Inflation continues to outstrip wage gains, but sales are up, and the economic fundamentals remain mixed.
The Week That Was
Today’s December retail sales report shows December sales fell 1.9% from November. These data are highly erratic. Even with the decline in December, fourth quarter sales are up at a 9% annual rate from the third quarter.
This week’s December consumer price report made headlines. It registered 7.1%, the highest yearly change since 1982. December’s annual rate was 6% for all items and almost 7% for all items other than food and energy. December producer prices for finished goods fell ½%, providing some relief from recent trends.
Initial weekly unemployment claims averaged slightly over 218,000 for the first two weeks of the year, up slightly from 202,000 in December. The number receiving unemployment payments continued to decline in December, to 1.7 million, down from 2.1 million in November.
Things to Come
There isn’t much in the way of important economic news scheduled for this coming week.
Later today, the Federal Reserve will report its December index on manufacturing output. The Fed’s index has been rising rapidly (at a 5% to 6% annual rate) for the past six months. The upcoming report should show manufacturing continuing to advance rapidly.
With respect to housing, the most important news will be Tuesday’s Homebuilder’s report. The reading from early January is expected to show builders remain highly confident for another strong year, in spite of the recent uptick in interest rates. Builder confidence should register a reading in the vicinity of 80, close to December’s 84 level.
Market Forces
Stocks were mostly lower this past week. The Nasdaq and small caps fell 2%, while the S&P500 and Dow were down ½%. The Nasdaq and small cap stocks are more than 6% below their all-time highs, while the S&P500 and Dow are only off by 2% and 3%, respectively.
Technical indicators have weakened considerably, with most stock indexes failing to hold support levels. The Nasdaq and small cap ETFs experienced the cross of “death” (10-day averages below the 50-day averages). The S&P500, which has been far more stable, also saw its 10-day move slightly below its 50-day. The Dow is the only index left with a positive technical position.
The economic news continues to show strong demand and strong inflation. With inflation outstripping wage gains, the economic fundamentals remain mixed.
Interest rates were down slightly this week as markets moved to digest the recent upward surge. While the short-term outlook for interest rates points to some stability, the upward trend is likely to continue throughout much of the coming year. Continue to avoid longer-term fixed-income securities.
The immediate outlook for stocks is more cautious. As the S&P500 chart shows, the market often reverses higher after breaking through its 50-day average. With the Fed continuing to pour new money into the economy, the market can easily reverse higher once again. However, with the S&P500 35% above its fundamental value, investor psychology can just as easily overpower money and send stocks lower. The cautionary yellow color below reflects the potential for uncertainty regarding the next move.
Outlook
Economic Fundamentals: mixed
Stock Valuation: S&P 500 overvalued by 35 percent
Monetary Policy: expansive
