Tough talk from the Fed about fighting inflation helped produce another down week for stocks. Meanwhile, surveys continue to show businesses adjusting and growing in spite of numerous challenges.
The Week That Was
Business surveys for March continue to show the economy growing.
The ISM surveys for both manufacturing and service companies show businesses performing well. On balance, new orders point to continued growth in the months ahead.
Weekly unemployment numbers show March initial unemployment claims at 166,000. Revised data show claims continue to trend lower. The same is true for number of people receiving unemployment insurance, which also hit a new low of 1.5 million.
Money, Money, Money
At its March meeting, the Fed reaffirmed its intent to sell securities after its May meeting. Powell had already indicated sales would be greater than the $20 to $50 billion a month they sold during the 2017-2019 period.
The meeting minutes showed the Fed plans to place caps on monthly sales at $95 billion. However, the caps will be phased in over a period of three months. This means monthly sales of about $30 billion in June, $60 billion in July and $90 billion in August.
We can’t know how much the money supply will be affected by these moves. The Fed still seems unaware that what banks do with their $4 trillion in deposits at the Fed could have more of an impact than what the Fed does. Hence, the outlook for monetary policy remains highly uncertain.
Things to Come
On Tuesday the government will report the bad news on inflation. Consensus estimates are for the March CPI to be up 1 percent, bringing the yearly increase to more than 8 percent.
Core inflation (without food and oil), is estimated to be up ½ percent, bringing the yearly increase to 6½ percent.
The only good news on inflation is the recent decline in oil prices to below $100. The bad news on inflation is it’s likely to remain high in the months ahead as strong demand coupled with supply disruptions offers little hope of relief from rapidly rising prices.
On Thursday, the report on March retail sales could be disappointing. Auto sales fell 5 percent from February.
Another reason for potentially weak retail sales is the divergence between retail sales data and incomes. February retail sales were 25 percent above their pre-Covid peak of two years ago. Most measures of wages and incomes are less than 14 percent from their pre-Covid peak. With incomes running far less than sales, there is the potential for retail sales to weaken somewhat.
To Market, to Market
It was another week of losses for stocks. Most of the major indexes fell by 2 percent to 3 percent. The best of the bad performers was the Dow, with a loss of 0.6 percent. The S&P500 lost 1 percent.
The main negative news came the from the Fed’s minutes confirming plans to sell securities after its May meeting, as noted above.
Technical indicators remain very negative. My stock market guru, Joe Barto, believes the S&P500 has hit its high and is hoping for support somewhere in the area of 4,200. That is his most pessimistic analysis in a long time.
Business surveys from March continue pointing to an economy growing at an annualized rate of 3 percent.
Auto makers still haven’t gotten their act together. Sales were down 5 percent in March compared to
February, as noted above.
In spite of declining to 7 percent below its peak, the S&P500 remains 28 percent overvalued.
An overvalued market, negative technical indicators, and the prospects for higher interest rates produce elevated risks for investing in stocks, calling for caution.
Outlook
Economic Fundamentals: mixed
Stock Valuation: S&P 500 overvalued by 28 percent
Monetary Policy: highly expansive