Summary and Conclusion:
Asset prices rose during August. The S&P500 index of U.S. equity market prices increased by 3.3 percent. The VIX fell to its lowest levels of the year – well below the levels preceding the election. The yield on 10 year U.S. government bonds edged back up to 2.33 percent, only slightly below the level preceding the election, when Federal Reserve officials intimated that a rate hike in December is a possibility. (The latest release on core and headline inflation based on the PCE price index registered 1.4% (headline) in August relative to August of 2016 and 1.3% on core. The Fed’s target is 2.0%.) The dollar depreciated 0.3 percent against the major currencies -- a level 8.7 percent weaker than its January 2 reading. I attribute the weaker dollar to a combination of slightly stronger than expected growth abroad, weaker than expected growth in the United States, and the perception of President Trump’s views on trade policy. I believe the lack of volatility and the modest positive direction of the markets since the Presidential election are due to market participants waiting for the resolution of Tax Reform legislation that contain a hoped-for capital gains tax cut, and perhaps the removal of the ACA investment income tax. The bond market is telling us that nothing much has changed with respect to the real economy since President Trump’s inauguration; any decline in the 10 year bond rate is due to lower expected inflation. I believe that Trump’s de-regulation policies will have a positive effect on output (as we have seen in the energy industry), so I think that we will eventually have higher 10 year yields and lower bond prices as these regulatory policies boost productivity and economic activity.