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 percent monthly jump in retail sales in March. 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 percent in March as automakers reported cutting production because of 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 next 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 because Homebuilders has told us housing activity has remained strong in April.
Market Forces
The bull run in stocks continues. The Nasdaq, QQQ, S&P500, and Dow all moved to (or within a fraction of) new all-time highs, with gains of 1½ percent to 2 percent. Small caps also were up, with smaller gains of ½ percent to 1 percent.
This week’s increase puts the S&P500 23 percent above its fundamental value. Stocks can further exceed their fundamental values, given the right conditions. Monetary policy remains 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. Ten-year Treasury yields declined to 1.53 percent after being as high as 1.74 percent only two weeks ago.
Depsite the heightened risks from an overvalued stock market, equities maintain a major advantage over bonds. This will be 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