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January 2018 Larsen macroeconomic and market scenarios plus projections - evaluates performance to date - July 25 2018

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On January 17, 2018 Larsen released PowerPoint presentation on SlideShare that discussed today’s macroeconomic/market landscapes and made specific projections. This July 2018 presentation evaluates how well the January 2018 projections have performed to date and what is likely to happen with stock indexes and interest rates going forward. Conclusion: long-term macroeconomic scenario outlined in Jan 17, 2018 PowerPoint remains intact. Consequence: long-term secular uptrend in U.S. stock prices is still underway. Given that inflation rate remains < 3 - 5% and long-term interest rates appear to be in ~ steady-state at relatively low levels and barring any serious Fed policy errors and near-term U.S. recession, an upside price breakout of DJIA is likely to occur within the next 3 - 6 months. As to future U.S. stock market prospects in the longer-term: you ain’t seen nothing yet.

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January 2018 Larsen macroeconomic and market scenarios plus projections - evaluates performance to date - July 25 2018

  1. 1. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 1 January 17, 2018: Larsen released PowerPoint on SlideShare Discussed today’s macroeconomic/market landscapes; made projections Contact: 1-312-861-0115 Chicago, Illinois USA lewisglarsen@gmail.com Lewis Larsen July 25, 2018 How well have projections performed so far from January 2018 through today?
  2. 2. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 2 2018 Image credit: Hywards/Dreamstime You ain’t seen nothing yet.
  3. 3. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 3 Below are key projections published on January 17, 2018 Items noted below are directly quoted from that PowerPoint presentation ▪ Slide #67: “Key long-term macroeconomic and technological forces that have driven 30-year secular uptrend in stock market prices and decline in both interest and inflation rates continue to operate as explained in Larsen qualitative models.” ▪ Slide #67: “Recent increase of ~6,000+ points (33%) in DJIA over past year occurred with limited price volatility and little retracement or any significant % technical corrections. Consequently, a healthy downward technical price correction in stock market indices is probably overdue after such a painless meteoric rise. Such a correction would typically entail a hard, freakish decline --- seemingly out of nowhere --- followed by choppy, sideways trading-range market for some period of time. Size of break would depend on exactly what triggered it. 66% retracement or 4,000 points (“Fibonacci” correction) is not impossible and would not violate parametric boundaries of long-term secular uptrend. At today’s price levels, initiating new positions or adding to previous positions on strength is not prudent; buying during corrections would be a better strategy.” Projected correction in DJIA did occur: technical break was roughly 3,257 points
  4. 4. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 4 Below are key projections published on January 17, 2018 Items noted below are directly quoted from that PowerPoint presentation ▪ Slide #68: “Resumption of strong increases in productivity will put a strong damper on wage-price inflation and further reduce costs of goods and services. This will create downward pressures on prices of manufactured products and help prevent overall inflation rates from increasing very much beyond today’s levels. This will help keep short- and long-term interest rates in roughly steady-state at relatively low values; 30-year secular downtrend in those rates is over, for now.” ▪ Slide #69: “U.S. Federal Reserve presently appears to be hell-bent on more tightening to ‘fight inflation.’ This could trigger temporary market corrections, depending on how it is perceived by investors. In any case, its primary effect would be to flatten or invert the yield-curve. Fed actions will have minimal effects on long-term interest rates as long as ongoing CPI inflation rate continues to remain well below 3 - 5% threshold ▪ Slide #69: “U.S. had already regained international competitiveness before Trump’s very bold initiatives to slash burdensome regulations and cut corporate tax rates. Those new actions further boosted U.S. economic prospects: 4 - 6% GDP growth [is] now possible.”
