June 29, 2014
Weekly Market Outlook
By Mish Schneider
Can stocks blast off to new heights with the kinds of news we had last week?
And if gold completes its major ‘bottom’ pattern...
Is it time for gold to outperform stocks?
First, let’s quickly review some of the headlines that drove, or distracted, the markets last week...
On Wednesday we learned that the...
“Economy Shrank Rapidly In First Quarter”
This headline announced the fact that GDP data for the first quarter was revised down further than previously reported bringing the measure to an annual rate of a DECLINE of 2.9%. In case you’re wondering just how bad that is...
This is the fastest rate of decline since the recession and the largest drop recorded since the end of World War II that wasn’t part of a recession.
Given such weak GDP data, perhaps we shouldn’t have been surprised by Thursday’s headline...
“Warning Sign: Weak Spending”
In fact, were it not for inflation, spending would not just have been weak, it would also been negative. Inflation adjusted consumer spending has been negative in April and May (as well as Jan. 2014 and Dec 2013). That’s 4 of the last 6 months for anyone not doing the math in your head.
I find this most interesting in light of Janet Yellen’s comment in her latest news conference on June 18th in which she said,
“I think part of my confidence in the fact that
we’ll see a pickup in growth relates to the fact that
I think consumer spending will continue to grow at healthy rate.”
Four out of six months of negative spending hardly sounds like “growth”. Unless of course, she was referring to the numbers that include inflation. Then it makes sense, and we all learn one of the benefits of inflation - it makes the consumer spending data look much stronger.
On June 18th, the Fed Chairwoman probably already knew we’d see inflation headlines such as we did this this week...
“Inflation at Highest For Year and a Half”
Now that’s “growth”. This headline is just an attention grabber however. Inflation is still below the Fed’s target of 2%, and far below levels seen in 2012, so it’s really no reason to be concerned.
And now that we know it’s also good for the consumer spending data, I suppose we can also ignore the discomforting fact that the largest increases in the inflation data came from groceries, gas, and utility bills.
In summary, this week revealed a record decline in GDP, weak consumer spending and 18 month highs in inflation. All this in the context of the Fed cutting back on its level of economic stimulus (i.e. QE) doesn’t sound like a set of conditions that we should expect to lead to a stronger economy which is what stocks would like to see.
Don’t worry, the Fed may be pulling back, but capitalism has its ways of self-adjusting. The banks are well aware of the fact that a certain segment of our population is not spending fast enough. Long before we received this week’s weak economic data, these banks started furiously working to solve the problem!
In the first quarter, banks and other lenders issued 3.7 million credit cards to “sub-prime” borrowers. This is a 39% jump from a year earlier and the most since 2008! That should help consumer spending without any economist's "adjustments".
So what does this all mean for the markets?
In this week’s video you’ll see how one of the broadest and most important stock indexes cleared highs not seen since March of 2014! I don’t think you can buy stocks with any of those new credit cards, but maybe the reason some people aren’t buying more “stuff” is because they’re too busy buying stocks!
You’ll also learn about a pattern you can’t see on a basic gold chart that suggests a breakout of its recent consolidation could offer a big opportunity for the bulls. I doubt the inflation data has any real cause and effect here, but the gold bugs will come out of the woodwork even faster if the news headlines support the price action.
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