The Layman's View of Inflation

Where do you think inflation is headed? The New York branch of the Federal Reserve recently decided to ask normal individuals, rather than trained economists, that question. It turns out that regular investors see inflation as a problem, but not a major one. The consensus was that inflation would peak next year at about 3 percent.

That’s not high enough to be a problem, although it is higher than inflation has been running recently. The personal consumption expenditures price index, which is the preferred measure of the Fed, was measured at just over 1 percent in December. The Fed’s target for inflation is 2 percent.

Those same respondents expected their personal earnings to grow by 2.4 percent over the coming year - outpacing the real inflation we've been experiencing, but not their projected inflation. They also think that finding a new job is getting easier, with 49 percent saying they’d be able to find a new job within three months, up from 46 percent who said that last December.

Not So Scary

The churning in the stock market this year may have led to increased fear on the part of many investors. But according to the VIX index - the market's so-called fear index, which measures how much volatility investors are expecting - the outlook is still relatively calm.

Last Monday, after the S&P 500 had dropped more than 2 percent on the previous Friday, the VIX jumped up to 21.44. That's the highest it had been since December of 2012. But it has settled back since then, and is now back below its ten-year average of 20.15.

Even that 21.44 is not so alarming once you put it in perspective. During the financial meltdown in 2008, the VIX touched 60, and even in 2011, when Europe was in crisis, it went over 40. Compared to those times, this year's turmoil has not been so bad.

Another Weak Jobs Report

This morning's jobs report showed the employment situation bouncing back a little bit in January, although not to any great extent. Following on the heels of December's disappointing 74,000 new jobs added, the economy added 113,000 more in January. The headline unemployment figure ticked down 0.1 percentage points to 6.6 percent.

To show how comparatively weak these numbers are, last November's figure was revised in this morning's report. It went from 241,000 jobs up to 275,000 in the latest reporting. December's figure was revised upward as well, but only by 1,000.

If there is any silver lining to this morning's report, it's that private sector payrolls were a bit stronger than the report might indicate. Private businesses added 142,000 jobs in January, while government at all levels was paring back by 29,000 jobs.

Time for a Correction?

The stock market’s recent troubles have many investors wondering if we are in for a correction, if not for something worse. A correction is defined as a drop of 10 percent, and since World War II, we have seen 27 of those. Since the stock market hit bottom in March of 2009, there have been three corrections. The most recent of these took place from April to September in 2011, when the Dow dropped by about 16%. 

If it gets down to a loss of 20 percent, that’s when it officially becomes a bear market. There have been 12 of those since 1945, and three of them since 2000. 

The average time between corrections since 1945 has been about 20 months. Market-watchers warn that it’s been closer to two and a half years since we last had one. The S&P is down about 7% since reaching its all-time high early this year. 

2013's Big Winners

Last year was a great one for the stock market, and the people who were best positioned to take advantage of it may have been the corporate titans who own huge blocks of their company's high-flying stock. As the Wall Street Journal pointed out yesterday, many of 2013's biggest winners were the well-known faces behind America's hottest stocks. Some of those winners:

• Warren Buffett, of Berkshire Hathaway, made $12.7 billion in 2013 alone
• Jeff Bezos, of Amazon.com, made $12.0 billion
• Mark Zuckerberg, of Facebook, made $11.9 billion
• Larry Page, of Google, made $9.0 billion
• Sergey Brin, of Google, made $8.8 billion
• Larry Ellison, of Oracle, made $5.5 billion

Lending Picking Up

One of the driving factors that made the recession so deep and the recovery so slow was that the credit markets basically froze up. After making so many bad loans, especially subprime mortgages, banks were reluctant to extend new loans in a bad economy. And that made business expansion a difficult proposition.

That's why its important to see loan activity increasing if the economic recovery is to gain steam. The Fed's latest survey of loan officers shows that demand has been growing, and that banks have been lending more to meet that demand. Commercial and industrial loans are currently at $1.62 trillion, which is up 7.5 percent from a year earlier.

The quality of the loans appears to be improving as well. The survey found that 40 percent of the banks expect mortgage delinquencies to decline this year, and 20 to 40 percent expect business delinquencies to decline as well.

A Good Year for Dividends

Even with the stock market's recent problems, there are figures emerging that should remind us that there's more to investing than just stock prices. General Motors recently announced it was paying a 30-cents-per-share dividend in March, its first dividend since 2008.

That brings the total number of dividend-paying stocks in the S&P 500 to 420 - the highest that figure has been since 1998, when there were 423 dividend payers. As recently as 2004, there were only 377 S&P stocks paying dividends.

Given that the market has been down recently, it's important for investors to remember that dividends aren't accounted for when share prices are reported. And the number of dividend payers might still grow even further, with companies reporting record-high quarterly earnings.