Why Stagflation Concerns Persist and Where the Market Will Go Next

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The S&P 500 (SPY) enjoyed a second straight week in the plus column as the rally now has us closer to the all time highs than the previous lows. This is helping thaw investor sentiment with visions of more upside to come. However, before we read a eulogy for the correction, and get back to gung ho bullish, we do need to ponder some of the negatives that are still abounding. Meaning to explore the reasons that some well respected investors are concerned that stagflation and/or a recession are in our future which obviously would not be a positive for stock prices. That is the mission of this week’s commentary to help us plot our path forward. Read on below for more….

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(Please enjoy this updated version of my weekly commentary published March 25th, 2022 from the POWR Value newsletter).

Earlier this week I posted a commentary that contemplated the vital topic of…Is a Recession Coming?

I am going to share the majority of that commentary below followed by the latest information on the economy to see if the recession warning sirens grow louder or softer:

“The place to start this discussion is with the following article published last week on CNBC:

Forecasters see growing chance of a recession as Fed hikes rates this year to fight inflation.

This is a monthly survey of economists to measure the average outlook for the US economy. And here are the key excerpts from that article:

“The probability of a recession in the U.S. was raised to 33% in the next 12 months, up 10 percentage points from the Feb. 1 survey… Respondents debated whether the recent surge in commodity prices would prompt the Fed to hike rates faster because it adds to inflation or raise rates less because they reduce growth… The average GDP forecast for this year slipped by 0.8 percentage point but remains at a slightly above-trend 2.8%. The GDP forecast for 2023 dropped by about a half a point from the last survey to 2.4%.”

Your first reaction is probably a sigh of relief that only 1/3rd of economists has this pessimistic outlook. Now the scarier notion is to find out that historically only 40-50% of economists were predicting a recession before it actually occurred.

Indeed, it is a very inexact science and why the current level of concern is actually quite high.

Now let’s contemplate this very thoughtful piece from one of my favorite market commentators, John Mauldin: Brace for (Recession) Impact

For the past year Mauldin has urged folks to consider the possibility of 1970’s style stagflation. That is an ugly economic environment where a stagnant economy emerges at the same time as high inflation.

And yes at that time it was about surging energy prices (folks my age or older will certainly remember the gas shortages and long lines at the pump across the US).

John originally contemplated the possibility of this happening. Now he fears that the Russia/Ukraine crisis, with related energy shock, was the last piece of the stagflation puzzle.

Is Mauldin right???

That indeed is the $64,000 question (more like $85 trillion question given the size of the world economy).

Now let’s go back to the previous statement…economics is an inexact science. So for as much as I appreciate Mauldin’s contemplation of stagflation…I don’t believe it is a forgone conclusion.

That sentiment is echoed in the previous clips from the economists survey showing the +2.8% GDP growth expectation for this year and +2.4% for next year.

So Reity…why even bring it up?

Because it COULD come true and we would be wise to stay vigilant looking for signs of that potential. That is why we are not back to 100% long the stock market even as we broke above the 200 day moving average today.

…If the threats of stagflation, world crisis and/or recession grows…then we will get more and more defensive.

If these threats prove to be nothing more than false boogeymen…and the economy and bull market stay on track, then we will become more aggressively long the stock market.

Just remember that the most bullish happening right now is we still have historically low interest rates making stocks the MUCH BETTER VALUE than bonds. That is no doubt behind the recent bounce as it was behind the March 2020 bounce when the Coronavirus crisis was far from being solved.

This last part explains our bullish bias now even in the midst of an unclear and unsettling environment.”

End of Previous Commentary. Now on with fresh insights on the economy to see if we are right to stay with our bullish bias in place.

Gladly the economic news looks pretty good starting with the lowest jobless claims report since 1969…yes, 1969.

This important measure of employment health tells you that employers are not yet worried about their business outlook even as inflation rises…supply chain concerns…and all the supposed worries about Russia/Ukraine.

Meaning that if those boogeymen were truly haunting business people it would lead to deterioration of the employment picture…not an improvement like the best jobless claims report in over 50 years.

Next lets check out the broader economic readings found in the PMI Flash report. There we see the Services component on the rise from a heathy 56.5 to an even healthier 58.9.

Same song for Manufacturing which churned out a 58.5 reading versus 57.3 previously.

Add them together and we have a Composite reading of 58.5. And just a reminder, everything above 50 points to economic expansion. And everything north of 55 is a sign of robust improvement.

So here again, if there were even a little bit of signs of weakness they should start creeping into these reports. I am not saying they would dive directly under 50 as proof of problems.

Perhaps seeing it slink lower and lower and thus getting closer to 50 where we would be more worried about a looming correction.

Simply not happening at this moment. So stick will bullish bias. BUT most certainly keep watching these economic readings in weeks and months ahead because we will want to get more defensive at the first serious sign of economic weakness.

What To Do Next?

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All the Best!

Steve Reitmeister
CEO StockNews.com & Editor of POWR Value trading service

SPY shares closed at $452.69 on Friday, up $2.20 (+0.49%). Year-to-date, SPY has declined -4.39%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.


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