Okay, it is Monday morning, and I should be lethargic, and I am, but that fact is I need to say something that has been on my mind for some time.

20 Reasons To Take Your Foot Off The Gas Pedal (Part I)

The above headline comes from David Moenning, who I respect as a macro-analyst, and in the first part of his bearish take on the market he suggests rising interest rates and inflation have been unkind to the market historically, so, in making his bearish case, he brings those too bad guys to the front as reasons to slow down in the market. 

  • … a rising interest rate environment has not generally been kind to the stock market.
  • ..  … history shows that one of the biggest killers of bull markets is rising inflation.

It is true that historically, one can find a correlation between market movement and both rising interest rates and rising inflation. The fact is, though, when either or both is excessive, market movement can be strongly down. The other fact is, though, when either or both are not excessive, market movement can be up strongly. It is an issue of degree, no doubt about it.

So what causes excessive rising inflation? Food, energy, and housing prices, certainly, but, more importantly, it is rising wages that can make inflation excessive. The fact is energy has been relatively stable at the higher end, as has been food. Now that housing has come back, it has joined the food and energy on the upper side. All seem to have found a level, but they are now flirting with moving toward the downside just a bit.

It is rising wages that are lacking any inflationary punch, and even though that is beginning to change, rising wages are nowhere near inflationary at this point. As the economic picture keeps improving, that will change, but we still have a ways to go on the productivity side of things for this to be an issue just yet.

As to rising interest rates (and by extension the Fed), well, Mr. Moenning makes the case himself …

  • … no one really knows what will happen when they [the Fed] try to return interest rates to more “normal” levels (remember, current rates are at generational lows).

The point here is that it is too early to take your foot off the pedal in the market. There is still plenty of space between a market that will turn on itself and one that will build itself up. 

  • … once the Fed sees signs of a recovery, they will reverse their course and raise rates, which signals investors that the problems plaguing the economy are starting to ease.

And there you have it in a nutshell. We still have that phase to go through – a market, and the businesses that comprise the market, fully believing in a rising economy. When we arrive at that phase, which is not too far away, it will be clear. The market will trend even higher than it is now, much higher. I still expect this fall we will see yet one more big leg up. After that, well, it is hard to say, as the Fed will terminate its QE program in October.

  • Better than expected Industrial Production numbers out of China led to big gains in Asia overnight.

Yup, we still have a ways to go before interest rates and inflation are rising enough to cause a market panic. My advice is stay on the train for awhile longer, as it is still building up speed.

Trade in the day; Invest in your life

Trader Ed