Recession, Inflation, Stagflation are Market Buzzwords

by Jeffrey Friedman

The stock market has been stuck in a range for weeks, and is looking ready to make a breakout—but we need some big news. From a fundamental standpoint, three forces are moving all the markets right now: the potential for recession, inflation, and/or stagflation. That’s the theme for the week. If the economy will succumb to these pressures is still up to speculation, but we’ll see which one of these words dominate.

Many market participants attributed January’s stock market decline to the idea the economy will be in a recession this year, but the jury remains out. While official data suggest no recession through January, economic data out last week showed the economy may be slipping closer to a mild recession. The Philly Fed manufacturing index fell deeper into negative territory, housing starts remained depressed, and the index of leading indicators slipped for the fourth month in a row. Meanwhile, higher energy prices pushed up consumer inflation. Crude oil prices settled over thecentury mark for the first time ever last week but by end of week eased on recession fears. The crude oil futures front month broke the $100 mark on a closing basis, Tuesday February 19, settling up $4.51 per barrel to $100.01.

The Federal Reserve is still forecasting that a slower economy will nudge inflation down, but in coming months, the economy is stuck with at least mild stagflation as economic growth stagnates and inflation remains elevated. The key question is whether the Fed’s forecast will hold true further out – one in which inflation has eased by 2009 and economic growth has rebounded. There is a moderate chance that the Fed’s forecast meets reality but there is still a notable chance that growth could remain sluggish into 2009 if the Fed sees inflation as re-emerging and forces interest rates back up. Last week’s economic data further raised the odds of real stagflation--recession plus rising inflation, which seems like an economic nightmare raised from the dead.

The dollar was down against most major currencies after the Federal Reserve lowered its estimates for U.S. growth. The FOMC minutes from the January meeting emphasized that the Fed remained far more concerned over a looming slowdown than increasing price pressures. This opened the way for more rate cuts.

The economic calendar is heavy this week, with highlights including January existing home sales to kick off the week Monday, the January producer price index and consumer confidence reports on Tuesday, durable goods and new home sales Wednesday, preliminary fourth-quarter GDP on Thursday, and on Friday, personal income and spending and the Chicago Purchasing Managers Index.

Major stock indexes still have a long way to go to recover losses since year-end levels. Major indexes are down from December 31 as follows: the Dow Jones Industrial Average, down 6.7 percent; the S&P 500, down 7.8 percent; the Nasdaq, down 13.2 percent; and the Russell 2000, down 9.2 percent.

We did see some positive momentum Friday, February 22, 2008. The stock market got a lift as the week ended on talk several banks would announce a bailout of bond insurer Ambac Financial. The S&P 500 futures closed higher, moving above the 10-day moving average at 1349. Momentum indicators, the stochastics and relative strength index (RSI), are bearish even though this market is moving up slightly. It’s in a triangle, coiling and ready to make a move. In the March contract, watch for 1312 on the downside and 1400 on the upside as breakout areas that could determine the next larger trend.

For day traders, I see the market as neutral to bullish. Investors have shown a willingness to hold positions over the weekend, which is a positive sign that could market a shift in sentiment. It’s going to have to be big news to break the market out of this sideways trend, but we’ll see what unfolds this week.

 

Financial Fundamental Reports: Feb 25 – Feb 29, 2008

Date	CT	Release	For	Actual		Consensus	Prior	Revised
Feb 25	09:00	Existing Home Sales	Jan			4.80M	4.89M
Feb 26	07:30	PPI	Jan			0.3%	-0.3%
Feb 26	07:30	Core PPI	Jan			0.2%	0.2%
Feb 26	09:00	Consumer Confidence	Feb			82.5	87.9
Feb 27	07:30	Durable Orders	Jan			-4.0%	5.2%
Feb 27	09:00	New Home Sales	Jan			600K	604K
Feb 27	09:30	Crude Inventories	02/23			NA	4204K
Feb 28	07:30	GDP-Prel.	Q4			0.8%	0.6%
Feb 28	07:30	Chain Deflator-Prel.	Q4			2.6%	2.6%
Feb 28	07:30	Initial Claims	02/23			350K	349K
Feb 29	07:30	Personal Income	Jan			0.2%	0.5%
Feb 29	07:30	Personal Spending	Jan			0.2%	0.2%
Feb 29	07:30	Core PCE Inflation	Jan			0.2%	0.2%
Feb 29	08:45	Chicago PMI	Feb			50.0	51.5
Feb 29	09:00	Mich Sentiment-Rev.	Feb			70.0	69.6

Please feel free to call me at 866-231-7811 or contact me via email at jfriedman@lind-waldock.com if you have questions on this topic or to discuss specific trading strategies for your unique situation in this or other markets.

Good luck and good trading!

Jeffrey Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at jfriedman@lind-waldock.com if you have questions on this topic or to discuss specific trading strategies for your unique situation in this or other markets.

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