  5. 5. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 5 As projected: DJIA corrected; entered into ~ flat trading range Correction = 3,257 points from high in January or ~ 50% of 6,000 point run Adapted and annotated graph by Yahoo! Finance
  6. 6. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 6 As projected: short-/long-term interest rates slightly higher 1/17/2018: 3-mo T-bills 1.44% 30-yr T-bonds 2.84% July 20: 1.99%; 3.03% Short- & long-term interest rates seem to be ~ steady-state at relatively low values
  7. 7. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 7 30-year U.S. T-bond yield in secular downtrend since 1979-80 As projected: 30-year secular downtrend in yield has likely bottomed-out Further passage of time will confirm if lows in secular decline are now behind us ? 1980 2018 Adapted and annotated graph by Trading Economics
  8. 8. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 8 Finer details: 30-year T-bond yield values since January 2018 30-year yield may have reached its secular lows in Oct. - Dec. 2017 period ? New trading range ~ 2.9 - 3.3% ? Further passage of time will confirm if lows in secular decline are now behind us Adapted and annotated graph by Trading Economics
  9. 9. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 9 https://www.bloomberg.com/news/articles/2018-04-18/u-s-yield-curve-nears-an- unprecedented-flattening-streak-chart Quoting: “The Treasury yield curve from 5 to 30 years is approaching unprecedented territory: It flattened Wednesday for the ninth straight session, to about 29 basis points. The spread has narrowed 10 consecutive times on only a few occasions, and has never compressed 11 trading days in a row, according to Bloomberg data going back to 1992. ‘The yield curve can’t flatten every day,’ said Jim Vogel, a strategist at FTN Financial Capital Markets. ‘But it certainly seems willing to try’.” As projected: U.S. yield curve flattens from Fed tightening Federal Reserve continues to “fight inflation”: increases short-term rates
  10. 10. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 10 https://www.bloomberg.com/news/articles/2018-04-18/u-s-yield-curve-nears-an- unprecedented-flattening-streak-chart As projected: U.S. yield curve flattens from Fed tightening Bloomberg chart shows two types of yield spreads going back to 2005 2018 Adapted and annotated graph by Bloomberg
  11. 11. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 11 As projected: U.S. yield curve flattens from Fed tightening Yield curve started flattening in January of 2017 and hasn’t stopped since 2018 Quote: “But instead, the yield curve changed course at the beginning of 2017 and started flattening --- and hasn’t stopped since ... The phrase ‘yield curve inversion’ may not be up there with ‘Taylor Swift’ or ‘Kim Kardashian’, but it has by now cropped up in the media so often that people are Googling it all of a sudden.” “Yield-curve inversion consensus rouses contrarian in me” by Wolf Richter July 17, 2018 https://wolfstreet.com/2018/07/17/yield-curve-inversion-consensus-rouses-contrarian-in-me/ Jan. 3, 2018 July 3, 2018 Adapted and annotated graph by Wolf Street
  12. 12. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 12 As projected: U.S. yield curve flattens from Fed tightening Chart shows yield curves on Dec. 14, 2016 (black line) vs. today (red line) 2018 Quote: “The chart below shows the yield curves on December 14, 2016, when the Fed got serious about raising rates (black line); and today (red line). Note how the red line has “flattened” compared to the black line. The spread between the two-year and the 10-year markers, at just 24 basis points today, is minuscule compared to the 127-basis point spread on December 14, 2016.” https://wolfstreet.com/2018/07/17/yield-curve-inversion-consensus-rouses-contrarian-in-me/ Adapted and annotated graph by Wolf Street
  13. 13. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 13 As projected: U.S. yield curve flattens from Fed tightening Many worried that yield curve inversion could be predictor for a recession 2018 https://www.reuters.com/article/us-global-markets-yieldcurve/commentary-in-defence-of-the-yield-curve- idUKKBN1K21J5 Jamie McGeever, Reuters columnist in DAVOS on July 12, 2018 Quoting: “Yield curve … has been calling [recessions] right for 45 years.” “All five U.S. recessions since …1970s have been preceded by an inverted curve.” “Inflation has remained stubbornly low since the crisis and the second longest U.S. expansion in history hasn’t led to significant wage growth. Many say traditional relationships between growth and inflation have broken down thanks to technology, weak labour bargaining power, a more flexible labour market and the ‘gig economy’.” [Note: very consistent with scenario in Jan. 17, 2018 PowerPoint] “One indicator they and others might want to look at is the Philly Fed’s ‘Anxious Index’, which measures the probability of GDP contraction in the next quarter. It’s historically low right now, near levels that have preceded every recession in the past half century.” [Note: this indicator of recession risk must be watched closely] “Given its past accuracy and the lack of alternatives, the yield curve is one of the few recession-forecasting tools economists have. Maybe it won’t be different this time after all.”
