Friday’s retail sales report showed no gain following the explosive increase in March. The economy continues to grow at a very rapid rate.
The Week That Was
Friday’s retail sales report showed sales in April were essentially unchanged after the explosive increase in March. Sales remain extended. They are 18 percent above their all-time high prior to Covid.
Consumer prices soared in April as the Consumer Price Index (CPI) and core CPI (ex-food and energy) increased by roughly 1 percent (a 12 percent annual rate). On a year-over-year basis, the overall CPI rose by 3 percent and the core CPI was up 4 percent.
Officials at the U.S. Federal Reserve are downplaying the increases. First, they claim they are an offset to earlier inflation, which was below 2 percent. Second, with a 6 percent unemployment rate, they view the economy as being far from full employment and in need of more stimulus.
Weekly employment data for the first week in May showed further improvement. Initial weekly unemployment claims fell to 473,000, bringing the four-week average to 534,000. This is down from 577,000 claims for the month of April and 724,000 in March.
Things to Come
There are only two mildly interesting reports due this week. The first is today’s
Homebuilders’ Index. It is likely to continue to register in the low to mid-80s, showing new
housing activity continues to boom.
On Wednesday, the Fed will release the minutes of its April meeting.
Neither of these reports is likely to affect financial markets.
Market Forces
Stocks were hammered this past week. The Dow fell 1½ percent, the S&P500 2½ percent, and the Nasdaq almost 4 percent to 7 percent below its all-time high.
The key index to watch at this point is the S&P500, where the news is both good and questionable. The S&P hit its all-time high a week ago Friday before falling to key support at its 50-day average. The good news is Thursday’s rebound from level.
The possible bad news is the decline on Wednesday was on higher trading volume and the
rebound was on lower volume.
If the S&P500 drops much below its 50-day average of 4056, technical indicators will turn negative. Technical indicators are already negative for the Nasdaq and small cap stocks, pointing to weakness.
Last week’s inflation reports appeared to be the main spark leading to the downturn in
stocks.
Fed officials reiterated their belief the rise in inflation is temporary. The Vice-Chair once again stated the Fed’s view is that inflation is temporary and the economy is far from full employment. Hence, massive stimulus was necessary. The Fed is not ready even to consider tapering its monetary stimulus.
The combination of monetary and fiscal stimulus will drive the economy and inflation higher. With the S&P500 still 23 percent above its fundamental value, stocks remain overvalued. However, as long as the Fed keeps pumping money onto the inflationary fire, the upward trend in stock prices should continue.
Longer-term interest rates quickly reversed their recent downward move. Interest rates remain well below their fundamental levels. As inflationary pressures build, longer-term interest rates will move sharply higher. By later this year, if not sooner, the markets will force the Fed to begin discussing the need for higher interest rates.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 overvalued by 23 percent
Monetary Policy: highly expansive