Even when they’re not particularly funny, social media memes often provide snapshots of economic trends. Dark humor about inflation has been showing up (unsolicited) in my Facebook feed. Here’s a recent example:

Q: What makes you think gas prices are getting ridiculous?

A: When I went online to see how much my car was worth, I was asked whether the tank was empty or full.

Ba-da-boom! A more reliable economic indicator than social media chatter is the actual price of crude oil. Investors tend to closely follow the daily ups and downs of the stock market, but you should also keep an eye on crude oil. The fluctuating price of oil can serve as a meaningful barometer of the broader economy and future direction of equity prices.

There’s an old saying in the energy patch: the cure for high oil prices is high oil prices. In other words, oil prices eventually get to such a high level that usage begins to decline in a process called demand destruction.

We’ve seen this dynamic unfold in recent days. Crude oil prices have generally slumped since June, amid economic deceleration and aggressive monetary tightening. Fears of recession are growing, but by the same token, Wall Street is encouraged by the Fed’s get-tough stance on inflation.

On Thursday, the major U.S. stock market indices continued their winning streak as follows: the Dow Jones Industrial Average +1.12%; the S&P 500 +1.50%; the tech-heavy NASDAQ +2.28%; and the small-cap Russell 2000 +2.43%.

On Friday, the U.S. Bureau of Labor Statistics reported that the U.S. economy added 372,000 jobs in June, extending a prolonged period of employment expansion that defies recession worries. The consensus expectation had called for 265,000 new jobs. The jobless rate remained at 3.6% for the fourth month in a row.

That’s not a scorching jobs report, but it’s still pretty darn hot, further cementing another big interest rate hike.

After the opening bell Friday, U.S. stocks were mixed, as rates climbed in the wake of the stronger-than-expected jobs report. As of this writing, the U.S. 10-year Treasury hovered above 3.00%.

Read This Story: Recession, The Market Slump, and…Fear Itself

Higher rates weigh on the economy, which in turn reduces demand for energy. Falling oil prices often indicate sagging demand, which can be a harbinger of recession. But the current economic slowdown also suggests inflation has plateaued, and that’s a good thing.

The American Petroleum Institute (API) reported on Wednesday a build (for the week ending July 1) for crude oil of 3.825 million barrels, whereas the consensus of analysts had called for a draw of 1.1 million barrels.

West Texas Intermediate (WTI), the U.S. benchmark, has been sliding on recession fears and higher crude inventories, although WTI bounced back Thursday and was rising in early trading Friday (see chart).

Oil prices have fallen by more than 20% since March, a trend that lessens Inflation. U.S. gasoline prices have dropped 10.4 cents over the past week, which makes it the third consecutive week that the price at the pump has fallen. On Friday, the average national price of gas hovered at $4.72 per gallon, whereas in early June the price had topped $5.00/gal.

The Fed stomps on the brakes…

Federal Open Market Committee (FOMC) officials on Wednesday released minutes of their June 14-15 meeting, and it’s apparent they consider fighting inflation to be “Job One,” even at the expense of economic growth. Adding to the drama will be the release July 13 of the latest consumer price index reading.

It’s a slam dunk the FOMC will announce another robust rate increase at its next meeting July 26-27, in the range of 50 or 75 basis points. June’s boost of 75 basis points was the highest since 1994.

I detect a flaw in the Fed’s strategy, though, that rarely gets mentioned by the media. You’ve doubtless heard the disingenuous arguments about inflation: it’s the fault of profligate government spending (wrong), or pandemic stimulus checks (wrong), or “green” policies that are hostile to energy production (wrong again).

If current inflation is viewed objectively and without partisan spin, it’s clear that rising prices are largely the result of supply chain disruptions and shortages caused by the pandemic and the Russia-Ukraine war. Calibrating interest rates can’t fix those problems, but the Fed remains under enormous political pressure to enact draconian rate policies. Is the Fed going too far in its hawkishness? We’ll soon get further clarity, as key economic reports come pouring in July 11-15.

Next week, in addition to the June CPI reading, the following scheduled reports about the U.S. economy will be crucial enough to move markets: three-year inflation expectations (Monday); the Fed’s Beige book (Wednesday); the producer price index (Thursday); retail sales and consumer sentiment (Friday).

How to trade now…

My view: We’re not staring down another recession so much as witnessing a stock buying opportunity. Value investors, take heed.

Start increasing your exposure to sectors that historically outperform when the economy recovers from a rough patch, such as health care, industrials, real estate, and consumer discretionary. Friday’s jobs report shows that the economy still has strength. Further cause for optimism are signs that inflation is peaking.

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John Persinos is the editorial director of Investing Daily. He also edits our premium publication, Utility Forecaster.

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