  14. 14. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 14 As projected: U.S. yield curve flattens from Fed tightening Fed claims that Anxious Index rises sharply at beginning of recessions 2018 https://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/anxious-index Grey-shaded periods indicate recessions Anxious Index has not yet started rising in 2018, but will it rise later this year? 2018 2nd quarter 2018 Index was at 8.6%, which is quite low Indexvalue(%) Year 8.6 % Adapted and annotated graph by Federal Reserve Bank of Philadelphia
  15. 15. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 15 http://www.businessinsider.com/us-economy-atlanta-fed-gdpnow-forecast-spikes-may-not-last-2018-5 Quoting: “The Atlanta Federal Reserve's GDPNow model is at it again. Its latest weekly forecast is that the US gross domestic product will grow at an ample annualized rate of 4.1% in the second quarter. That would be a nice jolt from the first quarter when the economy grew 2.3% according to an advance estimate.” “The GDPNow model was revised up to 4.1% from 4% last week because of strong retail sales data for April, led by spending on clothes.” “There are times, like the second and third quarters of 2014, when the economy's performance blows past the GDPNow model. So it may be unwise to conclude that this won't happen again. We'll know for sure as the Commerce Department releases its estimates of second-quarter GDP, starting on July 27.” As projected: U.S. GDP growth rate seems to be accelerating January 17, 2018: said I think that “4 - 6% GDP growth is now possible”
  16. 16. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 16 Quoting: “Real gross domestic product (GDP) increased at an annual rate of 2.0 percent in 1st quarter of 2018, according to "third" estimate released by Bureau of Economic Analysis. In 4th quarter, real GDP increased 2.9 percent.” National Income and Product Accounts Gross Domestic Product: First Quarter 2018 (Third Estimate) Corporate Profits: First Quarter 2018 (Revised Estimate) Released: June 28, 2018 Latest forecast: 4.5 percent released July 18, 2018 As projected: U.S. GDP growth rate seems to be accelerating Latest estimates: U.S. 1st quarter GDP = 2.0%; GDPNow 2nd quarter = 4.5% Quoting: “GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2018 is 4.5 percent on July 18, unchanged from July 16. After the Federal Reserve Board of Governors' industrial production release on Wednesday, July 17, modest increases in the nowcasts of second-quarter real consumer spending growth and second-quarter real private fixed investment growth were offset by a decrease in the nowcast of second-quarter real private inventory investment. The nowcast of second-quarter real residential investment growth inched down from 0.4 percent to 0.0 percent after this morning's new residential construction release from the U.S. Census Bureau.”
  17. 17. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 17 As projected: U.S. GDP growth rate seems to be accelerating Chart compares GDPNow model’s forecasts with Blue Chip consensus https://www.frbatlanta.org/cqer/research/gdpnow.aspx 4.5% GDP est. Adapted and annotated graph by Federal Reserve Bank of Atlanta
  18. 18. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 18 https://www.zerohedge.com/news/2017-01-27/barack-obama-now-only- president-history-never-have-year-3-gdp-growth 2018 As projected: U.S. GDP growth rate seems to be accelerating GDP growth ≥ 4% = exceptional performance; avg. 1.48% from 2008 - 2016 4.0% GDP 1950 Adapted and annotated graph by ZeroHedge
  19. 19. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 19 U.S. labor productivity continues to grow at excellent rates Automation is displacing labor at highest rate since Industrial Revolution 2018 https://tradingeconomics.com/united-states/productivity Increased productivity & automation short-circuit U.S. wage-price inflation spirals Adapted and annotated graph by Trading Economics
  20. 20. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 20 U.S. labor cost increases continue to be surprisingly modest June 2018 U.S. unemployment rate = 4.0%; some say ~ “full employment” 2018 https://data.bls.gov/timeseries/CIU1010000000000A
