Three Issues Markets Are Working Through

In addition, the U.S. economy has clearly been "juiced" with both monetary and fiscal stimulus. Put simply, the government will stop dropping money `from helicopters and the Fed will ultimately stop being ultra-friendly. As such, the "juicing" will end. So, it isn't much of a stretch to think that the 6-7% economic growth rates seen in GDP will also end.

Therefore, the next major question the markets will likely face/deal with is, what does the "new normal" look like in terms of growth (and inflation)?

In other words, will economic/earnings growth stay strong into 2022/23 or revert back to the lackluster levels seen pre-pandemic? If the former plays out, valuations will come down and stocks can go higher. But if it's the latter, well, valuations may become a problem. On that note, I'm reminded of one of my favorite Wall Street-isms: Valuations don't matter until they do - and then they matter a lot. Stay tuned.

Transitory or Not?

Finally, there is the issue of inflation, which we largely addressed at the outset of this morning's meandering missive. But while Powell has said that employment trumps inflation here, this could easily change looking ahead.

Just for fun, let's fast forward six months. It's late fall, and winter is on the horizon. The population is as fully vaccinated as its going to get. Kids are back in school. The economy is as "normal" as it will be. The Fed is talking about when to normalize. Business is good.

But a key question at this time will be if the issues causing the current inflation spike fading. Or has inflation become "sticky" (I.E., meaningfully above the Fed's target with no signs of abating)?

From my seat, this is likely when we need to start worrying about inflation - or not. Until then, we can expect supply chain issues, worker shortages, and higher prices for lots of stuff to continue. The real question is if inflation will still be running hot in 6 - 9 months from now. We shall see.

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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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