“Markets have a deep skepticism that we’ll ever see a pickup in inflation,” Stanley said in an interview. But market participants are implicitly assuming energy commodity prices will continue to fall as fast as they did in late 2014, when energy prices dropped more than 20%. “The bulk of the movement took place roughly a year ago,” Stanley said.

The Fed expects headline and core inflation to drift higher in 2016 to about 1.6%, and Stanley believes that forecast is the key to what the Fed will do this year. If inflation doesn’t begin to move higher soon, it’s likely that the Fed won’t raise rates more than one or two times. But if inflation surprises the Fed, as Stanley believes it will, then the Fed would be more aggressive.

“It wouldn’t shock me if inflation is higher than the Fed thinks it will be, and they may go one or two more times than is baked in,” he said.

Although markets are intensely focused on the global economy, Stanley argues that the domestic economy is what matters most. “The U.S. is a relatively closed economy,” with global trade accounting for only about 15% of the economy.

“The global economy won’t be entirely healthy, but it won’t deteriorate, deteriorate, deteriorate,” he said.

As for the U.S. economy, Stanley sees a relatively healthy household sector, with rising incomes and an improving housing market, continuing to do better than the business sector, with its soft investment spending.

Eoin Treacy's view

A point both David and I have made, particularly in the Subscriber’s Audio, is that the sharp declines in commodity prices will have a transitory effect on inflation figures because they cannot continue to fall at the current pace indefinitely. Once prices stabilise the effect on inflation statistics will wash out in a couple of quarters and the rising cost of services and wages will be more apparent. There is also the possibility that rebounds in commodity prices, from very oversold levels, will have an inflationary impact. I believe that is why the Fed continues to believe inflation will be higher later this year. 


Consumer Discretionary and Consumer Staples are the two strongest major sectors right now for a reason. The US consumer is less influenced by overseas considerations than domestic conditions. However they are not the only two sectors in the market and many industrial, materials and technology companies have substantial overseas operations. In this regard it is worth remembering that we are not buying the economy but companies. 

Short-term oversold conditions are evident and the major market indices bounced today from the region of their respective lows. Potential for reversionary rallies exists but sustained moves above their respective trend means will be required to signal demand has returned to dominance beyond short-term steadying.