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

Published 06/11/2021, 05:03 AM
Updated 09/20/2023, 06:34 AM

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. 

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

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.

Latest comments

this guy just went in circles "in the end, the difference between today and 2018 is that dissimilar" .. stupidly driven point made
this guy is kinda clueless?!
agreed... a Biden administration for one thing...
Kramer you're what's known downtown as a "Nancy boy". what a puts😂😂😂
PUTZ
Great article! The only thing I know for sure is that the reopening is "transitory"
Look up "Climate lockdown".
Thanks Michael. I hope you can do a follow up on this in a months time
reply by staff, ugggh
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.
I trust nothing that the mainstream media posts. Everything follows an agenda. Welcome to Socialist America. And no one seems to care.
you speak the truth .
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!
The CIA and the Media_ 50 Facts the World Needs to Know - Global ResearchGlobal Research - Centre for Research on Globalization_files check it out
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
That's how Socialist/Communist Dems supporters work. They use FEAR to rule the people. 😒
I hope you are wrong
copper falling isn't the sky falling. just reality kicking in.
Wasting time to read your article…
this arricle is very much useless... everybody knows whats going on...
they're going to hang.
Be afraid? Is that the message here?
no, mortgage you house and buy leveraged.
What's the author's stake in fear- mongering here?
Clearly you should keep your money out of the stock market!
Is not economy rather is people realize is too expensive to over stock lumber, copper, steel.
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.
stagflation as per 1970s, but times 1000
Inflation already in. head to the pump, to home depot, or to the supermatket.......Good one!
cannot delete, not for u
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!
Was thinking same thanks
A little bit lost in all this Michael.
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
This guy is a joke he is right about 1 out of 15 times reading his little graphs.
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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