Upcoming economic news for the nation should be mostly positive.
The Week That Was
Weekly employment data continue to improve. Initial weekly unemployment claims fell to 444,000 in the second week of May. This is down sharply from 579,000 claims in April and 724,000 in March.
These numbers suggest business activity remains very strong.
Things to Come
Markit will release its surveys of business activity for early May this morning. Given the sharp drop in initial unemployment claims, the surveys will likely show the economy continues to grow at a rapid pace.
Next Thursday’s report on new orders for durable goods in April should also bring good news. New orders have been very strong, as has been the case for most recent economic reports.
Next Friday’s government report on consumer spending and incomes will be the most comprehensive report of what happened in April. Spending and incomes soared in March. The April report will show the extent to which the economy was able to maintain its strong first quarter growth rate. At this point, monthly data indicate the strong growth in the first quarter has carried over into the second.
Market Forces
Stocks were mostly higher this past week. With little economic news, however, the markets lack a strong sense of direction.
The Nasdaq and Dow reversed their recent downward trends. The Nasdaq rose 3 percent, while the Dow moved slightly lower. The S&P500 found support at its rising 50-day average. This is a positive technical development. However, trading volume was below average, so technical indicators are still suspect.
The market is in a type of limbo because the scarcity of economic news provides little guidance about overall conditions in the economy.
With the S&P500 24 percent above its fundamental value, a correction can occur at any time. However, as long as the S&P remains above its rising 50-day average, the odds continue to favor further gains.
The economic news and strong earnings reports expected for this coming week should continue to provide mostly good news.
Several comments by Federal Reserve members indicate they may want to moderate purchases of securities. Fed data for March and April show they have already cut back. Instead of their target of $120 billion in monthly purchases, the Fed bought $102 billion in March and $79 billion in April.
This tapering may be deliberate, or simply a case of someone falling asleep at the money machine.
The easing in longer-term interest rates has helped stocks. With the 10-year Treasury rate well below its fundamental level of 4 percent, another sharp upward move in longer-term rates can occur at any time.
In spite of the risks that are always present in holding stocks, the near-term outlook for the market remains generally positive.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 overvalued by 24 percent
Monetary Policy: highly expansive
