We’ve witnessed some incredible extremes in economic numbers from depression era data due to the complete shutdown of the global economy to red hot 1970’s style inflation due to the vaccine and reopening. Last year the consensus was that it would take years for the market to fix itself and the economy to recover. It was just when the panic hit a crescendo that I wrote a piece at the exact bottom on March 23rd: “Light at the end of the Corona Virus Tunnel?”.
As an investor you can’t always act on what is presently happening. One must filter out all the noise of the moment and anticipate how things may look 6-12 months out. The market after all is a discounting mechanism.
Here we are a little over a year from those dark days when it seemed the world would end. The pendulum has swung from one extreme of depression era deflationist consensus calls to now runaway 1970’s inflation consensus talks whereby the FED has lost control and will be backed into a corner and forced to raise rates. Barron’s, the Economist, CNBC you name it and the talk of the town is inflation and rates are going higher.
The reality is that interest rates have actually been coming down see the US Treasury 10 year note below which stands today at 1.485% :
What about those red hot prices of Lumber the inflationist were pointing to? Lumber prices are down 40% from their May highs.
When everyone including your friends and neighbors believe inflation is going to get out of control will they all be right? Look at the Google search trends for the word ‘Inflation’ chart below going back to 2004 see the recent spike?
What about the search term ‘Economic Depression’? See the big spike back last March? That was a great time to buy stocks.
The bottom line is that I believe the market will begin to realize we are not in a 1970s style runaway inflationary environment. In fact we are most likely going to return to a pre-pandemic slow growth and low inflationary environment. China was the first economy to lockdown and the first to reopen. China’s economy has already begun to decelerate over the last few months. The US as well as Europe should follow suit. A market correction is likely imminent as growth cools down which is the exact opposite of what the consensus is expecting. The FED will remove stimulus at a slower pace and this will contain any correction. Technology stocks which have underperformed because of inflation fears should lead once again through the summer months as a low growth low inflation environment is bullish for technology.
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