Three Issues Markets Are Working Through

The DJIA and S&P 500 have been moving sideways for much of the past month, while the consolidation action in small-caps and the NASDAQ 100 has been going on even longer. Concerns over inflation, and in turn, the Fed's response - as in how soon Powell & Co would begin "tapering" their bond-buying program - have been at the forefront of investor's collective minds. The thinking is that if inflation runs hotter than expected (such as was seen in last week's CPI/PPI reports), then the US Central Bank will have little choice but to cut back on the current pace of bond purchases and perhaps even begin "thinking about, thinking about" raising rates.

To be sure, such a move by the Fed wouldn't have much of an impact on the current economic recovery or the stellar state of corporate earnings. My take on history suggests that some inflation is a good thing for anyone owning homes or stocks. After all, the central bankers around the globe have been striving for some inflation for more than a decade now. And at this stage, the general consensus seems to be that the worry of "runaway inflation" is definitely not in the cards.

Then there is the argument that the current surge in inflation is being caused by factors deemed to be "transitory" (I.E., "temporary" for those not well versed in Fed-speak). So, with the economy reopening, masks coming off, a little inflation in the mix, and earnings at record levels, what's not to like, right?

So, in looking at the market action, the question becomes: Why are we seeing a consolidation/correction?

Although one can never answer such a question without a healthy dose of hindsight, I've got an opinion on the subject I'd like to share this morning.

From my seat, the market appears to be trying to come to grips with three issues:

  • The possibility of the Fed "tapering" sooner than expected
  • The coming slowdown in economic growth
  • The potential for non-transitory inflation
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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should ...

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