Low Inflation Fuels High Returns

The latter weeks of summer are historically a choppy time for stock market performance, so it should be no surprise after a strong showing for stocks during June and July that some volatility would enter the market landscape during the month of August.

Buffering some of that volatility was Fed Chair Janet Yellen when she testified in front of Congress and made it clear that any interest rate increases would be gradual and data dependent, signaling that key interest rates would not need to rise much further. Her words were sweet music to market bulls.

Ms. Yellen acknowledged the recent softness in inflation and said that the Fed could alter its policy if inflation weakness proved to be more stubborn than the Fed expects. This was a pleasant surprise and a very dovish statement by Yellen, who also said, “We’re watching this very closely and stand ready to adjust our policy if it appears that the inflation undershoot will be persistent.”

As a result, the Fed Futures market reacted in favor of a potential delay in the next Fed interest rate hike until as late as December. The delay offers more sweet music for bulls.

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