With last week’s strong economic data and inflation largely flat, many believe there will be a soft landing rather than a recession.
However, there are statistics that indicate that when the yield curve is this inverted (most since 1983), a recession can and will probably continue to occur.
A recession may take some time to develop and is not expected to happen until 2024 or 2025.
First of all, however, we still see stagflation.
5.4% core CPI in Europe and 4.6% PCE in the US are just the numbers we need to conclude banks could still hike rates, but the pace (certainly) and maybe the Frequency with which they raise interest rates is coming to an end.
The FED wants a weaker job market and we could see that in the near future.
Also a new round of inflation.
Regardless, the market has been expecting an uptrend for the first six months of the year as it is forward looking.
The market saw that the pace of rate hikes was slowing, the economy was unlikely to shrink any further, inflation might have peaked, and the tech sector was cheap and attractive.
We can certainly thank consumers in large part for the great economic stats, because they are the reason the market and economy are stronger. YOLO?
If we had to split current sentiment into two categories, anger (France) and fatalism (YOLO) would win.
However, with GDP now up for three consecutive quarters, one has to wonder if the market will continue to forecast further economic strength in the second half of the year.
Range trading prevails in small caps, which means small caps need to find new leadership to stay bullish.
We need to see other consumer sectors emerge alongside the previous major rallies in airlines and cruise lines.
IWM is below the S&P 500 benchmark on the daily chart, the middle chart, or our Leadership Indicator.
On the monthly chart, IWM has not yet shown any real expansion.
The Real Motion or Momentum indicator below shows bullish divergence. Therefore, IWM needs to move the price for a rosier setup in the second half of the year.
Now add the uncertainties around the world, like weather (drought and floods), Russia (is it over?), China (more chip wars), global inflation (still stubborn), supply chain (deglobalization), labor (wages) . increase) and social unrest (France)
And the one-sided call for inflation seems far too one-sided.
Flexible and active traders will prevail in the next 6 months.
Barring some volatility in commodities and the recent sharp correction, we continue to expect the stagflation environment to persist into 2025.
Looking at 30-year cycles of commodities versus stocks (dating back to 1933), commodities are forecast to potentially outperform by more than 3:1 over the next 15 years starting this week.
We monitor the 20+ year (TLT) bond market for clues.
So far, bonds have barely moved. A recovery from current levels (above 104) and we will be more defensive on equities. And most likely friendlier to commodities and precious metals
Finally, we’re looking at the US Dollar versus the Euro.
The dollar stopped right at the 0.92 resistance level. Below 0.90 we would expect further dollar weakness.
Twitter: @marketminute
The author may hold a position in the securities mentioned at the time of publication. All opinions expressed herein are solely those of the author and do not represent the views or opinions of any other person or organization.
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