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U.S. equity markets keep rising this year, but prices have been gyrating more and more quickly in recent trading as investors have been spooked by September’s abysmal jobs report, relentlessly rising prices, and shortages of key goods that could last for months.
But those worries of hard facts and solid data are soon forgotten as we have noted, as equities keep pushing back up to their all-time highs. Slowing growth and spiking inflation are no realities for money junkies playing in the rigged markets.
The S&P GSCI Index of 24 commodities recently rose to its highest level since late 2014, indicating that inflation is unlikely to moderate for some time. And, as we have noted, copper prices today hit an all-time high!
The current positive market performance against a backdrop of a slowing economic recovery has led some analysts to recall the 1970s, when energy price shocks sent consumer prices soaring while the overall economy stalled—a condition known as “stagflation.”
The comparison is alive and gaining strength in the minds of investors and economists.
“Historically, stagflation has often been accompanied by oil [price] shocks,” analyst Jill Carey Hall at BofA Securities, said to The New York Times.
“There’s definitely a rising concern that we could be in that type of environment,” she added.
During the week of 4 October, the number of Bloomberg News articles including the word “stagflation” notched a record, the NYT noted.
Officials of the U.S. Federal Reserve have long insisted that today’s robust inflation rate is transitory; however, the Fed’s preferred measure of inflation grew in August at the fastest pace in 30 years, prompting more Fed officials to move more quickly to set the stage for higher interest rates (see related story in this issue).
Also, last week an index of the price of used cars—often seen as a barometer of inflation—set a record.
TREND FORECAST: Inflation keeps rising, job creation is weak, stock markets remain in stratospheric territory, while price-earnings ratios are at extremes.
The risk is not stagflation, with rising prices and a stagnant economy.
As we have forecast, the real risk is Dragflation. The economy will not stagnate, it will decline and prices will keep rising. (See “Dragflation to Hit Hard,” 11 Jun 2020).
From job creation to commodities shortages, we forecast that the world’s economy—after expanding earlier this year—will be contracting amid supply shortages and logistics snarls that will last for months, cutting factory output and hobbling consumer spending, as is already happening in Germany and China (see related stories).
Dragflation will make any return to post-COVID growth more difficult and take longer, especially as the Fed shuts off the spigot of cheap money and raises interest rates.
Also, the shortages pushing prices up will worsen as mandates for masks and proof of vaccinations keep people away from their jobs, going to events, restaurants, travel, etc.
TREND FORECAST: Rising prices that cannot be passed on to consumers will dent corporate sales and profits… which will in turn push stock prices lower. And, as inflation rises, as central banks have done in other nations, the U.S. Federal Reserve will be forced to raise interest rates… which will slow the flow of cheap money that has powered the stock market’s irrational exuberance this year.