Economy, Employment and Inflation

March 28, 2016

Economy, Employment and Inflation Photo

As we approach the end of a volatile first quarter, the number one question I have been receiving recently is, “Where do markets and the economy go from here?” The second question I’ve been receiving is, “What does the Presidential election mean for the markets?” I will address the question of politics in the next few weeks, but for now, let’s look at the market and the economy.

With only a few trading days left, it looks like global equities will end the quarter roughly flat to slightly up. The U.S. economy continues to chug along with positive, but subpar growth. Fixed income assets around the globe continue to perform well as negative interest rates have become the norm with central banks globally pursuing accommodative policies.

I am writing this post from Disney World on spring break with the family, and I have to say, if Disney was a microcosm for the economy, the U.S. would be booming. We all know this is not the case, but with that said, the U.S. consumer continues to perform well and individual balance sheets are in the best shape in years. I expect the U.S. economy will continue to perform reasonably well over the next few quarters, led by consumer demand.

Job gains continue to remain solid, averaging above 235,000 per month, but the wage gains remain modest. Even though unemployment is at 4.9%, the labor force participation rate is at the lowest level since the 1970s, which leaves significant slack and the potential for more job gains without adding inflation. I think the equity market, despite reasonable valuations on a price-to-earnings basis, will continue to be volatile in a wide range due to uncertainty from emerging market growth (we haven't heard much about China recently), the war on global terror, and the uncertainty from the Presidential election in the U.S.

I think oil has hit its low in price and barring something unexpected on the global growth side, should trade in the $30 to $50 per barrel range for the remainder of the year. With regards to U.S. Treasury bonds, I remain bearish in the intermediate-term due to dovish Fed policy and the potential for an uptick in inflation reports over the next several quarters. I generally prefer short-dated fixed income over longer maturities and have a favorable view on structured credit.

Tags: Monday Morning O'Malley | U.S. economy | Oil | Inflation | Employment numbers | Bearish

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