Happy New Year!
The Week That Was
Most economic data show business activity continued close to the rates in the third quarter GDP report. Hence, the year ended with spending increases of 8 percent to 9 percent, real growth of 2 percent to 3 percent and inflation of 5 percent-6 percent, all annualized rates.
Inflation continues to roll through the economy, with major items like homes and smaller items like groceries soaring far higher than the reported official rate of 6 percent.
The latest unemployment numbers show the labor market remains very tight. December initial weekly unemployment claims averaged 200,000, down from 235,000 in November. The number receiving unemployment payments also is trending lower with 1.8 million receiving benefits in December, down from 2.1 million in November.
Things to Come
December ISM business surveys for manufacturing and service companies are due Tuesday and Thursday, respectively. Both reports should be good news. The December Markit survey was about even with November, but saw a sharp increase in new orders. Soaring new orders means we should expect positive economic news at the start of the new year.
The Minutes from the Fed’s December meeting are due on Wednesday are unlikely to reveal anything new.
December’s employment report next Friday is likely to show private payroll job gains in the vicinity of 200,000 plus. In other words, more good news.
Market Forces
Stocks moved higher over the past two weeks as the major indexes closed yesterday near their all-time highs.
Economic news remains mostly positive. Although Covid cases are spiking, trends continue to reinforce the expectation of lower death rates from the Omicron variant. President Biden also helped by admitting there was no federal solution to defeating Covid.
Technical indicators remain positive for all the major stock indexes. The direction of the market in the week ahead will continue to show the extent to which investors are concerned over disruptions due to Covid.
At 4779, the S&P500 is 38 percent above its fundamental value. Stocks have become progressively more overvalued as memories of major downturns fade further into the past.
Outlook
Economic Fundamentals: neutral
Stock Valuation: S&P500 overvalued by 38 percent
Monetary Policy: expansive