Stock prices continue to claw their way back after steep losses. Erratic moves are likely to continue as a surplus of money pulls stocks higher and excessive valuations push them lower.
The Week That Was
The early March Markit survey of business conditions showed very strong demand continuing, with backlogs rising rapidly.
Although there was some concern over the impact of Russia’s invasion, the ongoing surge in demand and new orders increased expectations of further gains in business for the remainder of the year.
New orders for durable goods declined in February. The pullback came in both total new orders and in the more stable new orders extransportation and defense. At this point, the pullback appears to be a normal adjustment following months of rapid increases.
Things to Come
Significant economic reports scheduled this coming week include Wednesday’s fourth quarter GDP report on profits, Thursday’s report on consumer spending and incomes, and Friday’s jobs report.
GDP profits are important because they are for the entire economy. Comparing the gains in all profits to S&P500 company profits provides insight into profit gains by moderate and smaller cap businesses.
Consumer spending and incomes will provide a more accurate picture of real growth in the first quarter. The numbers help show whether real growth is closer to our estimate of a 3 percent quarterly rate or closer to the 1 percent rate anticipated by the Fed Reserve Bank of Atlanta.
Friday’s March employment report should be fairly strong. The Markit survey reported significant increases in hiring by both manufacturing and service companies. The recent decline in initial jobless claims confirms the likelihood of a strong jobs report.
Money, Money, Money
Fed Chair Jerome Powell continued his effort to convince us that the Fed is serious about fighting inflation. Powell also indicated it could take two to three years to contain inflation.
He’s correct about the lag to contain inflation. The best way to reduce inflation would be sharp increases in interest rates along with large sales of securities.
March data show a slight reduction in the raw ingredients for money as banks added $100 billion to their deposits at the Fed. Despite this move, the raw ingredients of money continue to grow at rapid, double-digit rates.
Market Forces
Stocks were mostly higher this past week as the Nasdaq rose by 4 percent and the S&P500 by 2½ percent. The rest of the indexes had little, if any, gains.
From a technical standpoint, all the major indexes managed to move above their 50-day average (a key level of resistance). However, only the S&P500 moved above its 200-day average (a major level of resistance).
A key March survey showed demand and new orders rising rapidly with no letup in inflation.
The war in Ukraine remains a key concern and is adding pressure to already high inflation. In spite of the war, the first business survey since the Ukraine invasion shows backlogs building at a rapid pace. Monetary policy through March still shows the money supply growing at double-digit rates. This should keep demand strong at least through the end of this year.
Interest rates received an additional upward kick when Chair Powell announced the Fed would raise its target rate by 50 basis points if necessary to contain inflation. It will be necessary.
The battle for direction of stocks continues. The flood of money entering the economy continues to provide buying power. Fourth quarter profits for S&P500 companies rose to 41 percent above their longer-term trend. Analysts expect another double-digit gain this year.
If the analysts are correct, stocks easily could become even-more overvalued. However, the challenges to continuing double-digit profit
growth will become progressively greater. With the S&P500 29 percent above its underlying value, investors should remain cautious.
Outlook
Economic Fundamentals: mixed
Stock Valuation: S&P 500 overvalued by 29 percent
Monetary Policy: highly expansive