What Keeps Inflation in Check?

It may seem obvious, but a new paper on inflation from the San Francisco Federal Reserve confirms it. The key to keeping prices from rising too quickly is keeping the public confident inflation. The paper also suggested the unemployment level is all but irrelevant to the inflation trajectory.

The San Francisco Fed economists tested what would happen to inflation with varying levels of unemployment, or if there were a lot less slack in the labor market. The results were very little change to the inflation trajectory. But when the researchers modeled what would happen if inflation expectations were to rise, they found that actual inflation would rise very quickly,  too.

That's not the only factor, though. The U.S. unemployment rate is still at a very low 4 percent, but inflation has barely touched the central bank’s 2 percent target. Some Fed policymakers continue to believe the tightening job market will at some point put upward pressure not only on wages but also on prices. At some point, inflation will be back.

The Big Legacy Questions

A disconcerting new report from Merrill Lynch in partnership with Age Wave found that only 55 percent of Americans aged 55 or older have wills. Only 18 percent have the three recommended essentials — a will, health care directive and durable power of attorney.

Respondents with $1 million or more in investable assets were the most prepared — 41 percent of them had taken care of the three essentials, compared with 27 percent for those with $250,000 to just under $1 million in assets. But even for this group, that’s still less than half.

Passing on values and lessons was considered the most important part of one’s legacy, cited by 59 percent of respondents. Asked to identify what they want to be remembered for, respondents overwhelmingly said it was the memories they shared with loved ones (70 percent) rather than the wealth they had accumulated (5 percent).

The Market Beats Earnings Season

Here's a paradox: Even though corporate earnings have been relatively weak so far, with fewer companies beating Wall Street expectations than in recent quarters, the S&P 500 is up roughly 5 percent since the middle of January. Stocks of companies that have reported their results have risen by an average of 1.1 percent, the largest post-earnings jump in a decade, according to Bespoke Investment Group.

They're doing all right even if they don't beat the Street's analysts. In recent years, the shares of companies that didn’t beat expectations lagged behind the broader market by 3.5 percentage points in the trading day that followed. This year, they have trailed by only 1.1 percentage points, according to Credit Suisse.

Over the last three months, overall, stocks reporting earnings have posted a median one-day gain of 0.78 percent.  That’s the strongest upside reaction to earnings in at least the last five years.

Apple Retakes the Throne

Two months after losing its title as the most valuable U.S. public company, and a month after revealing that iPhone sales were disappointing in the holiday season, Apple has regained its throne as the world's biggest company. Apple ended the session with a market capitalization of $821.6 billion, according to FactSet data. That performance was good enough to land atop Microsoft and Amazon.com, which both declined 1.1 percent on the day.

What's most remarkable is how similar the valuations are for America's top four companies. At the end of yesterday's trading, they looked like this:

1. Apple $821.6 billion
2. Microsoft $813.5 billion 
3. Amazon $805.7 billion 
4. Alphabet $778.1 billion

Why Is Lending Slowing Down?

The U.S. Federal Reserve’s quarterly survey of senior loan officers, just out yesterday, showed that the demand for loans weakened among U.S. businesses and households in the last three months of 2018. Banks had kept standards for commercial and industrial lending “basically unchanged” in the quarter, although they had tightened standards for credit card borrowing.

And the banks said they were likely to be even less generous with credit in the coming year. In an assessment that sounded foreboding for the economy, banks said they expected in 2019 “to tighten standards for all categories of business loans as well as credit card loans and jumbo mortgages."

In the fourth quarter of 2018, U.S. "banks reported weaker demand for all categories of loans to households," the Fed said. That will be something to keep an eye on in the first quarter of 2019.

What January Means

The S&P 500 jumped 7.9 percent last month, its best January performance since 1987, and its biggest gain in any month since October 2015. The Dow rose 7.2 percent in January, which was also its largest one-month rise since 2015 and biggest January gain in 30 years.

Remember December? In that month, the S&P 500 fell 9.18 percent and briefly dipped into bear-market territory on Christmas Eve. Since December 24, however, stocks have been on a tear, with the S&P 500 rising about 15 percent.

It’s often said that as goes January, so goes the year. According to Stock Trader’s Almanac, going back to 1950, January’s performance has predicted the year’s returns 87 percent of the time. But the indicator also signaled a positive year last year, and the market’s December sell-off ended up wiping out all of the gains. The S&P 500 ended 2018 down 6.6 percent, despite rising 5.6 percent in January.

January's Jobs Report

Another strong month for the employment figures, as the Bureau of Labor Statistics reported this morning that the economy added 304,000 jobs in January. That compares with an average monthly gain of 223,000 in 2018, and 241,000 over the past three months.
 
The headline unemployment figure ticked up to 4.0 percent, which the BLS attributed in part to the now-ended government shutdown. But federal employees on furlough during the partial government shutdown were counted as employed in the establishment survey, because they worked or received pay for the pay period that included the 12th of the month.
 
In January, jobs in leisure and hospitality rose by 74,000, construction employment rose by 52,000, and employment in health care increased by 42,000.  The BLS also reported that there were 17,000 jobs added in the category of “sporting goods, hobby, book, and music stores.”