The last few weeks, a significant amount of headline news distracted market participants’ attention from the fundamentals. Whether it is the tumult in Washington, the geopolitical tensions in the Middle East or the back and forth of trade tariffs, the market has been dealing with an excess of “noise” recently. In the near term, none of these factors impact the overall fundamentals of the economy, which remain strong. The key drivers of continued strength in the U.S. economy are fiscal stimulus (tax cuts and spending increases) and overall accommodative monetary policy. Given this economic outlook, stocks should keep a bid despite high valuations and bond yields will be pressured upwards as inflation expectations grind higher.
One market-related indicator that I have been watching for the past few quarters has been the shape of the yield curve. The yield curve has flattened as the Fed has increased short term rates. Much has been written about the flattening yield, and an inverted curve would be a significant danger sign for the economy. I expect the yield curve will continue to flatten slowly, but not go inverted in 2018, as inflation expectations will rise in line with Fed rate increases. The spread between the 2-year Treasury and 10-year Treasury is approximately 47 basis points (bps), and I expect this spread to contract to approximately 20 bps by the third quarter of this year.
I am going to stay focused on the fundamentals and try to tune out the “noise” that we get from many sources.
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