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The Stock Market May Have Bigger Things To Worry About Than Inflation

By Michael KramerMarket OverviewJun 11, 2021 05:03AM ET
www.investing.com/analysis/the-stock-market-may-have-bigger-things-to-worry-about-than-inflation-200585503
The Stock Market May Have Bigger Things To Worry About Than Inflation
By Michael Kramer   |  Jun 11, 2021 05:03AM ET
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This article was written exclusively for Investing.com

Since the weaker than expected jobs data last week, bond yields have fallen sharply, with the 10-year yields now below 1.5%. They dropped further following the hotter than expected consumer price index reading on June 10. There is a message here because copper prices have fallen by nearly 8% since May 10. This, coupled with declining 10-year breakeven inflation expectations, appears to signal not inflation but disinflation or a lower inflation rate. 

This has spilled over into parts of the equity market, with the PHLX Housing index and the Dow Jones Transportation Average falling by roughly 13% and 6%, respectively since their peaks. Suddenly there are stunning similarities that have developed that have all the warning signs from the fall of 2018. 

The Same, But Different

While today is different from a monetary policy standpoint than 2018, the fears of slower growth at the end of 2018 and a possible recession contributed to the nearly 20% decline in the S&P 500 back then. It may not be much different now, with earnings growth rates expected to decline dramatically heading into 2022. 

Couple this with falling commodity prices and sinking inflation expectations, parts of the market may be starting to worry about growth slowing as we begin to enter 2022. The transports and housing sectors are two of the more economically sensitive parts of the market. These two sectors are watching inflation expectations rolling over and bond yields dropping. This sends a thunderous message that inflation may not be the issue. Still, instead, the worries should focus on slowing inflation and growth.

Weaker Growth

While calls for a recession certainly aren’t front and center. The weaker than expected job growth could tell a tale that the US economy is in for a longer and slower economic recovery than initially believed. It could be one reason why we have seen this significant shift in some of the more economically sensitive parts of the financial markets. That would also confirm why inflation expectations and commodity prices are dropping on fears of weakening demand.

In 2018, the housing index began to diverge from the S&P 500, starting in July. The Dow Transports began to separate from the S&P by the middle of September. 

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We can see that the same thing has started in recent weeks, with the Housing index falling sharply, and now the Dow Transports is starting to drop. The S&P 500 has been trending sideways for the most part over this time and has to pick up on or ignoring this trend. 

HGX 300 Min
HGX 300 Min

May Take Much Longer

At this point, the is no clear indication that the economy is about to slow dramatically other than the disappointing job numbers. However, earnings growth next year is expected to slow dramatically. Estimates for S&P 500 EPS growth in 2022 are at 11.7%, according to the latest data from Refinitiv, which is down from estimates of nearly 17% at the beginning of January. Additionally, that is down dramatically from an expected 37% growth rate in 2021. 

If expectations of slower growth are starting to grip the market, then it would make sense to see the more economically sensitive parts of the market get hit first as the broader index holds up for longer. This is nearly the identical pattern in 2018, with fears of the Fed overtightening causing a recession. This time may be different because the Fed is already running a very accommodative monetary policy. In the end, the difference between today and 2018 is that dissimilar.

The Stock Market May Have Bigger Things To Worry About Than Inflation
 

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The Stock Market May Have Bigger Things To Worry About Than Inflation

