The ever evolving narrative on what makes the markets go up and down has added a new hook to hang our hats on, stagflation. I find this interesting since the fight against inflation that the Fed claims to be engaging in, is nothing more than a fight against the demand that is chasing the supply. If demand is curtailed, then unemployment may begin to rise and the economy would lose important consumers. If this happens, inflation may stop going up. But in my previous opinions, the increases in consumer prices present in the economy aren’t likely to go down any time soon. Hence, slow economy, modest inflation, is the natural outcome for stagflation. Not exactly a new idea, but the media has to have something to say every day.
So why the new prediction and the markets are moving higher this week? I’ve often written about the behavioral nature of the investor and the tendency to decisively sell, yet procrastinate when buying. As the signs of recession are sending out messages, which for some are evidence we’re in a recession, and for others not yet, the clear signs of procrastination are present in the recent increases in the broad indexes. I really don’t care, because it’s the private sector of our economy that decides if recession is evident when they begin to be concerned about, high prices at the grocery store, gas station, even the favorite coffee shops and lastly any growing concerns that may arise over the stability of one’s job. Tomorrow the monthly recap for Unemployment and Payroll data is expected, by a consensus of economists, to show some moderation in payroll growth and no change in the unemployment rate, currently 3.6%. This kind of outcome is likely to feed the markets penchant for volatility, but since the beginning of the Third Quarter (07/01/2022), the markets are reaching out for more favorable outcomes for equity valuations. Add to this, next week begins the broad string of quarterly earnings results that are sure to have impact on the market. With most analysts having lowered earnings and price targets that will include many of the most familiar name, it’s the guidance that usually finishes the report that gives the investor an idea of the company’s outlook for the rest of the year. If guidance is favorable, the markets may reward the company’s stock price, if the volatility, and our friendly Algochums let that happen.
Our favorite trio of uncertainties that include war in Ukraine, ostensibly a stalemate, China, ostensibly easing restrictions, suggested more by Disney (DIS) opening its theme park and Tesla (TSLA) opening up production. Lastly inflation, declining oil and natural gas prices and consumer sentiment are all favorable conditions that could show up in upcoming Inflation data. For the markets, there are other impacts to consider. For now, some of the most investable stocks are down over 30%, 40% and even 50%, and if investors have any optimism, taking advantage of any improvement is the inflationary environment makes sense, but not without risk. Uncertainties are easing, to some degree, and the short term technicals favor staying invested, but long term technicals are less favorable, and while a rally in the indexes could cut annual losses in half (NASDAQ -30% to -15%) it would take the clearer certainties, the economy and inflation, to bring in the cash that’s sitting on the sidelines. In the meantime, we’re invested and prepared to take the risk higher when the data invites us in.