The Latest On The Global Economy: Consumers Keep Their Poise While The Markets Stumble

Economic data suggest stagflation is here to stay but consumer and voter behavior doesn’t confirm this, leading to a mild disconnect that implies the current market correction will end soon. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), but my technical reading of key stocks in the S&P 500 is neutral. There are several negative factors across global asset classes. Oil is pointing to stagflationary conditions and the action in currencies signifies $US strength. This is leading bond investors to ramp up inflation expectations (based on measures of Treasuries and TIPS). With stagflation on the mind expect the S&P 500 to be range-bound over the next few days.

Minor Central banks around the world are raising interest rates as inflation and inflation expectations pick up. Supply chain issues are clearly temporary but what is worrying policymakers is the energy markets, where OPEC’s decision to limit supply increases is pushing oil up, while natural gas futures are exhibiting wild moves. There is the possibility consumers will get habituated to price increases and that would set the stage for accelerating inflation and stagflationary conditions as business confidence folds. But I don’t foresee this happening.

While supply chain disruptions have caused large moves in economic data from trade to factory production, this is against a backdrop of stable growth in most indicators through the summer. And while these disruptions and volatile data series suggest stagflation, the fact is the consumer is not reacting badly, either economically or politically. Elections from Canada to South America to Italy show that voters are effectively sanguine about centrist policies, and wary of ideologies. The one negative for the markets is that centrism now includes the blatant use of protectionist policies to achieve political ends.

The online marketplace effectively ensures consumers can be price conscious while disruptive new entrants and technologies cause existing firms to limit price increases. So the current inflation is simply a disruption, and expect the market correction to extend another week or so until hysteria dies down, or major Central Banks make comforting sounds to investors.

My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), Apple (AAPL), Gibraltar Industries (ROCK), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a hedged position in the S&P 500 (UPRO and SPXU).