Recession May Emerge Later but Stagflation Appears Imminent
2023.07.03 04:04
With last week’s strong economic stats and basically flatlined, many believe there will be a soft landing and no recession.
However, there are stats that say with the yield curve so inverted (most since 1983), recession can and probably will still happen.
Recession can take time to emerge, with expectations that it won’t occur until 2024 or 2025.
First, though, we still see stagflation.
5.4% in Europe and 4.6% U.S. are just the numbers we need to infer that banks could still raise rates, but the speed (for sure) and perhaps the number of times they raise is coming to an end.
The FED wants a weaker jobs market, and we could see that in the near future. Plus, a new round of inflation.
Regardless, the market anticipated a bull run for the first 6 months of the year as it is forward-thinking.
The market saw the rate of change for interest rate hikes slowing, the economy most likely not contracting further, inflation potentially peaking, and the technology sector cheap and appealing.
We can certainly thank the consumers in large part for the great economic stats, as they are the reason the market and economy have been stronger.
YOLO?
If we had to define current sentiment into two categories, it appears anger (France) and fatalism (YOLO) win.
However, now that has risen for 3 quarters consecutively, one must wonder whether the market will continue to project further economic strength for the second 1/2 of the year.
IWM-Monthly and Daily Chart
In the case of small caps, a trading range prevails, which means we need to see small caps show new leadership to remain bullish.
We also need to see other consumer areas surface beside the large rallies thus far in airlines and cruise ships.
On the monthly chart, iShares Russell 2000 ETF (NYSE:) has yet to demonstrate any real expansion.
On the Daily chart, the middle chart, Leadership Indicator, has IWM underperforming the benchmark.
The Real Motion or momentum indicator at the bottom illustrates a bullish divergence. Hence, IWM must get moving in the price for a more roseate second ½ of the year setup.
Now, add in the uncertainties around the world, such as weather (drought and floods), Russia (is it over?), China (more chip wars), global inflation (still sticky), supply chain (de-globalization), labor (wages rising), and social unrest (France)
And the one-way call for disinflation seems way too one-way. Flexible and active traders will prevail for the next 6 months.
Other than some volatility in the commodities area along with the recent healthy correction, we still maintain that a stagflation environment will persist until 2025.
Looking at the 30-year cycles in commodities versus stocks (going back to 1933), the next 15 years starting this week, are projected to see commodities outperforming by potentially more than 3:1.
We are watching the 20+ year-long bonds (iShares 20+ Year Treasury Bond ETF (NASDAQ:)) for clues.
So far, the bonds have not moved much. A rally from current levels (over 104), and we will become more defensive in equities.
And most likely more friendly to commodities and precious metals
Finally, we have eyes on the versus the .
The dollar stopped right at the resistance level of .92.
Under .90, we would expect more dollar weakness.
ETF Summary
- S&P 500 (SPY) Needs one more push or begins to look a bit toppy based on lethargic momentum
- Russell 2000 (IWM) 190-193 still the overhead resistance to clear
- Dow (DIA) 33,500 major support to hold
- Nasdaq (QQQ) Still working off a reversal top until it takes out 372.85
- Regional banks (KRE) Need a new move over 42
- Semiconductors (SMH) 150 support
- Transportation (IYT) 250 resistance and a potential correction /mean reversion in store
- Biotechnology (IBB) 121-135 range
- Retail (XRT) 63 support
