With little by way of significant economic news, the stock market has drifted moderately lower. Monetary policy remains expansive. As long as the Fed reaffirms its commitment to low interest rates, the outlook for stocks remains positive.
The Week That Was
Retail sales in August were up 0.7 percent from July. Sales are up 15 percent from a year ago and are 18 percent above the pre-Covid peak in February, 2020.
However, August sales were down at a 4 percent annual rate from the second quarter average.
This slower growth should continue. It’s necessary to bring sales more in line with July wages and salaries, which are up only 3 percent from their pre-Covid peak.
Consumer prices rose 0.3 percent in August. Prices for items other than food and energy increased by only 0.1 percent. Despite this moderation, yearly price changes remain in
the 4 percent to 5 percent range.
Weekly initial unemployment claims increased by 20,000 in the second week of September. The four-week average fell to 336,000, down slightly from 352,000 in August. The number of people receiving unemployment payments continued to trend lower.
Things to Come
Monday’s report from Homebuilders will provide the first glimpse of housing activity in early September. The survey of builder confidence has declined slightly from a peak of 85 to 81. It will probably come in around 80, which would indicate a very strong market for new homes.
Wednesday’s Fed meeting should focus on a decision for when the Fed will slow its purchases of securities. Expect the Fed to provide some cautious plans to slow … if developing conditions justify it.
On Thursday, Markit surveys of business activity in early September will provide the first indications of whether business activity slowed in September. I expect the index readings to remain close to 60, indicating no significant slowdown at this time.
Market Forces
For the second consecutive week, stocks moved modestly lower.
Once again, the declines were moderate, as the major indexes were all down less than 1 percent for the week.
Technical indicators for the indexes are mixed. They are not giving a clear signal as to where the market might be heading.
The good news is the S&P has so far found support at its 50-day moving average.
The bad news is the technical indicators for the Dow and small caps look less promising.
There hasn’t been much economic news to move the market. Next week that could change, however, with the Fed’s update on monetary policy and the first economy-wide business surveys for September.
Although the Fed is expected to provide some guidance regarding when it will begin to taper its purchases of securities, I doubt the announcement will have much impact on financial markets.
So far, the stock market’s moderate downturn appears constructive. With the S&P500 remaining above its 50-day average, the near-term outlook remains positive.
The upcoming economic news and the Fed’s ongoing assurance of an extended period of low interest rates should continue to provide support for stocks.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 overvalued by 28 percent
Monetary Policy: expansive
