“Complacent” is a word that my wife throws at me, when she’s worried about something that she thinks I’m insufficiently worried about. Experience shows that she’s usually right.

Are investors complacent about the trade war and other market risks? Probably. But Wall Street continues to savor the longest bull market in history.

The Dow Jones Industrial Average and S&P 500 moved sharply higher today, with financial stocks leading gains. However, the Nasdaq closed in the red, as expensive large-cap technology shares retreated after their recent run-up.

Good news arrived this morning on the crucial housing front.

The Commerce Department reported Wednesday that U.S. homebuilding rose more than expected last month, a reassuring sign for the housing market, which has struggled as interest rates for home loans have risen.

Housing starts jumped 9.2% to a seasonally adjusted annual rate of 1.282 million units in August, beating the consensus expectation of an annual rate of 1.235 million units. The Commerce Department also raised its estimate for starts in July to a 1.174 million-unit rate.

Driving August’s gain was the multi-family segment, with starts on buildings with two or more units climbing a robust 29.3% to an annual rate of 406,000 units.

Single-family homebuilding, which accounts for the largest share of the housing market, rose 1.9% to a rate of 876,000 units in August. Groundbreaking activity increased in the Midwest, South and West, but was flat in the Northeast.

The housing market has been underperforming the overall economy, indicating that consumers might start tightening their purse strings for other purchases. Scarce housing stock, higher home prices, and rising mortgage rates have made homes unaffordable for many first-time buyers.

But today’s news reassured investors. For most Americans, the home is their largest asset, which makes the housing market a closely watched bellwether.

That ’70s Show…

On the docket for Thursday is a slew of key economic reports with market-moving ability: weekly jobless claims, existing home sales, leading economic indicators, and household debt.

Keep a close eye on the jobless claims report that’s due tomorrow.

The economy is close to full employment. As the labor market tightens, wage growth could throw gasoline on inflationary fires.

The trade war took a back seat today, but it remains another inflationary trend. Companies, consumers and investors will soon pay the price for tariffs, which are really a form of taxation.

Tariffs boost the costs of goods. It’s also worrisome that massive tax cuts and federal deficit spending are occurring during the late stage of an economic boom.

Inflation moderated in August. However, as the following chart of the consumer price index shows, the long-term trend indicates steadily rising price pressures:

Source: Bureau of Labor Statistics

We’re overdue for a recession. If an economic slowdown hits while inflation rises, we’ll be confronted with a doomsday scenario for stocks: stagflation.

The national unemployment rate now hovers at 3.9%, a level that the Federal Reserve considers at or close to “full employment.” The Fed meets next week, at which time it’s expected to again hike interest rates.

U.S. employers continue to find reasons to expand their payrolls, amid massive tax cuts, deregulation, a thriving economy, and a bull stock market that just won’t quit.

The last time unemployment stayed below 4% for a prolonged period of time was during the go-go 1960s. Don’t forget, the 1960s gave way to the 1970s, which brought stagflation and a severe bear market.

But for now, the news for investors is encouraging. Amid the ebb and flow of trade tensions, the U.S.-China tariff spat eased somewhat today, as China delivered a surprisingly muted response to the Trump administration’s new round of trade sanctions.

China added $60 billion worth of U.S. products to its list of import tariffs in retaliation for Trump’s planned levies on $200 billion of Chinese goods. Chinese officials stated today that Beijing would not resort to devaluating the national currency, the yuan, to stay competitive on trade.

Wall Street doesn’t seem worried by high valuations, either. That’s probably a mistake. According to data from the Leuthold Group, a money-management firm, the median U.S. stock, when measured by share price relative to earnings over the past 12 months, is almost 50% more expensive than at the peak of the Internet stock bubble in 2000.

The upshot: Pare your exposure to momentum stocks and transition toward value. Elevate cash levels. Consider inflation-linked hedges such as commodities and hard assets.

Above all, don’t get whipsawed by daily headlines. One day U.S. and Chinese officials are conciliatory on trade; the next day they’re fighting hammer and tongs. Stick to your long-term goals. To borrow a famous line from Macbeth, much of the media’s sound and fury signifies nothing.

Wednesday Market Wrap

• DJIA: 26,405.76 +158.80 (0.61%)
  
• S&P 500: 2,907.95 +3.64 (0.13%)
  
• Nasdaq: 7,950.04 -6.07 (0.08%)
  

Wednesday’s Big Gainers

• Altiummune (NSDQ: ALTI) +285.48%

Biotech posts positive clinical data for influenza vaccine.

• Tilray (NSDQ: TLRY) +38.12%

Marijuana firm extends gains in wake of favorable DEA ruling.

• trivago (NSDQ: TRVG) +13.81%

Major investor boosts stake in online hotel search platform.

Wednesday’s Big Decliners

• Unity Biotechnology (NSDQ: UBX) -13.50%

Analysts fret about biotech’s weak cash position.

• Medifast (NYSE: MED) -7.96%

Weight loss products provider overweight with inventory.

• Constellation Pharmaceuticals (NSDQ: CNST) -7.69%

Analysts sour on newly public maker of novel drug treatments.

Letters to the Editor

“How badly can inflation hurt my portfolio?” — Tim K.

Historical data show that inflation dampens the returns of equities. From 1928 to 2017, when inflation was below 3% in any given year, the S&P 500 generated a median return of 16%. However, when inflation exceeded 3%, the median return for stocks was only 6.5% a year.

Questions about inflation and your investments? Drop me a line: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.