• 287 days Will The ECB Continue To Hike Rates?
  • 288 days Forbes: Aramco Remains Largest Company In The Middle East
  • 289 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 689 days Could Crypto Overtake Traditional Investment?
  • 694 days Americans Still Quitting Jobs At Record Pace
  • 696 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 699 days Is The Dollar Too Strong?
  • 699 days Big Tech Disappoints Investors on Earnings Calls
  • 700 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 702 days China Is Quietly Trying To Distance Itself From Russia
  • 702 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 706 days Crypto Investors Won Big In 2021
  • 706 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 707 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 709 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 710 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 713 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 714 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 714 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 716 days Are NFTs About To Take Over Gaming?
Market Sentiment At Its Lowest In 10 Months

Market Sentiment At Its Lowest In 10 Months

Stocks sold off last week…

What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

  1. Home
  2. Markets
  3. Other

More Headwinds To Worry About

On the way into the office this morning, I was listening to CNBC radio on Sirius Satellite. In that 7 minute drive, I think I heard the word "inflation" about 15 times. With year over year CPI virtually at zero, I am not sure what the worry is all about. This is the reality. Inflation is low.

On the other hand, with world central bankers making the cost of capital almost nil and their willingness to do "whatever it takes" to break the global slump and revive growth, the perception is that inflation is lurking around the next corner. If we can borrow the thinking of stock bulls, maybe we can say that inflation is so low that the only way it can go is up! It's a second derivative kind of thing.

All nonsense of course. But when it comes to the markets, perception always trumps reality.

However, what is worrisome from an equity perspective are the current trends in crude oil, gold, and 10 year Treasury yields. The prices in these assets are rising and gaining momentum, and this is a headwind for equities. So let's look at some data.

Figure 1 is a weekly chart of the S&P500 and the indicator in the lower panel is a composite indicator that assesses the strength of the trends in crude oil, gold, and 10 year Treasury yields. When the indicator is above the upper line (i.e., inflationary pressure line) that means that these trends are strong and inflationary pressures (real or perceived) are rising.

Figure 1. S&P500 v. Inflationary Pressures/ weekly

The question becomes: how do these inflationary pressures affect equities? So let's construct a study where we "short" the S&P500 during the time the indicator is at or above the high inflation line. The position is covered when the indicator drops below this line.

Since 1985, such a strategy has yielded 581 S&P500 points. There were 52 trades and 60% were profitable. The time spent in the market to get these 581 S&P500 points was an incredible 12%. Remember, this is a strategy that shorted the S&P500 through a bull market. Buy and hold S&P500 resulted in 736 S&P500 points. The equity curve for the strategy is shown in figure 2.

Figure 2. Equity Curve

I have tagged the equity curve with some dates, and in this age of asset bubbles, rising inflationary pressures (as measured by strong trends in crude oil, gold, and 10 year Treasury yields) is another headwind for equities. Note the rise in the equity curve since 2004. Whether inflationary pressures truly exist or not is another matter. The perception is that inflation does matter, and a stock market that has been pumped up on steroids (i.e., liquidity) will likely remain vulnerable to this dynamic for the foreseeable future.

 

Back to homepage

Leave a comment

Leave a comment