Although the economic news this past week appeared disappointing, the economy continues to move ahead at a rapid pace.
The Week That Was
Last week I was expecting good economic news. With retail sales and manufacturing falling by 3 percent, good news was in short supply.
The decline in retail sales is easy to explain. Even after the 3 percent drop, February sales were up at a blistering 12 percent annual rate from the fourth quarter. With incomes rising faster than spending, look for further good news on consumer spending in the coming months.
The decline in manufacturing is probably an anomaly. Business surveys show manufacturing soared in February. Both reports can’t be right.
The weekly employment numbers continue to trend lower. Weekly initial claims were up to 770,000 in the second week of March. However, even with the increase, claims for March are down 50,000 from February and 100,000 from prior months.
Things to Come
There are two important economic reports due this week. On Wednesday, the Markit business surveys for March will arrive. These surveys have been very strong in recent months and have accurately captured the accelerating pace of activity.
On Friday, the government will report on consumer spending and incomes for February. Although the data is not very current, it will provide the most comprehensive measures of growth between the fourth quarter and the current quarter.
The data should help confirm whether spending is actually increasing at an 8 percent annual rate with real growth close to a 6 percent annual rate.
Market Forces
Stock prices were mostly lower this past week. The Dow rose 2½; small cap indexes (IWM, IJR) fell 3 percent; the Nasdaq and QQQs fell 1 percent and 2 percent, respectively; and the S&P500 moved slightly higher.
The slight upward move in the S&P500 places it 19 percent above its fundamental value. Although holding overvalued stocks is risky, holding bonds involves an even greater risk as interest rates rise.
Technical stock market indicators are mixed. The Nasdaq and QQQs technically are negative, while other indexes remain positive.
One of the keys to a potential collapse in stock prices is a restrictive monetary policy. This week, Fed Chair Powell said the Fed intends to maintain maximum liquidity through 2023. The bond market won’t let the Fed do this. Investors know current policies are highly inflationary. Longer-term rates will go higher as investors try to avoid losses created by inflation and higher interest rates.
As inflationary signs increase, the Fed will relent. It will begin raising the fed funds rate before the end of this year.
Even when the Fed begins raising the fed funds rate, monetary policy will remain loose. The Fed has a history of moving too little, too late in applying monetary restraint. Monetary policy remains highly expansive.
An overvalued stock market is always subject to a correction. After the current leveling off, the ongoing flow of new money into the economy should enable stock prices to trend higher.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 overvalued by 19 percent
Monetary Policy: highly expansive
