The latest economic numbers show business activity in the United States soared in November despite the rising concern over COVID. The economy is about to hit new highs. Expect the momentum to continue into next year.
The Markit survey of business activity for early November shows both manufacturing and service companies with the highest monthly reports in several years. Production and new orders soared as domestic demand increased dramatically. The increase in demand created supply-chain shortages which led to the sharpest increase in prices the surveys have ever recorded.
Signs of a strong increase in business activity in November indicate the economy is about to hit a new peak in output despite ongoing lockdowns in many states.
With the economy about to surpass its previous peak, it is natural to expect a slowdown in spending. My forecast is for spending to increase at a 7 percent annual rate in the first half of next year and 5 percent to 6 percent in the second half. However, we are in unchartered waters. The massive amount of monetary stimulus associated with boosting the economy from its lockdown could produce an extended period of even faster spending. If so, inflation and higher interest rates would arrive sooner than my forecast anticipates. Fixed-income portfolios should remain defensive.
What to Expect This Week
The ISM business surveys should follow the lead of last week’s Markit surveys. Look for strong readings on both Tuesday and Thursday showing November manufacturing and service activity moved sharply higher. On Friday, the monthly employment report should follow the impressive improvement in the weekly data. This means the report will show strong gains in employment along with a further decline in the unemployment rate.
U.S. COVID Cases, Deaths Move Higher
U.S. daily COVID cases continue to soar. Although deaths have increased, they remain below the peak in April as doctors and medical staff continue to keep daily death rates below predicted levels.
Stocks appear to have broken out of their consolidation mode, as all indexes came close to or hit all-time highs. As in recent weeks, small cap ETFs (IWM, IJR) and the Dow led the major indexes, achieving gains of 3 percent to 5 percent. The S&P500 and Nasdaq registered gains of 1 percent.
As the Trump administration moves to accommodate a transition, there has been a collective sigh of relief in the markets as well as elsewhere. Although there are numerous signs fraud occurred in pumping up votes for Biden, thus far it has been difficult to provide sufficient proof to overturn the official results.
The S&P500 has risen to 9 percent above its fundamental value. Although risks increase as markets become more overvalued, a massive monetary stimulus, low interest rates, and strong economic growth should continue to drive stock prices higher into the coming year.