If I may share a personal thought with you…there aren’t really too many things in this world that I just don’t like.

For instance, I don’t much care for raw onions, or discovering that the only thing on TV at the gym is The View, or a thousand-point drop in the Dow. Indeed, I find that Dow thing very disturbing. Especially when it seems to be only a self-induced phenomenon — as it was a couple of times in recent days.

Yes, it was ‘only a correction’.

And as we’ve seen before, these correction things can occur just because it becomes the consensus among a cohort of traders that we should have one because, you know…Correction.

They also feared that valuations were over-reaching and that the employment situation might be inflation inducing.

We disagree. On both points. Valuations were not too high. And, they are even better now. Wage growth is a good thing unless it is overly broad and is separated from productivity.

Now, truth is there is some actual evidence of potential inflation. The Fed has been too accommodative for a long time and certainly excess reserves can ultimately be inflationary.

Many, dare I say most, economists believe that an expanding money supply is a contributor to inflation.

Likewise, increasing the velocity of the money already on hand can have the same effect. In the case of having an expanding money supply at the same time that we have an increase in the rate that money is being circulated, there is a compounding effect: inflation will likely appear and controlling it can easily become unwieldy.

Money supply growth is a double edge sword: It will improve profits, especially in its early stages. But, it also contributes to inflation growth – and the gap between the two can narrow. In other words — putting a squeeze on profits. This can be illustrated by seeing that the effect of rising interest rates creates the effect of a discount on future earnings. What is then happening is that there is the likelihood of a schism between numerical growth and true growth in net value. So, the question becomes, at what point is there enough cause for concern? When is it time to change your investment strategy? And most important; are we there yet?

Our friend over at First Trust has some wisdom on this very point. Their Chief Economist, Brian Wesbury, says there’s a long way to go before we get anywhere close to things looking scary.

Just a couple of days ago, Brian offered a convincing point saying that although the markets were soundly spooked when the 10 Year Treasury yield crossed over 2.8% this is nothing to get too excited about because…at current valuations the markets will be fairly valued with the 10-Year a full point higher than where it currently sits.

I cannot stress enough that the underlying reason to have any concern at all about inflation is not that there is a weakness in the economy, it is just the opposite.

The fear is focused on that it might be too good too fast. Inflation may be peeking at us from around the corner but, in the here and now, we have excellent earnings growth (15 – 16% is common) backed by strong consumer confidence, rising home sales and new construction starts to just name a few high spots.

As with so many things in life, what makes a good set of conditions for the markets is balance.

From our perspective the markets do have that.

 

Market Minute – What Happens Next?

We’ve been spoiled. The last time we saw a 5% pullback was in fall of 2016. Since the Nov. 2016 low, it’s been a steady rally – until the past few weeks. We’re finally seeing a test of the current bull market rally. Here’s the key –  selling is inevitable during all bull markets – and typical behavior is that there is a period of selling or consolidation (back and forth action) during all bull markets before the existing rally continues.   

I see no point in arguing what the trigger was that prompted the current pullback. It doesn’t matter. What DOES matter is what happens next. That’s the behavior that will help us to discover what the future may look like. 

So what’s happening now? We’ve just had 5 days of a rally, or bounce back. The initial drawdown of about 11% in most indexes has been reduced to about a 3.5% drawdown in a very short time. What we want to see is a risk-on attitude from investors and traders to determine the likelihood of a continued 9-year bull market. 

And the good news is (drum roll please!) that the aggressive sectors of the markets have been leading the charge. During the current 5 -day rally (today going on the 6th day) the leaders have been technology, financials, industrials, and materials while utilities and real estate have been weak. That’s exactly what we want to see at this time.Traders are not looking for shelter in defensive sectors. 

Let me reiterate: Selling is a part of all bull markets.

The current market behavior leads me to believe that this will be a typical pullback. It does NOT mean that the current pullback is over, but it does indicate that the current retrenchment is just a normal correction and the strength of the bull market will continue. There will most likely be some back-and-forth as buyers and sellers fight to gain control, but the overall strength gives me confidence in the continued bull. 

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

www.denkinvest.com

This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email please contact us at 602-252-8700 or by e-mail at lindaw@denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

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