Basically, higher inflation volatility tends to create investor uncertainty which leads them to reduce (sell) stock exposure resulting in lower stock prices (P/E ratio). Makes sense right? Heck, if you blur your vision a little you'll see that the relattionship tends to behave in a well contained "L" type curve.
But six data points stand out as unusual (even if they weren't colored red). And those points just happen to be the most recent 6 months of data.
I only post this as another demonstration of how we are not in normal times at all. Those "errant data points" indicate a sort of "No Man's Land". Perhaps indicative of the past 2 years of FED pumping??? Interesting!
This weekend I mulled over a lot and I think it largely comes down to the answer to this question, "Which will be the influence on our economy going forward for the foreseeable future: deflation or inflation?" The answer (and timing) holds the key to investment success over the next 5-7 years.
Many think inflation because: 1) the Fed has printed a ton of money and 2) we always have inflation when that happens...no? Yes, it has worked that way for most of our memories but that is definitely not the way it always works. Sometimes, unforeseen shocks can overwhelm situations that would ordinarily have very predictable outcomes. For example: what if the Greece implodes and the Euro is perceived as in jeopardy...enough so that people seeking safety rush into the US Dollar. Pssst....stronger dollar is not inflationary. Who knows...just an example.
At the risk of saying "this time's different"...I still lean toward deflation. Reasons: 1) credit expansion / loans were not backed by true value only "hoped for" value, 2) loans on banks books are currently underwater and will get worse (FED/Congress bought time but things have gotten worse), 3) deteriorating banks will seek to maintain loss reserves which will prevent them from lending to anyone except the US Treasury (now you know who's buying all the bonds...you are or at least your bank is with your money), 4) individual consumers and businesses don't want to borrow even if they could right now due to economic uncertainty and current debt servicing burdens, 5) taxpayers will not support additional federal stimulus and 6) states / municipalities can't print money, will no longer pray for federal stimulus and instead will actually have to cut spending or raise taxes but both take money out of the system.
As "in system" credit shrinks there is less money and fewer buyers willing to bid for assets. Prices have nothing left to do but fall...eventually seeking a level at which buyers are sufficiently interested to bid aggressively enough to finally put a price floor in.
Just a thought for a Sunday.
As to current action...choppy, sloppy go nowhere week (click the SP500 1Yr Daily on sidebar).
But at least we have some tighter pivots to watch at 1112 and 1086. Let's see what happens this week.
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