By: Kent Engelke | Capitol Securities
Shutdown and inflation fears weighed nominally on equities; equities which in almost every measure are over bought and perhaps overvalued.
I think the biggest story of 2018 will be the return of inflation, the result of stronger than expected growth. In every dimension, the economy is accelerating. Consumption indicators demonstrate that retail sales are rising by the greatest pace since 2003. Business investment is strong and is expected to surge with the immediate expensing of expenditures. Export indicators are rising and are expected to remain strong given the weakness of the dollar.
Against this backdrop, the labor market is continuing to tighten as an argument can be made there is a shortage of qualified workers. The combination of rising wages, demand pull and commodity inflation, all the result of today’s environment suggests inflation will rise in 2018.
The question at hand is whether or not profit margins will erode, that result in these higher costs, amplified by a potential rise in interest rates which may affect valuations.
Against this backdrop, I reiterate my long held belief that funds will gravitate back into the real economy as economic activity increases and interest rates rise.
What will occur today?
Last night the foreign markets were up. London was up 0.27%, Paris was up 0.44% and Frankfurt was up 1.06%. China was up 0.38%, Japan was up 0.19% and Hang Sang was up 0.41%.
The Dow should open nominally higher on the belief a government shutdown can be avoided. Financials can potentially trade higher on the news that the Fed is finishing a proposal to reduce bank leverage, a proposal according to most that could free up billions of dollars for banks. Will this increase the money multiplier which in turn will accelerate the economy? If history is of any guise, the answer is yes. The 10-year is unchanged at 2.63%.