For nearly a decade, the U.S. experienced a low-growth, low-inflation economy which turned out to be the ideal combination for equities as companies could continue to grow earnings, while monetary conditions remained supportive. Now, we are facing a much different economy in terms of the most inflation since the early 1980s and the most geopolitical risk since the 1940s.
Many are saying that this economy is in or about to enter a period of stagflation. This is when inflation rises and economic growth slows. The odds of this have certainly increased due to Russia's invasion of Ukraine which will weigh on trade and economic activity in the near term and add to inflationary pressures in the near-term and likely in the longer-term as supply chains are reoriented.
The other argument is that the current economy is more of a 'boom-flation'. This is simply a strong economy that has so much demand that it's leading to inflation which should subside as demand for services increases. This camp believes agrees that inflation is a threat but doesn't believe that the economy is slowing. Boom-flation is bullish for stock prices, while stagflation is bearish as it means that earnings would likely decline in an aggregate sense.
In recent weeks, there has been more evidence to support the boom-flation theory which is probably one reason that stocks have been trending higher with the S&P 500
The housing market remains strong with the only constraint being the supply chain issues preventing builders from building enough houses fast enough to meet demand. Unemployment claims are close to a record low, while unemployment is below 4%. And, there were fears that consumer spending may slowdown due to higher food and energy prices in addition to a rollover from stimulus payments in 2021. So far, consumer spending has came in above expectations and slightly above 2021 levels.
