Research.LeutholdGroup

Will this economic cycle end with “fire” (overheating) or “ice” (a whiff of deflation)? Interestingly, hedges against both outcomes have performed well in recent months, with both gold and Treasury bonds spiking. For many reasons, though, we believe the U.S. expansion is more likely to end in a deflationary bust.

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We think the current economic cycle is more likely to end in a deflationary bust than with a bout of late-cycle “overheating,” and analysts and investors should recognize that such a cycle ending could be especially difficult to detect.

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Wage inflation should accelerate in the months ahead, oil could bounce from its oversold low, and college textbooks might double in price before the fall semester. No problem…

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Investors have just suffered a negative wealth effect that will likely work to tamp down inflation over the next year.

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Re-deflation is the period where reflation gives way to deflation or disinflation. It has been so prevalent that it triggered a new “Higher Risk” signal in our Risk Aversion Index.

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The re-deflation theme has been so prevalent that it triggered a new “Higher Risk” signal in our Risk Aversion Index. There are significant negative implications for all risky assets.

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Can a deflationary outlook coincide with a bullish stance on equity markets? The short answer: YES. Periods of more commonly experienced mild deflation have actually coincided with above average stock returns, especially when deflation occurs outside of a recession.

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While our tongue-in-cheek “Correlation Of Everything” measure has retreated from record levels, it remains far above anything seen prior to 2010.

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Don’t fear deflation. Leuthold historical studies show mild deflation can actually be a good environment for the stock market.

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Expectations for broad leadership from inflation-beneficiary sectors of Materials and Energy tell us that investor obsession seems to have shifted too rapidly from deflation to “reflation”.

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Mild deflation is nothing to fear: An environment of 0% to 2.4% deflation has proven to be one of the more conducive environments for stocks.

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There remains considerable macro support for industrial commodities. 

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Steve Leuthold answers client questions in this month’s “View From The North Country”, including his thoughts on the slowing earnings growth, and his definition of secular bear markets. His dollar outlook is also updated.

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We think deflation fears are overblown, but, it isn’t necessarily bad for stock performance.

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Why deflation and depression are not synonymous, undemocratic suggestions for 401(k) plans and the NBA Name Game: Does Basketball’s sponsorship fare better than baseball or football?

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The U.S. yield curve could mildly invert in 1998, even with a passive Fed.

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Long term rates are "normally" higher than short term rates to compensate investors for the likely risk that inflation will undermine the value of their bonds.

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Is Warren Buffett doing some very significant selling? I think this might be the case. Leuthold Group three part series on deflation will be sent to clients in September and October. Also, the 10th Anniversary of 1987’s stock market peak: two important “then” and “now” comparisons.

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Bond market rally continues: weaker economic news, lethargic consumer spending, and tame inflation reports increase likelihood of further Fed easing. Other positives include strong foreign buying, and improving fiscal disciplines.

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What Has Been The Best Inflationary Environment For Stock Market Performance?...How Have Stocks Done In Deflationary Years?...121 Years Of History Examined...Also Looks At P/E Ratios In Different Inflationary Environments

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In examining various consumer and producer price measures going back for as long as 1000 years, it was found that prices have risen about 60% of the time and fallen about 40% of the time in the Western world.

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A preview of our new U.S. inflation histograms, soon to be regular features of our quarterly Benchmarks publication.

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Today, many are concerned about the potential negative impact of deflation and the stock market. Our work demonstrates that moderate deflation has typically not been a hostile stock market environment. However, deep deflation (5%-11%) has historically been a bad time for stocks.

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Regardless of the recent reported upticks in the GNP Deflator and CPI, our Early Warning Inflation work provides little if any evidence that inflation is beginning to accelerate. Five of our inflation analytical tools are presented and discussed, along with the risks of Deflation.

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At this point there is no indication inflation may be about to accelerate. Some may recall that in the early spring of 1984, this work led us to conclude that 1984 inflation might be a lot lower than most then thought at the time. This section also includes comments on the possibilities of deflation and what might be expected if it does occur. It probably would not be the disaster some seem to think.

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