  21. 21. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 21 2016 - 2018: price of crude oil increased from ~$30 to $70/bbl Recent real crude oil price of ~US$ 70/barrel expensive in historical terms 2018 https://www.quandl.com/data/BP/CRUDE_OIL_PRICES-Crude-Oil-Prices-from-1861 Refreshed June 22, 2018 US$ 72.58 20182013 Market closing prices on July 19, 2018 (2016$) Adapted and annotated graph by Quandl
  22. 22. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 22 Energy intensity measures how energy benefits an economy Megajoules (MJ) of energy used per $ of gross domestic product (GDP) 2018Energy intensity (abbreviation = EI): “Measures how much a bit of energy benefits the economy. This value is calculated by taking the ratio of total primary energy use (TPES) (all of the fuels and flows that a country uses to get energy) to GDP (the total money made in a country). This quantity (measured MJ/$) is used to indicate how effectively a certain economy is using their fuels and flows. When a country reduces wasted energy it becomes more efficient, this lowers its EI (lower EI is better).” Further quoting: “This ratio quantifies how much good a little bit of energy provides. Energy use per capita describes only how much energy is being used, and provides no details as to how that energy is helpful. EI clarifies 'what energy does for a person', which certainly varies from country to country. Wealthier countries almost always use more energy per capita than poor countries and EI accounts for this discrepancy in wealth.” https://energyeducation.ca/encyclopedia/Energy_intensity
  23. 23. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 23 Value of U.S. EI has decreased dramatically since mid-1970s Oil price spike caused by 1973-74 Arab oil embargo altered U.S. behavior 2018 https://energyeducation.ca/encyclopedia/Energy_intensity “Great Recession” of 2008 U.S. had enormous gasoline shortages during oil embargo Oil embargo caused U.S. retail gasoline prices to quadruple in short period MartyLederhandler/AP Adapted and annotated graph by University of Calgary
  24. 24. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 24 EI of U.S. and world have decreased by > 1.2%/yr. since 1990 World economy now much more resilient to oil price shocks vs. 1973-74 2018 https://yearbook.enerdata.net/total-energy/world-energy-intensity-gdp-data.html Quoting: “Global energy intensity (total energy consumption per unit of GDP) declined by 1.2% in 2017, slightly below its historical trend (-1.5%/year on average between 2000 and 2017 and -1.8% in 2016).” Adapted graph by Enerdata
  25. 25. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 25 U.S. economy now vastly less vulnerable to oil price shocks Persistently high real oil prices or spikes much less inflationary vs. 1970s 2018 https://www.usnews.com/news/national-news/articles/2018-07-10/eia-us-net-oil-imports- to-drop-to-lowest-levels-in-60-years Quoting: “U.S. NET OIL IMPORTS are projected to drop by nearly 60 percent next year compared to 2017, falling to their lowest levels since 1958, the U.S. Energy Information Administration said Tuesday in its latest Short-Term Energy Outlook. ‘That certainly is eye-popping,’ says Patrick DeHaan, head of petroleum analysis for GasBuddy. Net imports are expected to fall from an average of 3.7 million barrels per day last year to 2.4 million bpd this year and 1.6 million bpd next year – ‘a pretty staggering number,’ he says. The reduction in net imports of foreign oil – a measure of the amount of oil imported versus the amount of oil exported – is being driven by record-setting production that is poised to see U.S. producers extract more oil per day next year than the last record set in 1970. The forecasts, if proved right, would continue trends unleashed by the U.S. shale oil and gas boom of the past decade. The U.S., in short, may in a few years become a net exporter of oil – a major shift in world markets and the country's economic makeup – but it will always remain ‘energy interdependent,’ says Tom Kloza.”
