Russia’s invasion of Ukraine dominated the news and rattled markets (see Market Forces below), which continued to decline.
The Week That Was
Today’s report on January spending and wages shows both increasing at 12% annual rates. Inflation rates remain in the vicinity of 7%.
The Markit Survey of business activity in early February provides early feedback from businesses. The results show a sharp increase in activity with the composite index increasing to 56, up from 51 in January.
Businesses reported strong demand, particularly for new orders, there were fewer disruptions due to Omicron, and prices increases continued at record levels. The results are consistent with expectations of real growth at a 3% to 4% rate in the first quarter and no letup in inflation.
Things to Come
Next week’s leading economic reports include the ISM business surveys (on Tuesday and Thursday) and Friday’s employment report.
January ISM business surveys were close to readings of 60. February’s ISM surveys are likely to be slightly stronger, based on the abovementioned sharp increase in the alternative Markit business survey.
The February job report should also be strong, with an addition of 400,000 to 500,000 private payroll jobs. This estimate is based on the Markit report showing an improvement in business’ hirings in February over January.
Market Forces
Russia’s invasion of the Ukraine has rattled markets. The downward negative trend continued with stocks falling 2% to 3% this past week.
Those of us who hoped for a diplomatic resolution with the Ukraine were disappointed. No one wins when countries go to war. While the Ukrainian people will suffer the most, Russia will share in the economic pain, as they are cut off from potential trade benefits with the West.
As for the U.S., the immediate economic effects will not be significant. Demand remains strong, our businesses are doing well. This will continue.
My technical guru, Joe Barto has viewed 4200 for the S&P as a key area of support. After plunging yesterday to 4120 at the open, the index climbed back to close at 4289. The sharp reversal at a key support area could mark a major turning point, if the index can remain above this area.
Although the S&P500 index is down 11% from its peak, the index remains 23% above its fundamental value. Technical indicators for all major stock indexes remain very negative. Even with a positive reversal, it’s risky to move back into the market based on one positive day. I recommend holding the stocks you still have, but also hold the cash you raised.
The yield on the 10-year Treasury Note remained unchanged. With the Fed’s meeting less than a month away, Powell has indicated the Fed will not change its plans, even with the Russian invasion. Financial markets place the odds of a ¼ point increase in the fed funds rate at 87%.
Outlook
Economic Fundamentals: mixed
Stock Valuation: S&P 500 overvalued by 23 percent
Monetary Policy: highly expansive
