May 7, 2018
By Mish Schneider
These tulips in front of Citi Field in Queens, NY, are in full bloom and quite attractive.
There are tulips lining the entire entrance to the stadium.
So, while the landscape looks amazing right now, what happens when the tulips lose their buds, leaving only the stems?
Similarly, we have an economy running hot.
Employment numbers make the economic landscape look amazing.
The inflation target of 2% reflects decent global consumption.
However, the beauty of the variegated tulip that the market has enjoyed looking at for the last 8 years-low gas prices, low interest rates and a bullish stock market, has started to shift.
The tax cuts in an already strong economy, have historically had little extra impact.
Oil prices are rising, interest rates are climbing and the financial markets both domestically and globally are stalling.
Furthermore, although premature in this prediction, inflation could easily climb well beyond the Fed’s 2% target.
In the tulip world, after a strong growing season spiked by plant fertilizer, the next cycle is for the flowers to fall.
After the markets peak, what is the next economic cycle?
In the market world, that translates to after its strong growing season, spiked with tax cuts and solid corporate earnings, the next cycle is for the economy to begin to stagnate.
Here’s Webster’s definition of stagnation. “to stop developing, progressing, moving.”
That alone could contain the market inside its current trading range.
It could also take the market lower. However, a “crash” would probably become less likely.
The “X” factor, is what happens with commodity prices.
Should inflation exceed 2% gradually, then welcome to a potentially stagnate market, but without a lot of fear.
Should inflation ignite out of control, then stagflation becomes a very real threat.
The dictionary definition of stagflation is “persistent inflation combined with stagnant consumer demand and relatively high unemployment.”
Presently, we are not there. Although, “relatively high unemployment” is open to interpretation.
If we go from 3.9% to 4.3% (10% increase), that could interpret as “relatively high unemployment.”
Beautiful buds, once fully bloomed, can last on the stem for a long time, but eventually….
Technically, all the indices and some of the Modern Family sectors tested the top of the recent trading ranges.
That puts them at resistance until those key areas clear. See below.
S&P 500 (SPY) A tease, it failed to take out the resistance at 268. Now, 264 pivotal support we want to see hold
Russell 2000 (IWM) Also ran right into the 158 resistance with 160 the double top to clear. That means this must hold 154 or we are looking like yet another test to recent lows.
Dow (DIA) Over 245 better.
Nasdaq (QQQ) Also tested resistance today at 167 but did at least confirm the bullish phase. That makes 164.10 huge to hold
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