It was another wild ride for the market, which saw early gains erased on Thursday, but the major indices regained composure, building momentum into the close:

• Dow Jones Industrial Average: +300
• NASDAQ: +113
• S&P 500: +33
• Russell 2000: +15

It was two Fridays ago that Wall Street lost its collective mind unleashing its algorithm – based sell programs which went berserk, trigging days of wild gyrations and panic not seen in years.

The smartest guys in the room placed the blame on individual investors and a strong economy, and in the process, revealed their own animosity about sharing this platform of wealth creation and disdain for Main Street getting ahead. 

Inflation, they warn, will wreak havoc like Godzilla stomping through New York City.

But what is inflation, and is it really something we should fear?

The short answer is we love when our paychecks inflate, and we love when the value of our homes inflate, and we love when we hear our comic book collection is worth more. 

Of course, we should fear runaway inflation, but the average American household has been stuck in their own personal stagflation so long that this is the moment they’ve been waiting for.

Inflation

The Keynesian School puts it this way: “too much money chasing too few goods.”  Obviously, we aren’t there yet. In fact, the velocity of money, which measures the frequency as one unit of currency, is used to purchase goods and services within a given time continues to wane. 

Of course some would say it’s hard to get velocity of money when so much has been added to the economy.

That brings me to the Monetarist view of the cause of inflation: an oversupply of money into the economy. The Fed turned on its printing press to combat the Great Recession, resulting in its balance sheet ballooning from $900 billion in the summer of 2008 to $4.4 trillion today.

They saved the banks, but not only did you not get inflation; you didn’t even get a lousy t-shirt, and try getting a bank loan.

Forward-Looking

The market is a forward-looking mechanism, and it’s matching what we continue to hear from various niches of the economy: the near-term future looks amazing.

Yesterday, we saw homebuilder confidence for the next six months, which rocketed to its highest level since 2005, as prospective buyer traffic continues to increase.

Perhaps these would-be buyers know they are on the verge of making more money.  Earlier this week the NFIB reported small business’ opinion that “now is good time to expand” climbed to its highest point ever (series began 1973) and plans to increase compensation over the next three months are also at levels not seen in years.

Well, I said the big upside test for the Dow would be 25,200, which is exactly where we closed.  The index has a chance to clear this pivotal number, turning it from resistance to support. The next big resistance point is 26,200. 

I continue to think you should be overweight in industrial, material, and consumer discretionary names.  Speaking of which, big winners yesterday included TripAdvisor (TRIP) and Zoetis (ZTS) (we love our pets). After the close, beats from Shake Shack, (SHAK), Sleep Number (SNBR), and CBS Corp (CBS) which gained on higher subscription fees and saw mixed initial reactions.

Today’s Session

Equities turned lower in futures trading this morning, although, it’s tough to pinpoint the exact reason.  Import prices came in higher than anticipated, but housing starts were significantly better than consensus, and major indices edged higher.  But these uncertain pre-opening gyrations have become par for the course.

We will have more details on the economic data in the afternoon note.  

Comments

Spot on, Charles!! Plus the lower tax rates for corporations and Sub-S businesses has created an umbrella not only for business investment and higher wages, but also for mitigating price increases; as the lower taxes are funding both above, hence mitigating the necessity for raising prices. Now if there's really increasing demand in excess of supply (gosh, real economic theory), prices might and should increase. I'm anxious to see some productivity numbers, as I believe happy workers are far more productive!! We'll see!! Joe Noga Joseph P Noga on 2/16/2018 10:18:36 AM

Excellent as always! The reason we didn't get inflation is that as the money supply exploded to the upside, velocity (as you have stated on many occasions) has virtually fallen to new lows and almost collapsed. Only fiscal policy and regulatory pullback can increase velocity which has turned up for the first time in years. As far as inflation, we all want our income and assets to increase in value or appreciate without the value of money going down so we are treading water. Only if it increases without inflation or above the rate of inflation do we have true price appreciation. Ray Weldon on 2/16/2018 10:46:04 AM

great points Ray. CP Charles Payne on 2/16/2018 11:41:15 AM

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