Housing and labor posted good numbers today (again), but what seems to interest the market more is the inflation data that came out today.

  • Underlying inflation pressures pushed higher in October, even as falling gasoline prices kept overall U.S. consumer prices in check.
  • The Labor Department said on Thursday its so-called core Consumer Price Index, which excludes food and energy, rose 0.2 percent, the largest increase in five months, after nudging up 0.1 percent in September.
  • In the 12 months through October, the core CPI rose 1.8 percent after rising 1.7 percent in September, a sign that a recent disinflationary trend has probably run its course.

The reason why the market is more interested in this information, rather than the housing or labor data, is that it is a sign that the second of the Fed’s two mandates are being fulfilled. The other, of course, is a tight labor market, or, by the numbers, unemployment at 5.2%.

Now, if inflation is rising, especially in the face of dropping fuel prices, it tells us two things – 1) wages are on the rise, given that some 70% of Fed-considered inflation derives from wages, and 2) the Fed is more likely to raise interest rates on schedule, which is June of 2015.

If the market wanted more affirmation that the near- and longer-term view of the market is solid, it would have a hard time finding it. No matter how you slice it, dice it, or spin it anymore, there is no denying the US economy is moving steadily into a strong period of growth.

  • In October, energy prices fell for a fourth straight month, with gasoline prices declining 3.0 percent after dropping 1.0 percent in September. Food prices edged up 0.1 percent after gaining 0.3 percent in September.

Food prices are on the decline, along with energy prices, as the correlation is direct. It just takes food prices longer to come down because of the backlog of foods already in the pipeline. Food prices dropping, energy costs dropping, unemployment going down, and rising wages are the exact and precise formula for a robust economy.

Now is the time to get your money into the market, if you have not already been on the uphill ride. Now is the time to spread out your money. Get exposed to small caps and technology. Both of these will provide ample opportunity to make money.   

  • The Russell 2000 and the NASDAQ Composite were down 1.06% and 0.57% today, respectively. This is the same kind of disparity we saw on Monday when we first pointed out the NASDAQ and small caps tend to lead the market higher or lower.

The fact is that both technology and small caps have underperformed this year, at least from late last spring, but I expect they will come around as confidence in the economic future builds and the large- and mid-caps become overcrowded.

This won’t happen as a big, sweeping wave. It will take time to build up, but it will build up. In the meantime, there will be peaks and troughs and those will both present opportunities to buy and sell, if that is your predilection.  

Trade in the day; invest in your life …

Trader Ed