The Week That Was
Today’s report on consumer spending and incomes in February show spending up at a 7% annual rate from the fourth quarter. Wages and salaries were up at a 5% annual rate. With inflation up in the vicinity of 2%-3%, the overall gains were less than as expected. Even so, business surveys suggest the economy will accelerate in the second quarter.
The Markit surveys of business activity in March report the highest level of new orders in 6½ years. Business is booming for both manufacturing and service companies. Although Markit reported on supply problems keeping manufacturing from meeting its full potential, its manufacturing score in March was at 59, one of its highest scores.
Weekly initial unemployment claims fell to 684,000, the lowest level since the pandemic began. The number receiving unemployment payments also dropped sharply to 3.9 million, from 4.4 million a month ago.
Things to Come
The economy is moving ahead rapidly and the upcoming reports in the week ahead are likely to confirm the strength.
There are only two significant reports due this coming week—Thursday’s ISM survey of manufacturing and Friday’s jobs report.
Demand and new orders for manufacturing are booming. The ISM manufacturing survey for February registered a very strong reading of 61. Look for the March number to be close to 60.
Friday’s jobs report follows some highly erratic numbers. There was a sharp drop in December, a modest rise in January, and an explosive 465,000 increase in private jobs in February. March numbers should revert to a more normal rate. My estimate puts the gain in the vicinity of 200,000 jobs and a likely decline in the unemployment rate.
Market Forces
Amid normal up and down moves, the overall market has remained essentially unchanged for the past two months. Stocks were mostly lower this past week. Over-performing indexes are now under-performing and vice versa.
Technical indicators are mixed, with those for the Dow and S&P 500 remaining positive, while those for the Nasdaq remaining negative. The S&P500 puts is 17% above its fundamental value.
A highly expansive monetary policy remains the main force keeping stock prices above their fundamental value. The continued growth in the money supply should not only keep stock prices overvalued, in spite of the overvaluation.
Reports of constraints in the supply chain for manufacturing have raised concerns over near-term. These concerns may have contributed to the drop in the yield on 10-year T-Notes, from 1.7% to 1.6%.
Current monetary and fiscal policies will eventually end in much higher inflation and economic stagnation. But not just yet. Although price pressures are building, well-managed companies will be able to pass the increased costs to their customers.
While erratic ups and downs in the market will continue, once the leveling off process ends, the most likely trend will be toward higher prices.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 over-valued 17 percent
Monetary Policy: highly expansive
