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Market Update: November

November 29, 2017

Chart of the Week:

Unemployment is still declining as wages are inflating (albeit at a bit slower pace – see below).  Wage inflation is one of the leading indicators of an inflationary economy – one that the Fed desperately works to keep from OVER inflating or NOT inflating enough. The rate of interest is the main tool they use to help with this.

Jerome Powell, the Federal Reserve governor set to replace Janet Yellen as the Federal Reserve Chairman, testified before the Senate Banking Committee on Tuesday. He signaled he would stick to a similar monetary-policy course as Chairman Yellen if he is confirmed as the central bank’s next leader. That likely means raising short-term interest rates in December and gradually lifting them higher over the next two years.

He also told a Senate panel that he is open to reviewing banking industry rules to make them less burdensome and allow more free business. Mr. Powell said he expects the economy to grow about 2.5% this year and maintain about that pace throughout 2018. He also noted that the unemployment rate could fall below 4% next year and that wage growth remains well below the pace of previous economic expansions.

However, he reiterated that delaying future rate increases could risk the economy overheating, which would force the Fed to raise rates more quickly than desired.  Raising rates abruptly, perhaps sharply, raises the probability of triggering a recession.

This is what our investment committee is constantly keeping an eye on – leading indicators for a recession. We are less concerned with short term drops and pops due to headlines but mostly looking for any indication of recessionary markers. We change investment mixes accordingly.