The stock market had its best week since January 2013 after having struggled in the previous two weeks.
Simply Money Advisors wouldn't be surprised if we saw lower prices in the short term, but we believe stocks will be higher in the months ahead. The catalyst for the recent stock market volatility was worries about inflation because it may force the Federal Reserve (Fed), our nation’s central bank, to raise short-term interest rates more aggressively.
However, investors shook off a higher-than-expected inflation reading last week, where core inflation came in at 1.8% higher over the past year. Interestingly, the rise in inflation was mostly due to goods inflation, not service inflation. Goods inflation - like clothing - has been rising, but service inflation - like medical costs - has been relatively steady over the past three years.
Because service inflation makes up about 75% of total inflation and it's been steady, this suggests that inflation is not in the broad economy yet.
Simply Money Advisors expects the Fed to increase short-term interest rates two or three times in 2018 as inflation will probably increase later this year. Remember, part of the Fed's job is to create an environment with stable inflation. Higher interest rates can help keep inflation contained. These interest rate hikes will not derail the US economy though. Interest rates would still be very low by historical standards even if the Fed hikes three times this year.
Investors will get an idea of what the Fed is thinking in light of the recent stock market uncertainty and inflationary readings, as there will be eight Fed speeches this week. But it's next week that will be more important, as new Fed Chair Jerome Powell will deliver the Fed's semiannual monetary policy report to Congress.
So far, about 80% of large companies have just reported quarterly results. These companies, on average, had 15% higher profits and 8% higher sales compared to last year. Simply Money Advisors believes corporate profits will grow around 15% in the upcoming year thanks to a healthy US economy and tax reform.
The Simply Money Point
Stock market volatility may not be over yet, but because there is no real threat to the economy, we believe the stock portion of your personalized financial plan will help support your financial goals as the year progresses. Investors should focus on a growing economy and growing corporate profits, which have been very strong.