Some inflation could be a good thing!

Inflation and Interest rates

We’ve not heard much about either of these two market slayers of late. Barron’s year-end edition brings them back into focus –– “What Inflation Could Mean for the Market – Even a small uptick could catch markets off-guard. How to prepare.” 
We all know that higher inflation, and the higher interest rates that will ensue, will destroy the market. Or, at least, this would appear to be the common wisdom. This was the common fear, much played up by the media and punditry, on the end of Quantitative Easing (QE), the beginning of Fed rate increases and the current withdrawal of QE (the slow shrinking of the Fed balance sheet). How did avoiding stocks in the face of these much-advertised market killers work out? I think not too good.

In my last post of 2017 (“Strange disconnect … ) I labeled higher interest rates as the markets next ‘big thing’ to worry about (the more things change, there more they stay the same). These higher rates would probably be a result of the US economy running a bit hotter on the inflation front. That higher rate of inflation would probably emanate from a combination of ingredients — an already strong US economy, low unemployment bolstered by lower taxes and a worldwide synchronized economic recovery. My conclusion:

Higher rates are probably coming as a result of the potential inflationary effect of the tax cuts (probably even without tax cuts) and improving worldwide economies. This would be normal (to be expected) and the higher rates MAY give way to a significant correction in stocks … after which the secular bull market resumes.

Having stated the above, I still do not believe the slow shrinkage of the Fed balance sheet will be a big contributor to any increases.

I stand by this position

First of all, I believe a moderate bump in the rate of inflation too, say, 2.5% to 3% is a good thing because it will soothe the minds of all those who have been worried about disinflation. Remember, it was just two years ago this month when many market participants were circling the wagons due to the perception that falling commodity prices were forecasting a decrease in worldwide demand, signaling an imminent recession. Of course, as I said repeatedly at the time, it was all about oversupply, not demand (kortsessions -12/21/2015 – If everything is so good, why do we feel so bad?)