The inflation rate for August is likely to be reported as about 1.9%. What does this mean relative to the value of your investments? From time to time, I still have people telling me how they remember the “good old days” when they were making 16% on their CDs.  The only problem with that memory is that they have forgotten that, at the same time, the inflation rate was 18%! As fast as your money was growing, it was losing purchasing power faster.  If you buy a CD today that is paying, say, 0.5%, and inflation is at 1.9%, your loss of purchasing power is only 1.4% vs.

It was not that long ago when the 10 year U.S. Treasury bond was over 3%. The expectation was that it would continue to go higher as the economy improved. The drop in the rate is a clear indicator that there is a flight to safety, as more money is flowing into the safest types of bonds. These include U.S. Treasuries as well as U.S. Corporate investment grade bonds.

A great deal of conflict is transpiring in the world at this time. The Middle East, Asia, Africa, and Eastern Europe are all in different types of conflict, and in addition, we are experiencing tense relations with Iran, Russia and China. Domestically, we are dealing with a major immigration issue, as thousands of children are streaming across our southern borders, in search of refuge. In the past, such conflict, turmoil and loss of life would have resulted in the stock market sinking and the bond market making a mighty surge, as investors sought the greatest safety possible.

A report in the Saturday edition of the Wall Street Journal reviewed the 30 stocks of the DJIA that have now reached the cumulative 17,000 milestone, and how they have fared since the average hit 16,000 on November 21, 2013. The overall average was up 6.6% for the period, a decent return over the past 7 months. Averages, however, can be misleading. In this case, 13 stocks had returns above 6.6% and 17 had returns below 6.6%. Of the 17 below 6.6%, seven of them were in negative territory! This means that 23 stocks in the DJIA were up, even if only slightly, and seven were down.

The Federal Reserve (FRB) has been targeting a 2% inflation rate for the past few years. With the economy in rocky shape, the rate of inflation during the past several years has remained stubbornly below this target. The FRB believes that a 2% inflation rate would indicate that the economy is growing, accompanied by fewer unemployment claims and a greater number of new jobs. Recently revised government statistics indicated that the economy contracted 2.9% in the first quarter and that consumer spending was down.

An article about U.S. Treasury bonds in today’s Wall Street Journal made it very clear that interest rates have gone global, especially for high quality bonds. The article pointed out that at the close of business this past Friday, the 10-year Treasury bond carried an interest rate of 2.597%. Given the growth prospects of the U.S. and political stability, the U.S. Treasury bond is of very high quality.

The U.S. Government recently released results of economic growth for the first quarter. The report indicated that the economy shrank by 1%. While the expectation had been for slow growth, this significant negative reversal signaled a loss of momentum from the fourth quarter of 2013. The impact is visible in the housing industry, where both existing home and new home sales slowed. One would think that this information would result in a negative stock market reaction, but the S&P 500 soared to a new high.

The current economic picture is one of slow growth. The economy is moving in fits and starts but lacks momentum. The S&P 500 closed yesterday at 1885. At the end of 2013, the S&P 500 closed at 1848, meaning it has risen about 2% for the year to date. This certainly is not the robust market of 2013. Many reasons might account for slowing the growth in stocks, but overall, I’d say the stock market got ahead of itself.

Today, in the second section, page 2, of the Wall Street Journal (WSJ) an article appeared about what cheap natural gas means to the U.S. economy. For some time I’ve thought that the abundant gas in the United States would result in greater manufacturing coming here. I had not considered the impact of construction from this change. The WSJ reported that the chemical industry alone is accounting for more than $100 billion of new construction in the gulf coast states, with another $125 billion anticipated. This business investment is by the U.S., Germany, Canada, and other countries.