Inflation Monitor Summary – Composite Ranking
Inflation Monitor – February 2016 – Introduction
It is February, and winter has finally arrived in the northeast. Not only has the weather turned cold, but so have the markets. The stock markets started the year off cold with the worst start to January performance on record and ending with the S&P 500 down -3.37% for the month. The start of February has not been great either. As I write this the S&P 500 is at its lowest levels since February 2014.
Generally this Inflation Monitor is not focused on the stock markets, but I have been wondering for the past year how long it would take for the stock market to realize that deflation was strong and growing stronger. Apparently it is now on the table since Japan lowered their interest rates into negative territory to join their European brothers. The idea of negative interest rates should be an episode of the twilight zone. It is new to almost everybody and how this plays out will certainly be interesting. What is the definition of insanity? Doing the same thing over and over and expecting different results. (this was not said by Einstein, although frequently attributed to him).
Gold has finally picked up steam in the past few weeks with the metal up over 10%. Maybe it the fear of negative interest rates that is driving the flight to safety in gold. With the rest of the commodity complex still in a bear market, I doubt gold and silver prices will start a new bull market. Only time will tell, but despite the rise in gold price in US Dollars, it is important to note the price of gold in other currencies (see this below in the gold section).
I mentioned this last month, and I’ll mention it again.
If you have not read my 2015 recap, then now is a good time to read it. Last year the S&P 500 ended with a performance of -0.7%, which is surprising since many blue chip companies were down between -10% & -20% for the year. If you did nothing but look at the index, you would have missed the large dislocation of the index performance and the performance of the underlying stocks.
The risk you should consider this year is contagion. This is the risk of assets selling off because other assets are selling off, having very little to do with underlying fundamentals. For example, if the high yield bond market continues to sell off or worse yet, crashes, then the investment grade corporate bond market may also sell off. This in turn could lead to a sell off in equities and other assets. The spread of this contagion is not knowable, but you should be aware of this risk.