Strong economic news and a surprising drop in longer-term interest rates add fuel to the bull market.
The Week That Was
This week’s economic reports confirm a sharp
acceleration in business activity. The most
dramatic sign was the 10% monthly jump in
March retail sales. The gain proved that if the
government sends people enough checks, they
will use them to buy things. Who would have
guessed?
Manufacturing output gained a more modest 3%
in March as automakers reported cutting
production due to a shortage of computer chips.
Initial weekly unemployment claims declined
sharply in the first week of April to below 600,000.
Weekly employment numbers continue to show
significant positive moves.
The Homebuilders’ survey for early April remained
in the mid-80s, indicating strong activity in the
market for new homes.
Things to Come
The are no significant economic reports due this
coming week. Consumer confidence surveys will
obviously reflect the positive impact of people
receiving checks from the government without
having to work. The excitement will go away
when they eventually receive the bill.
Housing numbers due this coming week reflect
activity in March. They are not significant since
Homebuilders have told us housing activity
remains strong in April.
Market Forces
The bull run in stocks continues. Nasdaq, QQQ,
S&P500 and Dow all moved to (or within a
fraction of) new all-time highs with gains of 1½%
to 2%. Small caps also were up, but with gains of
½% to 1%.
This week’s increase puts the S&P500 23%
above its fundamental value. As I noted in my
monthly report, stocks can further exceed their
fundamental values given the right conditions.
Monetary policy continues to be the main force
driving stock prices higher. Add the related surge
of new stimulus checks from the government and
business is booming.
This week’s surprising decline in longer-term
interest rates added further fuel to the bull market.
10-year Treasury yields declined to 1.53% after
being as high as 1.74% only two weeks ago.
In spite of the heightened risks from an
overvalued stock market, equities maintain a
major advantage over bonds. This is particularly
true if inflation takes off, as it will.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 overvalued by 23 percent
Monetary Policy: highly expansive
