Genetski: It’s Looking Like a Bear Market for Stocks

Stocks are down, despite a flood of new money.

The Week That Was

January retail sales rose by 3½% from December, putting retail sales up at a 14% annual rate from the fourth quarter. With sales up 13% from a year ago, demand remains strong.

The Fed’s measure of manufacturing production registered close to a 4% annualized gain in
January. Despite reports of ongoing supply-side issues, manufacturing output appears to be doing well.

Housing activity also remains strong. The February Homebuilders’ index was 82. Any reading close to 80 indicates a strong market for new homes.

Initial weekly unemployment claims in February remain close to January’s 250,000. February’s numbers are up from December’s low of 200,000. An alternative measure of unemployment shows those receiving unemployment benefits leveled off at 1.6 million, where it has been since mid-January.

Things to Come

Next week’s only significant economic news will be next Friday’s reports on January data for income and spending and durable goods.

The income and spending data will provide the most comprehensive picture of economic growth going into the first quarter. I expect the data will confirm that current dollar spending continued to increase at double-digit annual rates, with real growth at 3%-4% and inflation near 6% to 7%.

New orders for durable goods have been strong through December. While monthly data can be erratic, with continued strong demand in the economy, new orders also should remain strong.

Market Forces

Stocks moved erratically lower this week. The leading indexes fell anywhere from 1% to 3%. Most observes pointed to the uncertainty over a possible Russian military move into the Ukraine as the most likely cause of the decline.

While geopolitical events can spin out of control, the odds are this one will be resolved peacefully. Even with a potential resolution, the outlook for stocks remains highly uncertain.

In addition to stocks being overvalued, technical indicators, which had been weak for some time, have taken yet another bad turn. The S&P500 and Dow, which were the least negative of the stock indexes, joined the other key indexes. Yesterday’s declines brought all major indexes below key support at their 200-day moving averages. Hence, all indexes are now in a bear market.

The latest decline in stock prices has brought modest relief to interest rates. Financial markets have reduced the odds of ½% point increase at the Fed’s March meeting from 93% to 33%. By yearend, the odds now favor a fed funds rate of 1½% to 1¾%, instead of slightly higher.

As part of its taper, the Fed purchased $109 billion in securities in January. However, banks reduced their deposits with the Fed by over $300 billion in January. Thus, the raw ingredients of the money supply increased by over $400 billion. Money remains highly expansive.

While a flood of new money should be pulling stocks higher, overvaluations and negative
technical indicators are pulling stocks down.

Expect these contrary pressures to continue to move at cross purposes, making the future
direction of stocks highly uncertain.

Outlook

Economic Fundamentals: mixed

Stock Valuation: S&P 500 overvalued by 29 percent

Monetary Policy: highly expansive