We now see a lot of firsts. Some are relatively inconsequential; some could potentially carry great impact. Last night, our two presidential candidates traded barbs, some benign, some malicious. Truthfully, I had no idea who had come out on top. After the debate I turned on one news channel, which said the Democrat had won, then I switched to another news channel and it was as if it were a different world: the commentary could not have been much more different. To break the tie, a brainstorm told me to turn to my Bloomberg machine and punch in the Mexican peso. It was up. The Democrat was the perceived winner.
Mr. Market breaks the tie—at least for certain currency investors. That does not mean the American public wins. Actually, it makes America a divided country—intensely divided, unprecedented in modern times. Whoever wins will also win a major imperative: to put America back together again.
The stock market reaction to the debate was far more subdued than that of the Mexican currency. S&P 500 futures rose last night, with only slight gains, which suggests that even Mr. Market is confused as to whether the debate forecasted a winner for stocks. Historically, a country’s prosperity and the direction of its financial markets are tied closely, but not this time—which is very consequential. We could be in for potentially very dangerous economic policy. Mr. Market should be confused.
Over the weekend Stanley Fischer, in a minor reversal of his previous hawkish position, averred that the Fed was not behind the curve but that rates should still rise. His message was that we should not read the lack of a rate hike in September as a consequential event.
I am not so sure. Today’s big news: Russia announced it will join OPEC and cut oil production. I had predicted as much in a previous update and it wholly aligns with my view that the oil market in the East will fall under China’s control. This will become apparent next year as China begins to trade futures denominated in yuan.
Russia’s announcement boosted oil prices, as of this writing, more than two percent. As you can see from our chart, the 30-day moving average of oil prices is now 50 percent above the low it hit last February. Should oil prices continue to rise, stay up and then hit a level taking of 80 percent above the 30-day average, it would mark a sell signal in stocks—a signal that without fail has indicated a severe market correction since the early 1970’s and in most cases an economic recession.
As I have noted before, oil correlates strongly with other commodities and its rise since its earlier lows has accompanied a general rise in commodity prices. An index of base metals—copper, aluminum, lead, tin, zinc, and nickel—increased 20 percent in the past 8 months. And one of our favorite measures, the CRB index of raw industrials, recently broke out to a 15 month high, while it staged its most intense rally since 2009-10.
These commodities gains combined with still low wage gains provide a clear recipe for the resumption of a decline in household income, which reversed in 2015 as commodities weakened, but already has started to decline again in 2016. Bottom line: very likely, most measures of inflation will climb to 3 percent or so. And these measures affect real household income and will slow consumer spending and further polarize the economy.
The Fed is behind the inflation curve and falling further behind, but any chance to catch-up by raising rates would boost the value of the dollar and further slow the economy. There are trains on the same track now headed toward one another, but for now they remain a distance away. So, absent clear economic sell signals and, given the possibility that we could still avoid a crash, we won’t yet get ultra-cautious. Please stick with our highest rated stocks as well as commodity plays that have proven their mettle during the commodity downturn.