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Weekly Market Report: New Inflation Uptrend

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The weekly market reports include a market position update, a stock market forecast, and an analysis of capital markets. To access the full report, you must subscribe to Premium ArticlesWeekly Premium Articlesor an All-in-One subscription.

Included in this report:

  1. Weekly summary.
  2. A new inflation trend.
  3. Market positioning update.
  4. Stock market forecast.
  5. Capital markets analysis.

1. Weekly Summary (June 17–June 21, 2024)

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  • Stocks (SPY) rose 0.6% in the holiday-shortened week.
  • Bonds fell 0.7% in response to mixed economic data.
  • Commodities (DBC) rose 0.6% in response to rising energy prices. Crude oil futures gained 4% on the week.
  • The US dollar index (UUP) ended the week up 0.4%.
  • Gold (GLD) has outperformed stocks (SPY) since January 3, 2022, with a return of 25.6% versus 19%, respectively.
  • Since January 3, 2022, bonds (TLT) have been down 31.7%, while large-caps (SPY) have gained 19%.
  • The consumer discretionary sector (XLY) gained the most on the week, by 1.6%. Utilities (XLU) fell the most, by 1%.
  • Stocks (SPY) and the technology sector (XLK) are in highly overbought territory.

2. A New Inflation Trend

Most macroeconomic analysts focus on specific drivers of the economy and inflation but miss the big picture, which is what counts. Furthermore, when they talk about inflation, most economists mean the YoY change, but in this blog, we mean the CPI price level.

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CPI log chart

The current inflation period, which began in January 2021, is similar to the one that began in January 1971, although the specific drivers were different. In both cases, as shown in the above chart, the CPI rose 20% over a period of three years and four months.

More importantly, in the 1970s, the CPI started moving on a new increasing trend with a higher slope, as better shown on the linear chart below, and gained 128% until a lower slope trend started in the mid-1980s. That new trend continued just before the recent change.

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CPI linear chart

Referring back to the log chart above, even if YoY inflation reaches the target of 2% and stays there for the next five years, the CPI level will rise significantly, affecting purchasing power and social security costs. Only a severe deflation could bring the CPI down to the previous trend, which is not a policy choice. Therefore, when we look at the forest rather than a few trees, a significant improvement in productivity will be required to avoid the type of mean reversion experienced in 2008, when the CPI briefly moved above the trendline and then violently reverted back.

We believe that the current drive toward artificial intelligence could increase productivity, but at the risk of known and unknown second-order effects: high unemployment, increased stress on the welfare system, and even the rise of sociopolitical tension are some of the known consequences. In the next five years, some kind of economic reset will be necessary, but there will be winners and losers. Future reports will cover more on this subject.

3. Market positioning update

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Specific disclaimer: This report includes charts that may reference price levels. If market conditions change the price levels or any analysis based on them, we may not update the charts. All charts in this report are for informational purposes only. See the disclaimer for more information.

Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting and backtesting program: Amibroker. Data provider: Norgate Data

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