The financial markets flip-flopped from 2015 to 2016, and again from the first half to the second half of 2016, as my colleague Simon Fennell explained previously. Are the financial markets reacting—correctly—to the economic environment?

I believe so. In cyclical terms, the expansion in the United States is well advanced. Consequently, inflation is back to pre-2008 crisis levels. We have not had inflation in several years, and as it has become more apparent this year, it has taken both equity and fixed-income markets by surprise.

Late-Stage Cyclical Expansion—Expected

Monthly new auto sales in the United States have averaged well above an annualized rate of 16.5 million units, their pre-crisis peak. While steady, there is little to suggest that auto demand has much room to grow from current levels.

Similarly, on the housing front, monthly housing starts have recovered to an annualized rate of roughly 1.3 million units, which is commensurate with net new household formation. This is decent growth, but we expect little acceleration from here.

In addition, wages are growing only marginally in excess of inflation, and thus real disposable income growth is slowing.

This picture of stable to slower growth is completely consistent with a late-stage cyclical expansion.

Inflation—Long Overdue

As the U.S. economy has moved further into expansion, inflation has picked up. Both core (which excludes food and energy) and services measures of inflation are back to their pre-2008 average levels and are still rising, as the chart below shows.

And, from early next year, import prices are likely to begin contributing to overall inflation, which will be a first since early 2014, the chart below illustrates.

But this is not the hyperinflation that many of you may have been thinking about; it is benign, long overdue, and cyclical. Later, I will explain why.

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Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

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The William Blair Funds are available to U.S. residents only. Non-U.S. residents, please click here.

Copyright © 2020 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

The William Blair Funds are available to U.S. residents only. Non-U.S. residents, please click here.

Copyright © 2020 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
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