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Comments (22)
Adnan Azam
Adnan Azam Jun 13, 2021 6:09PM ET
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this guy just went in circles "in the end, the difference between today and 2018 is that dissimilar" .. stupidly driven point made
petet lurkar
petet lurkar Jun 13, 2021 6:09PM ET
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this guy is kinda clueless?!
Evan Ault
Evan Ault Jun 13, 2021 5:58PM ET
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agreed... a Biden administration for one thing...
Houka Caterpillar
Houka Caterpillar Jun 13, 2021 9:06AM ET
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Kramer you're what's known downtown as a "Nancy boy". what a puts
Houka Caterpillar
Houka Caterpillar Jun 13, 2021 9:06AM ET
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PUTZ
Larry DeAngelis
Larry DeAngelis Jun 12, 2021 11:01AM ET
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Great article! The only thing I know for sure is that the reopening is "transitory"
Miriam Morkhul
Miriam Morkhul Jun 12, 2021 11:01AM ET
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Look up "Climate lockdown".
Sandeep Gupta
Sandeep Gupta Jun 11, 2021 11:56PM ET
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Thanks Michael. I hope you can do a follow up on this in a months time
Houka Caterpillar
Houka Caterpillar Jun 11, 2021 11:56PM ET
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reply by staff, ugggh
gary leibowitz
gary leibowitz Jun 11, 2021 12:28PM ET
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Bias and distorted micro trend has resulted in a call that the dead calm weather isnt because we are in the eye of a storm. Commodity prices spiked to absurd levels. Now a correction is seen as disinflatioary? JOLT housing China CPI disposible income labor costs and an early post pandemic economy is supposded to question the likely path going forward? Insane. Bond prices are manipulated by the FED. Once the street realizes where we are headed the dollar and tilds will apike like commodities has. Up is not sown and inflation will be number one topic going forward.
Lonnie Shelton
Lonnie Shelton Jun 11, 2021 11:28AM ET
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I trust nothing that the mainstream media posts. Everything follows an agenda. Welcome to Socialist America. And no one seems to care.
Stephen Willis
Stephen Willis Jun 11, 2021 11:28AM ET
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you speak the truth .
me ish
me ish Jun 11, 2021 11:28AM ET
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you should see the documentation available online as to how much the CIA IS the Mainstream media, not just in the US but infiltrated into many parts of the global media. It's stunning!
me ish
me ish Jun 11, 2021 11:28AM ET
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The CIA and the Media_ 50 Facts the World Needs to Know - Global ResearchGlobal Research - Centre for Research on Globalization_files check it out
Bulent Ok
Bulent Ok Jun 11, 2021 11:20AM ET
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Article with an agenda... Could smell it miles away. But I'm sure the millennials on robinhood would fall for it and dump positions that are going make money.... There is momentum for another run... Stocks jumping all times highs again... The volatility shows that. Any moment the rally will takeoff
Joseph Wll
Joseph Wll Jun 11, 2021 11:19AM ET
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That's how Socialist/Communist Dems supporters work. They use FEAR to rule the people. 😒
Justin Tucker
Justin Tucker Jun 11, 2021 11:18AM ET
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I hope you are wrong
Kim frank
Kim frank Jun 11, 2021 11:17AM ET
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copper falling isn't the sky falling. just reality kicking in.
Bilqis Faiha
Bilqis Faiha Jun 11, 2021 11:12AM ET
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Wasting time to read your article…
Carlos GV
Carlos GV Jun 11, 2021 11:12AM ET
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this arricle is very much useless... everybody knows whats going on...
Houka Caterpillar
Houka Caterpillar Jun 11, 2021 11:12AM ET
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Carlos GV they're going to hang.
Randall Grisi
Randall Grisi Jun 11, 2021 11:09AM ET
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Be afraid? Is that the message here?
George Pichurov
George Pichurov Jun 11, 2021 11:09AM ET
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no, mortgage you house and buy leveraged.
Randall Grisi
Randall Grisi Jun 11, 2021 11:08AM ET
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What's the author's stake in fear- mongering here?
Derek Everhart
Derek Everhart Jun 11, 2021 11:08AM ET
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Clearly you should keep your money out of the stock market!
Peter Lai
Peter Lai Jun 11, 2021 11:06AM ET
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Is not economy rather is people realize is too expensive to over stock lumber, copper, steel.
Kevin McCarthy
Kevin McCarthy Jun 11, 2021 11:05AM ET
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really wish everyone would differentiate between economic inflation and monetary inflation. monetary inflation is through the roof. economic disinflation is through the roof. put these together, and you'll see our money has less purchasing power and our businesses are all losing real value even as their share prices soar.
me ish
me ish Jun 11, 2021 11:05AM ET
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stagflation as per 1970s, but times 1000
Christian Gustafson
Christian Gustafson Jun 11, 2021 8:37AM ET
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Biden is not POTUS. Crash, full stop.
CJ Burton
CJ Burton Jun 11, 2021 8:37AM ET
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Obama was over the slowest economic recovery on record. Biden is going to beat that record.
Elvis Durant
Elvis Durant Jun 11, 2021 8:18AM ET
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Inflation already in. head to the pump, to home depot, or to the supermatket.......Good one!
Paolo Gerin
Paolo Gerin Jun 11, 2021 8:18AM ET
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cannot delete, not for u
Dennis Snoozy
Dennis Snoozy Jun 11, 2021 8:18AM ET
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More of the high prices with gas, food and building is supply chain problems in getting the economy going again. There is alot of signs we may be in a longer duration deflationary period. Good article!
Steve Grossman
Steve Grossman Jun 11, 2021 8:05AM ET
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Was thinking same thanks
Damian Wahner
Damian Wahner Jun 11, 2021 7:34AM ET
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A little bit lost in all this Michael.
Javier Godar
Javier Godar Jun 11, 2021 5:43AM ET
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Has the writer looked at any serious commodity index, such as Bloomberg´s? Where is that " commodity prices are dropping on fears of weakening demand". Maybe the writer things that commodities need to increase in prices every single day? https://www.bloomberg.com/quote/BCOM:IND
Michael Gabbert
Michael Gabbert Jun 11, 2021 5:43AM ET
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This guy is a joke he is right about 1 out of 15 times reading his little graphs.
Dhia Betar
Dhia Betar Jun 11, 2021 5:08AM ET
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Inflation expectations rolling over? Have you been following whats going on around the world ? Hhhhhmm. Lets revisit in few weeks. Rough ride ahead !
 
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