- Retail Sales: is the economic data starting to deteriorate?
- The CPI report is the equivalent of the Jobs Report from a few years ago
- Credit spreads are flat. Medium-long term bullish for stocks
- The Powell Put
Read Study: how long will it take for the stock market to make a new all-time high
3 pm: Retail Sales: is the economic data starting to deteriorate?
Masked by today’s CPI report is today’s Retail Sales report. Retail Sales was very weak: it fell -0.3% in January.
The Year-over-Year change in Retail Sales is still mostly flat, so this is not a huge concern.
Today’s weak Retail Sales is indicative of a broader trend in the economic data:
U.S. economic data is deteriorating a little
Short term fluctuations in the data are normal and mostly irrelevant to the stock market. I don’t think this is the start of significant economic deterioration because the data is still trending higher. But we are on the lookout since this bull market in stocks only has 1-2 years left.
The U.S. stock market is easy to trade because the economy always deteriorates significantly before a bear market begins.
3 pm: the CPI report is the equivalent of the Jobs Report from a few years ago
The S&P 500 initially spiked down on today’s 8:30 am CPI report and then soared.
This reminds me of a few years ago when each month’s Jobs Report was used as a trigger. The market’s reaction to today’s higher-than-expected CPI report confirms two things:
- We are in the final inflation phase of this bull market in stocks. The market is starting to care about inflation. Inflation phases last approximately 1-2 years.
- Historically, rising inflation is initially good for stocks because it means that the economy is improving at a faster rate. Inflation is only bearish for stocks when the economy experiences stagflation.
The U.S. economy is still improving at a healthy rate right now, so stagflation is not a concern right now. We are on the lookout for significant economic deterioration, which has not reared its ugly head yet. That will help us pick the bull market’s top.
On a sidenote, please ignore each month’s CPI Report. Focus on CPI’s trend. Each month’s CPI is just a trigger, the same way each month’s Jobs Report was just a trigger a few years ago. Wall Street “analysts” like to make a big deal out of each month’s CPI report. This happened in the last rate hike cycle from 2004-2006. There were a lot of short term and intraday market movements on these reports. But in the medium term, these reports had almost zero bearing on the stock market. Focus on the U.S. economy and inflation’s trend.
3 am: Credit spreads are flat
U.S. high yield spreads have been mostly flat for months despite a small increase in spreads recently (spreads increased because the stock market fell). This is a medium-long term bullish sign for the U.S. stock market. Bond market investors are smarter than stock market investors. That’s why spreads always rise significantly before a bear market begins, and they sometimes widen before a significant correction begins.
Hence, flat credit spreads imply that a bear market is AT LEAST months away.
We are watching credit spreads right now. If the stock market makes new highs and credit spreads continue to widen, then that is an important medium-long term bearish sign for the stock market.
3 am: the Powell Put
Some investors are concerned that Powell will be less supportive of financial markets than his predecessors. They argue:
- Powell was relatively quiet in the wake of last Monday’s stock market crash.
- Powell was not as supportive of Bernake’s QE as many people think.
Perhaps I was wrong. Perhaps Powell isn’t as dovish as I initially expected. But here’s the reality:
- No Fed chairman wants the stock market to crash and enter into a bear market on his watch. The Fed has no choice but to intervene because if it doesn’t, the next recession might turn into a replay of the Great Depression. I admire Bernake for what he did in 2008. 2008 could have turned into a repeat of 1929 if the Fed didn’t step in. The Fed did too little in 1930. What could have been a normal recession turned into a decade long depression thanks to the Federal Reserve’s inaction.
- It’s only a matter of how much the market falls before the Fed & Powell steps in to save the day. If Bernake stepped in when the market fell 12%, perhaps Powell will step in when the market falls 20%.
I don’t think this economic expansion and bull market will end with a deflationary crash like 2008. I think this expansion and bull market will end with stagflation. Central banks can combat a deflationary crisis with monetary easing, but central banks are powerless against stagflation.
Here’s how I think the next bear market will play out.
- The economy will start to deteriorate in 1-2 years.
- The stock market will fall and the Fed will ease.
- The Fed’s easing will put upwards pressure on inflation, which is already rising.
- The stock market will go up for a few more months while the economy continues to deteriorate.
- With stagflation (rising inflation and a deteriorating economy), the stock market finally begins a bear market.
Here’s what I think will happen based on my discretionary outlook.
- The S&P has made a small 6%+ “small correction”. This will not turn into a “significant correction”.
- The S&P 500 has approximately 2 years left in this bull market.
I do not use my discretionary outlook to trade. I remain 100% long UPRO because my Medium-Long Term model does not foresee a significant correction at this point in time. I ignore small corrections. I only sidestep significant corrections and bear markets.
I have been 100% long UPRO since September 7, when the S&P was at 2465 and UPRO was at $109.3
*I also have a small Day Trading portfolio. Click here to view my day trades.