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OKLAHOMA CITY (Reuters) - Federal Reserve officials with competing views about inflation laid out on Friday the quandary facing U.S. policymakers as they wrestle over whether a recent dip in the pace of price increases is trivial, or the result of global forces that could permanently throw off the Fed's policy calculus.
Economy Good; Markets Expensive
The stock and bond markets continued their winning ways this year as the U.S. equity markets set multiple record highs during the second quarter. The bond market rose during the quarter, pushing yields lower. We are seeing mixed, although mostly favorable economic data, which is providing the fuel for stocks to rise.
Falling interest rates are usually a sign the bond market is forecasting a slowing economy, while rising stock prices are a sign the equity markets are forecasting a growing economy. It is interesting to look at the factors that are giving us these seemingly opposite outlooks. Stocks, in the short run, are very volatile as investors discount the likelihood of various things happening. Our economy has been growing since 2009 and optimism has been growing for eight years. It is worth noting, however, that 40% of the gain this year in the S&P 500 is due to just four companies. This latest uptick does not have broad market breadth, which is usually a warning sign that the rally is not sustainable. As we have stated in our past few letters to you, we are also seeing signs that are typical of a late bull market run. Bond yields have been dropping as we are seeing little evidence that the tight labor markets are leading to rising wages, which suggests that inflation remains in check.
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