Commonwealth

Yesterday, I appeared on Fox Business’ Morning with Maria to discuss the markets, inflation, consumer spending, and what’s ahead for the fourth quarter. Listen in to hear more.

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After inflation, which we talked about yesterday, the next biggest set of questions I get focus on what the effect of the new tax law will be and whether the higher tax rates in it will derail both the economic recovery and the market. People generally make a good argument about how it will hurt confidence, take money out of consumer and business spending and investment, and generally take us back to a state of depression. I understand the arguments. But two things are missing that would make them convincing: facts and context.

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One of the most urgent and consistent questions I have been getting recently is around inflation. With the headline numbers high—and they are high—the concern is that we are moving back to the 1970s and that inflation will stay at the current 5 percent or run even higher. That conclusion seems reasonable, given the large federal deficit and spending over the past couple of years. When combined with the signs of slowing growth, it could point back to stagflation. The 1970s are calling. Maybe disco will come back as well?

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Last week was relatively quiet in terms of economic updates, with only two major data releases. Initial jobless claims continued to decline to start September, while producer prices increased by more than expected in August. This will be a busier week for updates, with reports to come on consumer inflation, industrial production, retail sales, and consumer sentiment.

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China’s recent regulatory crackdown and the consequent impact on its financial markets have caught the attention of worldwide media and investors. (A recent post by my colleague Peter Roberto explores the regulatory backdrop.) Given the current environment, I’ve been receiving numerous questions asking if now is the time to double down on Chinese equities. Potential investors are wondering if the recent bounce in some of the hardest-hit stocks could be a sustained run. My belief is that, over the shorter term, headline risks remain elevated for Chinese equities. In the long term, continued economic growth in China may present attractive opportunities for value creation. To avoid potential landmines, however, active management is critical.

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My colleague Sam Millette, manager, fixed income on Commonwealth’s Investment Management and Research team, has helped me put together this month’s Market Risk Update. Thanks for the assist, Sam!

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