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Goldilocks Economy Sends Dow Soaring in 2019, but Can the Party Last?

Last Updated September 23, 2020 12:39 PM
Gerelyn Terzo
Last Updated September 23, 2020 12:39 PM

By CCN.com: If you’re not careful, you’ll get whiplash from the speed at which the mood in the market is changing. We’ve gone from a doom-and-gloom recessionary outlook to one that’s now sunny skies ahead. In fact, the stars appear to have aligned for a Goldilocks economy – inflation is low, the economy is expanding, and stocks are racing to new highs as a result. The Dow and the S&P 500 have climbed 14% and 17% higher year-to-date, respectively, and it’s only the second quarter. There’s not even a hint of sell in May, go away, with stocks setting new record highs in an earnings season that was supposed to see the bottom fall out. Tech stocks are leading the charge, having advanced nearly 40% since year-end 2018.

Stocks are on a roll amid low inflation and a growing economy. | Source: WSJ and FactSet

Big Week Ahead for the Dow and S&P

So what could throw a wrench into the Goldilocks economy and record stock highs? Inflation. Any sign of an inflationary economy could motivate the Federal Reserve to reverse course and begin lifting interest rates again. But the signs are not pointing toward any rise in inflation in the current conditions. Yet, the economy isn’t stalled, paving the way for corporate profits which in turn should keep the bull market going. According to data cited in the Wall Street Journal , there’s only a one-in-10 chance that inflation will rise above 3% in the next half-decade compared to a one-in-five chance in September 2018. In fact, investors haven’t been so sure that inflation wouldn’t be too hot or too cold since the Great Recession, suggesting that economic conditions will be just right for the foreseeable future.

The one wild card is commodity prices, as evidenced by crude oil rising nearly 40% year-to-date. And some consumer companies are lifting prices to offset higher expenses. On Monday, personal income and spending data will shed some light on whether the Goldilocks economy plans to stick around for a while.

Tech Unicorn IPO Pipeline

Meanwhile, with the pace of tech IPOs coming down the pike, it’s evident why investors are partying like it’s 1999. Slack just unveiled its IPO filing and the valuation of the tech unicorn has more than doubled since 2018 to $15 billion, the WSJ reports . Investors have demonstrated an appetite for new issues as evidenced by the response to stocks such as Pinterest. The stock is up approximately 50% since it made its public market debut.

Lyft has been having a tougher time, with its share price slashed by approximately one-third since the IPO. Even though Uber hasn’t gone public yet, it still appears to have influence over Lyft’s price, the latter of which short-sellers have been having a heyday with. Uber revealed it was fetching a valuation of $90 billion, which is below the $120 billion that it initially sought.

All of the tech IPO activity bodes well for the stock market including the Dow and the S&P 500. This week’s economic indicators will reveal whether the Goldilocks economy is here to stay or if the big bad bear is waiting around the corner.