A Dose of Caution may be in Order

U.S. equities resumed their winning ways last week, as the S&P 500 climbed 1.2 percent, reversing the loss from the prior week that had interrupted the previous run of three successive weekly gains. The index closed at 2905, higher on the year by 8.7 percent, just 0.3 percent below the record closing high of 2914, set on August 29. Helping to drive prices higher was another round of solid economic reports. Strong revisions to the July retail sales report offset a modest August gain, while industrial production rose more than expected and included an upward revision to the prior month report. The rise in consumer prices moderated, while small business optimism rose to a record high and consumer sentiment rose for the first time since June.

Will Inflation Hinder Consumer Spending?

As reported by the Labor Department in its August employment report on Friday, the year-over-year pace of average hourly wage growth rose to its highest level since the current economic recovery and expansion began in June, 2009. Bond yields rose in response, along with expectations for the future path of fed funds.

Can a Growing Economy Continue to Support Rising Stock Prices?

Two-thirds of the way through the third quarter and U.S. stocks are so far enjoying their best quarterly returns of the year. The S&P 500 index fell 1.2 percent in Q1, rose 2.9 percent in Q2, and through two months is higher by 6.7 percent in Q3. These gains have come despite the fact that not much has changed on the trade front. Apparent progress in negotiations with Mexico has not been matched by progress with Canada. And recent talks in Washington with Chinese trade representatives apparently yielded little progress. But trade aside, the U.S. economy remains healthy.