A great deal of what we have seen since 2016 has been very much like the 1960s and 1970s a period of intense social upheaval and spiraling costs due to inflation. Now with inflation at 40-year highs, there is evidence that people are losing faith in government, similar to that prior period in our nation’s history. Now as then the U.S. populace (exacerbated by communications technology) has become much more divided politically. At times anger on both sides of the political spectrum has boiled over into riots.
The Afghanistan pullout caught many Americans by surprise and consternation reminiscent of the last days of the Vietnam War in 1975. After Vietnam, the national mood became one of despondency on a war gone badly, as inflation raged and the economy sputtered.
Today the nation is at full employment, but beyond that statistic, many people have exited the workforce, some permanently. The labor force participation rate remains 1.2% below February 2020. This would be equal to almost 900K fewer Americans working or looking for work than before the pandemic.
Around the year 2000 the labor force participation rate was above 66%, today it stands at 62.4%. It is climbing off the lows of the pandemic, yes, but well below a level that could support much of the ever-expanding federal spending and state outlays. A portion of the low participation rate can be explained by aging demographics, but not the entirety. Something will have to give, eventually.
A whiff of inflation can be good for stocks, but not the kind of inflation we have seen over the last year and a half. Much of it is the result of the mandatory economic shutdowns by the federal and state governments and the attempt to blunt those effects with trillion-dollar programs in pandemic relief to businesses and individuals. Too many dollars chasing too few goods, prices rise.
We now see the potential for more problems of the same sort. A key energy producer, Russia, will now be potentially locked out of a considerable portion of the hydrocarbon market, and China with its draconian lockdowns will have the effect of denying its trading partners key supplies for goods moving through the manufacturing process. In addition, the agricultural problems will be demonstrable due to Ukraine being taken offline as the breadbasket of Europe. The paucity of fertilizer components from Russia will add to the agricultural woes. Prices for fertilizer have already soared to levels that will bring bankruptcy to many a farmer.
As to our S&P 500 master cycle, we had a low on the 12th of April one day in advance of our target date the 13th. Like a few others, we anticipated there would be a low ahead of the 18th (Tax Day). We saw the low of the 12th undercut on the 18th. Post-Tax-Day, the market reacted strongly to the upside on the 19th. We continue to expect that this rally will expire on the 22nd, Friday, plus or minus 1 trading day. From there we expect a decline into the end of April or the beginning of May.
In the medium term (bigger picture), the master cycle points down until the end of June. Some related cycles decline into the end of July.
Trade well and stay safe. JHS
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