Needless to say, both the markets have been quite interesting as of late. That being said, I’m gonna offer my take on what I believe is likely (not guaranteed) to occur in the near future as it related to the U.S economy. To give my intake, I’m gonna analyze points that I find to be important in somewhat of bullet points.
Before I get into my analysis, let me make a quick point. One thing that has to be understood about the economy as it relates to the financial markets is this — the markets will rise so long as investors believe that there is room for economic growth. When inflation in viewed as a potential threat, that tells the financial community that there may not be much room for growth.
Let’s begin with what some would consider to be one of the best barometers for how well the economy is doing….
The Employment Situation (Jobs):
So far, in 2015, the unemployment rate stands at 5.7%. That’s close to the rate that we had in the years leading up to the 08 Financial Meltdown, which shows that the economy has improved. One can easily say that this low unemployment rate is due to two things. 1) A low participation rate. 2) Many people are working multiple part-time jobs. Both points are relevant but I don’t care to delve deep into those points because that would distract from the bigger picture — that being where we are likely headed economically.
With the unemployment rate nearing levels that we haven’t seen since the 08 crisis, in my opinion, that’s a warning sign that we could see some economic slowdown in the near future. Not because of the employment rate itself but because of the potential for wage inflation. When unemployment is low and companies have to compete for labor, that generally increases wages, which has historically been a sign of inflation. Such an event could be a catalyst for a Fed rate hike later this year. If wage inflation does occur, that increases the likelihood of a rate increase.
The U.S. Dollar:
Unless you’ve been living under a rock, you’ve undoubtedly noticed the strong upsurge in the U.S. Dollar which has been taking place since the mid summer. I think we can all agree that the markets have been pricing in the possibility of a Fed rate hike. However, the dollar has been trading within a tight lateral range since late January. Where does the USD go from here? Well, since I don’t believe in bucking trends and since this consolidation doesn’t appear to be a sign of important distribution, I’d say up. Even further, when I analyze the USD vs other currency pairs, everything suggests a further rise.
It may be pretty easy for some to become overly enthusiastic about the recent bounce back in equities but if you’d notice — the major indexes aren’t making any convincing new highs. If anything, the highs have served only as a point of resistance for further sell-offs . The same thing is happening right now as I type this. What I see happening is a further but sluggish rise before another selling wave hits. The way that bonds are shaping up at the moment, especially the 10-Year, I see a rise in bonds occurring soon which tells me to be on the lookout for another selloff in equities.
You may have noticed that commodities have been rising as of late. It’s no surprise when you go back to what I said about the dollar being in a period of consolidation (trading range). During this consolidation, the dollar has traded lower and a weaker dollar typically leads to higher commodity prices. That being said, we’ve saw a mini-recovery in oil but I don’t think that is going to last if the dollar moves higher. The same for most other commodities — if the dollar rises, the bear trend in commodities will more than likely continue.
Conclusion: I think that we may see some economic slowdown in the near future. When (that’s if it happens) if anyone’s guess. FYI: When I say economic slowdown, I’m not referring to a global economic collapse that these doom and gloom prognosticators a.k.a gold salesmen have been pushing. I’m referring to a normal slowdown and/or recession that occurs after a Fed rate hike that is intended to fight inflation. Being that we are only 7 years into a new business cycle, I doubt that inflation is a serious threat, but it may be enough for the Fed to raise rates. On the other hand, the U.S. economy didn’t meet the Fed’s goal of 2% inflation but one could reasonably say that falling oil prices is the cause of that. When you take those two paradoxical views into account, that makes determining the likelihood of a rate hike more difficult but the way that I see it, the markets themselves will tell you what will happen and when.
None of this is a “prediction” of any sort. For all I know, the markets and the economy could do the complete opposite of everything I’ve said.