: .65% 5-year: 1.26% 10-year: 1.77%

The benchmark 30-year fixed rate mortgage is currently 3.62%, which is up about 10 basis points from last month. (Source)

Today’s polls are showing Clinton maintaining her lead, NBC has her at 6 points ahead, Washington Post 4 points ahead. (Source)

Inflation & The Fed

One of the key excuses for the Federal Reserve to hold off raising rates again and again, and to raise them very slowly, is that inflation remains extremely low.

When we talk about inflation, there are a number of statistics out there, but the two gauges we look at the closest are CPI and PCE. The CPI, or consumer price index, is a measure of average prices paid by households for a common basket of goods and services like food, gas, clothes, etc. PCE, or personal consumption expenditures, is more broad because it includes goods and services consumed whether they are purchased by consumers, or by employers or federal programs on behalf of consumers. So, CPI is just what people consume and bought for themselves, PCE is what people consumed, but didn’t necessarily buy it themselves.

Why is this distinction important? The Fed uses PCE, not CPI, when reviewing economic conditions to decide what actions to take.

CPI rose .3% in September, the largest monthly increase in 5 months. It is now up 1.5% from one year ago. PCE is up 1%.

Remember, the Fed’s target for this statistic is 2%. So while we aren’t facing deflation, the overall inflation statistics have remained low, but are trending up.

Now, another important distinction. And remember, if this is a little hard to follow, we’ll be posting it on our blog for you to read later. I’m explaining this because I think it’s important to remember that one single statistic can’t even begin to tell you everything.

Both of these statistics we’ve talked about have another version, which is called “core”. So we have core CPI and core PCE. The term “core” essentially takes these numbers and removes energy and food, which are much more volatile in terms of pricing than all the other items. So, if we look at CPI vs. Core CPI, and PCE vs. Core PCE, it tells us a little bit more about what’s really going on.

  • CPI has risen 1.5% over the last year, while Core CPI has risen 2.3%

  • PCE has risen 1% over the last year, and Core PCE has risen 1.7%

So again, that “core” distinction removes energy and food. Energy prices are stabilizing and food prices will rise again, so we expect to see the overall inflation numbers rising to the Fed’s target rates, leading the Fed to raise interest rates.

All statistics courtesy Bureau of Labor Statistics.

Other Data

  • Earnings have been good. Of the 34 companies that reported on Friday, 79% of them beat expectations.

  • Real average hourly earnings are up 1% in the last year

  • Industrial production increased .1% in Sept, a little below expectations

  • Manufacturing (excludes mining and utilities) rose .2% in Sept.

  • Auto production is up 5% vs last year, when it was down .5%

  • Retail sales rose .6%,

  • and energy rose 2.5% in Sept.

  • Energy prices have been volatile month-to-month, but the overall trend is up.


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