We have been talking about the reasons that the next phase in the markets could be an inflationary one…
- The Fed is in Dove mode as backward looking economic data, notably employment, are weak.
- The Fed is pushing for a preconceived ‘just right’ level of inflation, which is like summoning a genie from a bottle. They don’t go back in so easily once they get out.
- Embedded costs continue to rise in many services sectors (ex. Healthcare).
- ‘Prices paid’ have been rising for manufacturers.
- And now, on top of it all an early economic indicator (the Semiconductor Equipment sector) is flashing an economic growth signal if it will work as it did in early 2013.
The above are all fundamental considerations for the economy and for the financial system that runs it. This is important because with the economy and markets so dependent now on policy, we need to continue to realize that fundamentals are one thing and price and technicals, quite another.
Indeed, the fact that it is all dependent upon a central monetary authority is a big fundamental negative. So I want to put some caution into the picture and continue to advise we wait for a break one way or the other from the US market’s sideways consolidation before heavy commitment. Global markets as we know are generally in bear trends with a few items relatively bullish and/or bouncing.
If I could sum it up in one chart I’d say let’s consider the VIX. A big pop in volatility is now being ameliorated as peoples’ nerves ease. VIX is settling back to the support zone. This is a week that will make a lot of headlines and with VIX at or above the support line, we should be open to resumed volatility and the potential of negative market events. If it breaks down, we can get further-still toward a bull stance.
We are looking ahead to a potentially bullish (if inflationary) phase but this is just a reminder for moderation and caution in the very short-term on the broad markets. The best time to buy is amid fear and angst.