Genetski: Economic Fundamentals Move from ‘Neutral’ to ‘Mixed’

Today’s report on December spending and incomes was mixed. Consumer spending fell 0.5 percent in December while wages and salaries increased at a 9 percent annual rate. The December data indicate the economy slowed a bit from autumn’s explosive growth

The Week That Was

The Fed meeting held no surprises. The Fed did just what they signaled they would do. The problem is the Fed is far behind the curve, they intend to continue to buy securities and put more funds into the economy until mid-March.

Fourth quarter GDP data were far higher than indicated by monthly data. Current dollar spending (GDP) was up at a 14 percent annual rate. Half of the gain was real growth and half was inflation, The data indicates the economy doesn’t have a supply-side problem. It has a demand problem created by the Federal Reserve and too much money.

The January Markit flash business survey reported a significant slowdown in activity. Omicron, vaccine mandates, and ongoing supply shortages reduced the composite index from 57 to 51. This is the lowest reading in 18 months. Even so, businesses remain optimistic for the future due to signs of strong future demand.

The volatile December total for durable goods orders was down, but the more stable category (ex- transportation and defense orders) was up sharply.

During the past four weeks, initial weekly unemployment claims rose to the 250,000 area, up from 200,000 the previous two months. The increase is either due to firing workers for not being vaccinated or it’s an aberration. An alternative measure showing the number receiving unemployment benefits is leveling off at 1.7 million, similar to December’s level.

Things to Come

On Tuesday and Thursday, the January ISM business surveys will provide some indication on the extent of any supply-side problems due to Omicron and vaccine mandates.

The Markit surveys (noted above) tend to be weaker than the ISM survey. However, if the ISM surveys drop from 60 to close to 50 (neutral), it would point to a significant slowdown. Neither of these business surveys captured the type of surge in activity shown in the GDP report. If the GDP report is accurate, the strong autumn economic momentum has likely carried over into this year. If so, the ISM surveys should remain strong with readings only slightly below December’s 60.

On Friday, January employment data will likely show gains in private payrolls close to the 200,000 area, similar to December’s gains.

Market Forces

Stocks continue to move sharply lower. The Dow and S&P500 are down 7 percent and 10 percent, respectively from their peaks. The Nasdaq and small cap ETFs are 16 percent to 21 percent below their peaks. All major indexes are now below key support at their 200-day averages.

The only positive indicator is the Bulls to Bears ratio. This is a contrary indicator. Over the past two months, Bullish newsletter writers have decline to 35 percent from 57 percent, while Bearishness has increased to 26 percent from 21 percent. It will take only a 10-point swing for bears to outnumber bulls, thus providing a potential sign of an imminent turnaround.

In addition to the Fed’s stimulus, banks have been moving their deposits from the Fed back into the economy. The bottom line—the economy is flushed with cash. When the economy has this much money, it usually provides strong support for higher stock prices.

With the S&P500 still 25 percent above its fundamental value, there is no telling how much negative psychology will continue to drive prices lower. Nor are there any indication when the additional money stimulus will work its way back into the market.

Outlook

Economic Fundamentals: mixed

Stock Valuation: S&P 500 overvalued by 25 percent

Monetary Policy: very expansive