  26. 26. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 26 https://en.wikipedia.org/wiki/United_States_Consumer_Price_Index#/media/File:Inflation_and_oil.png As projected: U.S. annual rate of inflation remains low ~ 2.8% Recent high real $ price of crude oil has done little to accelerate inflation BLS (June 15, 2018): “Consumer Price Index up 2.8 percent over the year ending May 2018.” Note: average monthly rate of inflation from Jan. thru May 2018 = 0.2 %/month (BLS data) Adapted and annotated graph by Wikipedia
  27. 27. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 27 CRB does not suggest significant reacceleration of inflation Behavior of CRB data since 2016 still within boundaries of 9-yr. downturn 2018 Long-term downtrend in CRB Index could be bottoming like 30-yr. T-bond yields Adapted and annotated graph by BigCharts
  28. 28. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 28 As projected: U.S. annual rate of inflation remains low ~ 2.8% Larsen’s long-term macroeconomic scenario is intact if inflation < ~3 - 5% Note: U.S consumer prices rose +2.8% in the twelve months up to June 2018; this was fastest increase since February 2017 and before that, February 2012 2018 3% 5% Adapted and annotated graph by John Kemp (Reuters)
  29. 29. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 29 Gold has been in sideways trading range since August 2017 Price drop ~$100/oz. so far in 2018; suggests no acceleration of inflation 2018 2018: Gold price went down ~$100/oz. while crude oil price went from ~$60 up to ~$70+/bbl; decreases in world EI attenuate inflation impact of oil price increases Adapted and annotated graph by Goldprice
  30. 30. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 30 DJIA to Gold price ratio has been increasing; will it continue? Price appreciation in equities substantially better than Gold for 5 years 2018“This interactive chart tracks the ratio of the Dow Jones Industrial Average to the price of Gold. The number tells you how many ounces of Gold it would take to buy the Dow on any given month. Previous cycle lows have been 1.94 ounces in February of 1933 and 1.29 ounces in January of 1980.” Adapted and annotated graph by macrotrends
  31. 31. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 31 U.S. Dollar is presently very strong versus other currencies Increases $ price of oil, cuts U.S exports, but dampens U.S. inflation rate 2018 Trade-weighted U.S. Dollar Index: January 4, 1995 through July 11, 2018 Today’s value of Index close to peaks seen in Feb. 2002 and Dec. 2016 - Jan. 2017 https://fred.stlouisfed.org/series/TWEXB Adapted and annotated graph by Federal Reserve Bank of St. Louis
  32. 32. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 32 Overview: current values of major stock indexes & P/E ratios Most P/E ratios today not markedly different from values of one year ago 2018
  33. 33. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 33 Chart: value of S&P 500 P/E ratio from Jan. 1928 to Jan. 2018 July of 2018: S&P 500 = 24; DJIA = 23; Nasdaq 100 = 26; Russell 2000 = 81 24 P/E at upper-end of 90-year range; in healthy market environments, stock price increases should be earnings-driven --- that will happen if U.S. GDP growth ≥ 3% Adapted and annotated graph by macrotrends
  34. 34. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 34 2018 Image credit: Will bull market uptrend in stocks resume? When might that happen and how will we know it? What specific risk factors could prevent this from occurring? Old Wall Street adage: “A bull market climbs a wall of worry.”
  35. 35. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 35 Reference: PowerPoint uploaded to SlideShare Jan. 17, 2018 Adobe Acrobat pdf download copy available at URL provided down below https://www.slideshare.net/lewisglarsen/lewis-larsen-dowjones-industrial-average- reaches-26000-what-happens-next-boom-or-bust-jan-17-2018
  36. 36. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 36 Chart of DJIA as of July 20, 2018: now in a sideways pattern Questions: (1) will 2016-17 uptrend resume? ; (2) when might that happen? 2018 Fundamental market forces will trigger breakout if long-term scenario stays intact Adapted and annotated graph by Yahoo! Finance
  37. 37. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 37 If uptrend resumes DJIA must exit its recent sideways pattern Chart below shows an idealized breakout from roughly triangular pattern 2018 Adapted and annotated graph by DailyPrice Action
  38. 38. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 38 See Jan. 17, 2018 Larsen PowerPoint for details of models Economic and technological forces continue to support bullish scenario 2018 Key long-term macroeconomic and technological forces that have driven a 30- year secular uptrend in stock market prices and decline in both interest and inflation rates continue to operate as explained in Larsen qualitative models. ▪ U.S. had already greatly regained much of its international competitiveness before Trump’s bold initiatives to slash burdensome regulations and reduce corporate tax rates. Those recent actions further boosted U.S. economic prospects: 4 - 6% GDP growth is now possible. To assess present rate of U.S. economic growth see estimated 2nd quarter 2018 GDP released July 27 ▪ Strong GDP growth of 3% or more in 2nd quarter 2018 estimate may well be a necessary but not solely sufficient condition for a stock price breakout. While excellent GDP growth boosts corporate earnings, market participants might still be quite worried about: (1) earnings and GDP hits from tariff- driven trade wars with China and EU; (2) triggering of U.S. recession by Fed policy error in continuing to increase short-term interest rates (unaware that major reacceleration of U.S. inflation rate is really not a problem); and (3) risk that Republican party could possibly lose control of U.S. House, an event that could lead to Trump’s impeachment and removal from office --- this would be quite negative for markets due to reversals of Trump policies
