Stocks took an early holiday this past week. There were only minor shifts. The S&P500 was typical of a market at rest.
The Week That Was
The flood of economic numbers this past week confirms both a weakness in real growth during the summer and into October. Income and spending data for October show both total wages and salaries and consumer spending growing at double-digit annual rates. However, after allowing for inflation, October real wages are up only 2 percent annualized.
October new durable goods orders fell slightly. However, new orders remain very strong when excluding the volatile defense and transportation components.
The labor market remains tight. In the week ending November 20, new weekly unemployment claims fell to 199,000, the lowest since 1969. In early November people receiving insured unemployment payments fell to 2.0 million, down from October’s 2.2 million.
Things to Come
Wednesday’s [December 1] November ISM survey of manufacturing companies is likely to show continued strength with a reading at or slightly above the vicinity of 60. The expected strength is based on the Markit survey, which showed an uptick in manufacturing in November.
Friday’s employment report should also continue to show strong gains in jobs. Employment remains about 3% below its pre-Covid peak. Businesses are struggling to get workers to meet rapidly rising demand. Potential workers need the money to keep up with inflation. The combination means workers are returning to jobs.
Market Forces
There was a lot of economic news, but little changed. The data all show demand and prices
are soaring amid a shortage of workers. Although demand is booming, real growth remains close to a sluggish 2 percent to 3 percent annual rate.
The good news for stocks is the major indexes continue to find support at key technical areas.
However, some technical indicators suggest stocks are overbought and overdue for at least a short-term downward adjustment.
Part of the strong ongoing demand for stocks is likely due to weakness in Europe compared with the relative strength in the US. Even so, the potential for renewed concern over variants to Covid can always put a damper on near-term optimism.
Third quarter corporate earnings for all U.S. businesses rose 21 percent from a year ago to a new all time high. In spite of the strong gain, operating earnings for S&P500 companies rose 51 percent for the same period. Large cap company profits continue to outperform those of small and mid-cap companies.
Monetary policy remains expansive, which means demand should remain strong at least through the first half of next year. However, with stocks 34 percent above fundamental value, it’s best to be cautious.
Outlook
Economic Fundamentals: neutral
Stock Valuation: S&P500 overvalued by 34 percent
Monetary Policy: expansive