- U.S. Factory Orders fell. This is not a medium-long term bearish sign for stocks.
- More signs that inflation will rise throughout 2018. Medium term bullish for stocks
- The stock market today looks more and more like the stock market from the late-1960s.
- Trump’s tariffs will not cause a repeat of the 1930 stock market crash and Great Depression.
Read Study: what happens next after February’s correction
3 pm: U.S. factory orders fell. This is not a medium-long term bearish sign for stocks
U.S. factory orders declined -1.4% in January 2018. The economy and stock market move in sync over the long run.
Factory Orders is an extremely noisy and choppy data series. It does not consistently lead the U.S. economy. Factory Orders will sometimes tank even during years with strong economic growth. Hence, January’s weak Factory Orders reading is not a medium-long term bearish sign for the U.S. stock market.
3 am: More signs that inflation will rise throughout 2018. Medium term bullish for stocks
Various signs point to rising inflation throughout 2018, and here’s one more. The following chart illustrates the strong correlation between Core CPI and ISM Nonmanufacturing Operating Rate. ISM’s Nonmanufacturing Operating Rate tends to lead Core CPI by 1 year.
The Nonmanufacturing Operating Rate’s surge suggests that inflation will rise throughout the rest of 2018. This is a medium term bullish sign for the stock market. The stock market and inflation usually rise together UNTIL the economy deteriorates.
There are no signs of significant economic deterioration right now.
3 am: This looks more and more like the late-1960s.
There are many parallels between the stock market today and the stock market of the late-1960s (e.g. 1967).
- The economy was already at full capacity by 1966. The economy is at or near full capacity today.
- The Federal government injected fiscal stimulus into the economy while the economy was hot (via defense spending on the Vietnam war 1966-1967). Trump injected fiscal stimulus into the economy via tax cuts and higher government spending.
- Inflation went up after 1965. Inflation is going up today.
The stock market went up for 2.5 more years (1966-1968) after the government injected fiscal stimulus. The Medium-Long Term Model predicts that the current bull market still has 1-2 years left.
3 am: Trump’s tariffs will not cause a repeat of the 1930 stock market crash and Great Depression.
Bearish investors claim that a trade war will lead to another Great Depression and stock market crash. They say that Trump’s tariffs on steel and aluminum will lead to a repeat of the 1930 crash. I disagree.
- The 1930 Smoot Hawley Act was a tariff on 20,000 goods. That tariff had a much wider impact on the U.S. and global economy. In comparison, steel and aluminum account for a meager 2% of imports.
- The 1930 Smoot Hawley Act came out AFTER the economy and stock market had already crashed. Smoot Hawley added fuel onto the fire. In contrast, the U.S. economy is growing robustly today.
- As I said yesterday, this is not the start of a slippery slope. Republicans are strongly against tariffs. Trump cannot start a full blown trade war on his own, and Congress is generally pro-free trade.
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.