This post Two Competing Market Narratives appeared first on Daily Reckoning.
Markets were up and down like a yo-yo today, but the Dow closed today up 330 points.
Since last Thursday we’d seen a triple meltdown in bonds, stocks and cryptocurrencies. What’s amazing is that there’s no consensus on why these three markets were all crashing at once.
Using my unique Project Prophesy predictive analytic methods, I can offer investors a clear view of why markets have been falling, and what’s next.
Despite the recent losses and volatility, investors who position correctly today can reap huge gains in the weeks ahead.
Usually there’s some convergence among analysts when there’s this much drama in the markets. Analysis will agree on a theme such as “higher rates” or a “fat finger” trade to explain the mayhem.
Your correspondent on the floor of the New York Stock Exchange with Stephen “Sarge” Guilfoyle, NYSE Director of Floor Operations. Sarge told me that the days of the specialist market maker who would stand up to waves of selling were long gone. He said, “Jim, there’s no liquidity on the floor. When massive selling starts investors are on their own.” That advice has proved prescient in recent days.
Not this time. Opinion is all over the place. In fact, there are two completely contradictory story lines making the rounds. It’s truly a tale of two markets. Let’s cut through that to see where things really stand.
The first narrative could be called “Happy Days are here Again!” It goes like this: We’ve just had three quarters of above trend growth at 3.1%, 3.2% and 2.6% versus 2.13% growth since the end of the last recession in June 2009. The Federal Reserve Bank of Atlanta GDP forecast for the first quarter of 2018 is a stunning 5.4% growth rate.
This kind of sustained above-trend growth will be nurtured further by the Trump tax cuts. With unemployment at a 17-year low of 4.1%, and high growth, inflation will return with a vengeance.
This prospect of inflation is causing real and nominal interest rates to rise.
That’s to be expected because rates typically do rise in a strong economy as companies and inpiduals compete for funds. The stock market may be correcting for the new higher rate environment, but that’s a one-time adjustment. Stocks will soon resume their historic rally that began in 2009.
In short, the Happy Days scenario expects stronger growth, an improved fiscal position due to higher tax collections, higher interest rates, and stronger stock prices over time.
The competing scenario is far less optimistic than the Happy Days analysis. In this scenario, there is much less than meets the eye in recent data.
Last Friday’s employment report was much touted because of the 2.9% year-over-year gain in average hourly earnings. That gain is a positive, but most analysts failed to note that the gain is nominal — not real. To get to real hourly earnings gains, you have to deduct 2% for consumer inflation.
That reduces the real gain to …read more
Source:: Daily Reckoning feed
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