U.S. markets are in turmoil as the Fed’s monetary stimulus continues.
Financial markets continue to respond erratically to a variety of developments, including uncertainty over Federal Reserve policy and the fallout from the war in Ukraine. Recent monetary data show another injection of money in May, despite the Fed’s comments about doing everything it can to contain spending.
The Week That Was
This week’s economic numbers were mixed. April reports for retail sales and manufacturing output showed activity remained strong. April sales and manufacturing output were up at annual rates of 11 percent and 8½ percent, respectively.
May data from Homebuilders was a disappointment. The survey fell to 69 from 77. Builders report buyers are being discouraged by a combination of sharply higher mortgage interest rates and higher housing prices.
Housing activity is one of the earliest and most reliable indicators for the economy. While still moderately strong at 69, a sharp decline in builder confidence raises the odds of weakness in the economy later this year.
Initial weekly unemployment claims continue to drift slightly higher. Claims were 208,000 for the first two weeks of May, up from 188,000 in April and 175,000 in March. Although the upward move is still modest, it could signal developing problems.
Things to Come
The coming week is an important one for economic previews.
The most insightful report could be Tuesday’s advanced May Markit business survey. Business surveys for April show both the United States and much of the world expanding, with readings in the mid-50s (50 is no growth). China and Russia are exceptions, with readings in the 40s, reflecting declining activity.
Most expectations are for the May surveys to remain in the mid-50s. If so, it would indicate that the problems in China and Russia have not yet spilled over into the United States and the rest of the world.
While no one knows for sure, we expect it’s more likely the survey numbers will be in the lower 50s. If so, the economy is moving closer to zero growth than our forecast would suggest.
On Wednesday, April new orders for durable goods also can provide insights. Although orders were down slightly in February, they rebounded to new all-time highs in March. If new orders remain close to these records, it bodes well for the economy.
Also on Wednesday, the Fed releases the minutes from its meeting earlier this month. Fed members continue to say the Fed will do whatever is necessary to contain inflation. The minutes are unlikely to change that perception. Given the burst in money so far in May, the Fed has yet to do anything but fall further behind in restraining spending.
On Friday, the April data for spending and incomes will provide the most comprehensive view of how the economy performed going into the second quarter. So far, preliminary data through April indicate the economy performed well, with real growth close to a 3 percent annual rate.
To Market, to Market
The bloodletting on Wall Street eased a bit this past week. After soaring back from key support levels, stocks reversed direction, ending close to where they were a week ago.
Interest rates moved modestly lower in response to the recent downward reversal in stocks. Investors, opting for safety, shifted from stocks into fixed-income securities—a dangerous move.
Economic news was mixed. Although April sales and manufacturing were strong, the S&P500 reported first quarter earnings down almost 20 percent from the fourth quarter.
The stock market’s technical signals remain as negative as ever. My technical guru, Joe Barto, wrote about major support for the S&P500 at about 3,800. The index has tested this level several times and rebounded back. Barto says this area is key support. A break below would probably indicate a further the downward move in stock prices.
Despite the S&P500 index declining by almost 20 percent from its highs, our model shows the index remains 19 percent above its fundamental value. Stocks look cheap relative to their highs, but they are still expensive relative to their fundamental value.
Next week’s economic news should provide some insight into real growth. Government policies have reduced productivity and growth. This makes the economy more vulnerable to disruptions from the Ukraine war.
Preliminary data from May show banks reducing their deposits with the Fed by almost $500 billion. Monetary policy remains expansive.
Outlook
Economic Fundamentals: weakening
Stock Valuation: S&P 500 overvalued by 19 percent
Monetary Policy: expansive
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