The news on the U.S. economy, earnings, and the virus remains positive.
The Week That Was
The economic news this past week was mostly positive. Retail sales soared in January, after declining in December. Averaging the December decline and the January increase puts sales 5 percent above their peak from a year ago. January sales show an increase at a double-digit annual rate from the fourth quarter average.
The U.S. Federal Reserve’s (Fed) measure of manufacturing production also soared in January, to within 1 percent of its peak of a year ago. As with retail sales, January manufacturing rose at a double-digit annual rate from the fourth quarter average.
The Homebuilders Index reading of 84 for February was also strong. Housing activity continues to soar. Although housing starts and other weather-sensitive activities may be temporarily hampered by freezing temperatures, things will bounce back as the weather improves.
The only seemingly negative news was a large jump in weekly initial unemployment claims in mid-February. Weekly claims are highly erratic. The latest jump brought the four-week average back to where it has been since October. The bad news is that unemployment claims have not declined. The good news is that they have remained stable.
Things to Come
Upcoming economic news includes the Markit business surveys for February (due later today), consumer confidence (due Tuesday), new orders for durable goods (Thursday), and January consumer spending and incomes (Friday).
Markit surveys for business activity in February could slip a bit because of the freezing weather, but they should remain in the mid to upper 50s.
Consumer confidence is a soft number with little real meaning independent of economic numbers. Ignore it.
Almost all measures of new orders have been surging. Expect Thursday’s report for new orders of durable goods orders to remain strong. Friday’s report on January consumer spending and incomes is likely to confirm strong gains in retail sales and wages and salaries.
COVID-19 Developments
U.S. COVID-19 cases and deaths continue to decline rapidly. Deaths tend to follow cases with a lag of about four weeks. Vaccine manufacturers forecast daily vaccine rates will soon jump from 1½ million a day to 2 ½ to 3 million.
Hence, the steep reduction in daily deaths should continue. Expect a more normal spring and summer.
Market Outlook
After hitting all-time highs on Tuesday, stocks moved sharply lower. Over the past week, small cap indexes were down by 2 percent to 3 percent, the Nasdaq was down 1 percent, the QQQs fell by 0.6 percent, and the S&P500 was unchanged.
The rise in initial unemployment claims was the only negative economic news. As noted above, the rise is not significant, and most other indicators point to rapid growth. Employment growth may temporarily slow a bit because of the recent end of global warming (sarcasm alert). We can confidently predict warming and employment growth will return this spring and summer.
The weakness in stocks over the past few days represents a healthy pause. Technical indicators remain positive, with the S&P500 well above its 50-day average. Business activity is accelerating, new orders are strong, and the Fed says it will run its money machine 24/7 to drive the economy higher.
Stocks remain overvalued, with the S&P500 17 percent above its fundamental value. In an overvalued market, a sharp correction can occur at any time. However, with a strong economy and the likelihood of upward revisions in earnings estimates, any correction should be fairly limited.
The recent upturn in longer-term interest rates is a positive sign for the economy and the stock market. The widening spread between short- and longer-term interest rates is a reflection of a stronger economy and a threat to bond holders.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 over-valued by 17 percent
Monetary Policy: highly expansive