  39. 39. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 39 See Jan. 17, 2018 Larsen PowerPoint for details of models Long-term economic and technological forces are ameliorating inflation 2018 ▪ Long-running trade wars via imposition of tariffs is a non-trivial risk for future U.S. economic growth and corporate earnings. If and when market participants become convinced that Trump will very probably be able to negotiate fairer trade deals with China and EU and drop newly imposed punitive tariffs, that risk will disappear as impediment to upside breakout. Watch for key signs that trade negotiations may be headed for ‘soft landing’ ▪ Multiple long-term fundamental economic and technological parameters indicate that U.S. rate of inflation is well under control and very unlikely to exceed key 3 - 5%/year threshold level for any significant period of time. If that holds true, Larsen’s long-term macroeconomic scenario will remain intact and long-running secular bull market in U.S. stocks should continue. This further implies that upside breakout of today’s sideways price pattern is inevitable; only remaining question is when that event might happen. Caution: breakout could be delayed by lingering worries that U.S. Fed (still planning more interest rate hikes in 2018) might boost rates way too much, invert the yield curve, and then trigger a U.S. recession due to policy error Sideways market price patterns very often characterize periods during which market participants are assessing likely probabilities for key risk factors. Up or down price breakouts occur once market fundamentals are better clarified
  40. 40. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 40 See Jan. 17, 2018 Larsen PowerPoint for details of models No obvious economic reasons for U.S. recession during next 3 - 9 months 2018 ▪ Since the U.S. economy is just beginning to strongly re-accelerate --- and absent any near-term Fed policy errors or totally unexpected, exogenous economic calamities --- there are no compelling economic reasons for it to slide into a recession during the next 3 - 9 months (which would trigger a downside price breakout). See how market reacts to further interest rate hikes & additional yield curve flattening or inversion; also watch behavior of Philadelphia Fed’s Anxious Index. Although it is not infallible, if Fed’s Index ‘flashes red’ one should evaluate total market exposure and closely monitor new economic data for any confirmation that a recession may be imminent ▪ Absent obvious onset of U.S. recession and/or all-out China/EU trade war with no hope for negotiating better trade agreements, watch carefully for classic technical breakout event similar to what is illustrated on Slide #37. Given U.S. GDP ≥ 3%, upside breakout from sideways price pattern would receive additional impetus from any successful resolution of present vexing U.S. trade issues with China and/or EU. However, breakout may not occur until and unless Fall election results eliminate risk for Trump’s impeachment Markets do not always wait to stage breakouts of sideways price patterns until probabilities for fundamental economic and/or political risks are fully resolved. Consequence: one must always be alert for technical breakouts as in Slide #37
  41. 41. July 25, 2018 Lewis G. Larsen, Copyright 2018 All rights reserved 41 See Jan. 17, 2018 Larsen PowerPoint for details of models Upside price breakout of DJIA is likely to occur within next 3 - 6 months 2018 ▪ Recent bellicose communications between U.S. and Iranian leaders have raised specter of hostilities between U.S. and Iran leading to possibility of Iran blocking transit of oil tankers through Strait of Hormuz. If this event occurred, and depending on duration of shipping interruption, spot crude oil price would skyrocket and oil markets would drastically invert. Similar cataclysm that occurred during 1973-74 Arab oil embargo helped trigger a global “stagflation” recession that lasted from 1973-75. Situation of U.S. and global economy are different today: world EI is much-reduced from levels prevalent in 1970s and oil price increases have much lesser impact on current rates of inflation (see lower chart on Slide #21). Unlike 1970s, there is now substantial capacity for manufacturing hybrid or all-electric vehicles. Today, consumers could very rapidly switch from vehicles being powered by gasoline or diesel fuel to electricity if economics are favorable ▪ Conclusion: long-term macroeconomic scenario outlined in Jan 17, 2018 PowerPoint remains intact. Consequence: long-term secular uptrend in U.S. stock prices is still underway. Given that inflation rate remains < 3 - 5% and long-term interest rates appear to be in ~ steady-state at relatively low levels, and barring any serious Fed policy errors and near-term recession, upside price breakout of DJIA is likely to occur within the next 3 - 6 months

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