Stocks continue to run into a brick wall at the upper band of this year’s trading range. The best case scenario may be an extension of the recent lateral move as deflation pressures are absorbed.
Producer prices and the momentum in forward earnings estimates are tightly linked and the current message is grim (please see the chart below).
So far, the Fed’s desire to move away from the zero bound appears to be trumping the need for immediate confirmation that inflation will track back up toward their target over the medium term.
There is still a dearth of evidence pointing to a reacceleration in global economic growth, despite easy policies abroad. The deflationary weight of deleveraging in Europe and China’s moribund economy are offsetting policymaker’s efforts to stimulate growth.
Although global trade has expanded at roughly twice the rate of world GDP for several decades, the value of exported goods has plunged, warning that corporate sector sales will deteriorate further.
We continue to recommend a capital preservation mindset and expect our defensive portfolio strategy to continue to outperform.