Stocks have moved lower as concerns over a spike in Covid and other problems emerge. None of these concerns are justified. Although the downward move in stock prices can continue, I expect it to be fairly moderate and of limited duration.
The Week That Was
Retail sales data for July fell by more than 1 percent. The retail sales data have been distorted by government payments, which led to an explosive spending rise this past spring. Even with the recent declines, retail sales numbers have increased far beyond the increases in wages and salaries. As a result, sales should remain weak until personal incomes catch up.
The Fed’s index of manufacturing activity rose 1.3 percent in July. This index finally has passed its prior peak. It has lagged other indicators of manufacturing but is now catching up.
After leveling off in June and July, weekly unemployment claims have resumed their
downward trend in August. The number of those receiving unemployment payments also is trending down. There were 2.8 million in the latest week, down from 3.2 million a month ago.
Things to Come
On Monday, the Markit surveys of business activity will provide the first tentative view of conditions in early August. In July, the Markit surveys showed business activity remained strong but had slowed slightly from June.
Business surveys indicate many companies are suffering from shortages of labor and materials.
The August surveys can provide insight into how the shortages may be affecting output. Available weekly data suggest the overall economy is dealing with the shortage problems and moving ahead. If so, Markit surveys will continue to point to strong growth, with readings close to 60.
Wednesday’s report on new orders for durable goods also should be revealing. In recent months, these data have soared to new records. Given the extraordinary growth, it would be normal for orders to level off or even decline. If they continue to rise, it will point to ongoing strength.
Friday’s report on consumer spending and incomes for July will provide the most comprehensive view of business activity. The report should show wages and salaries continuing to catch up with spending
Another Covid Death Spike
The CDC estimates 62 percent of those 18 years old and over have now been fully vaccinated. However, U.S. daily deaths from Covid have risen from 200 to 700 in the past month.
Although the CDC attributes the new outbreak to the unvaccinated, it does not have reliable data on which group is in fact responsible.
Data from Israel indicate patients who had been fully vaccinated were six times more likely to be reinfected than those who had recovered from Covid naturally.
Apparently, it will take more time and data to determine the effectiveness of vaccines in dealing with the virus.
Market Forces
Stocks were mostly lower this week.
After hitting an all-time high on Monday, the S&P500 fell 2½ percent. The Nasdaq indexes and the Dow fell 2 percent, and small cap ETFs fell 4 percent.
News reports attributed the decline in stocks to a number of events: Fed plans for an early taper, the spike in Covid, the Taliban taking control of Afghanistan and mixed economic numbers.
The main reason for the decline is that stocks had gone too long without a meaningful downward adjustment. When this happens, any excuse can trigger a downward move.
From a technical standpoint, the outlook for stocks is mixed.
The good news is the major indexes have all found support close to or above their 50-day moving averages. The bad news is small cap stocks have fallen well below their technical
support levels.
If the major indexes fall through their 50-day moving averages, the recent downturn in stock prices is likely to continue.
Talk about the Fed tapering (cutting back its purchases) has little to do with a meaningful shift in policy. Even when the Fed eventually begins to raise interest rates, it will be a long time before interest rates move high enough to restrain the money supply.
Stocks seldom go straight up as they have been. They are overdue for a downward adjustment.
With the Fed continuing to pump money into the economy, however, any downward moves should be fairly moderate and short-lived.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 overvalued by 25 percent
Monetary Policy: expansive
