HomeBudget & Tax NewsU.S. Stock Prices Continue to Defy Monetary Restraint, Declining Profits

U.S. Stock Prices Continue to Defy Monetary Restraint, Declining Profits

Later this year and into 2024 the delayed economic weakening effect of last year’s surge in federal spending will combine with the delayed impact of monetary restraint to send the economy down. Stocks continue to defy monetary restraint and declining profits. Expect a reckoning once the economy finally responds to the Fed’s restraint.

The Week That Was

The second-quarter GDP and core inflation numbers for June show annualized real growth of 2 percent and core inflation of 2 percent. Hence, monthly data indicate the Fed has hit its inflation target. For the past year, core inflation is 3.8 percent, and for the past
three months the rate is 3.4 percent.

Although it is too soon for the Federal Reserve (Fed) to declare victory in terms of reducing inflation, all the trends are heading in the right direction.

The combination of a sugar high from the increase in federal spending along with lower inflation is all good news, for the moment. The 10 percent surge in federal spending can provide a temporary boost to the economy. However, it comes at the expense of a draining  of funds from the private, productive sector in the following 12 months.

Hence, later this year and into 2024 the delayed weakness from the surge in federal spending will combine with the delayed impact of monetary restraint to send the economy down. The extent of the decline will depend on how quickly the Fed shifts to a more accommodative monetary policy.

Things to Come

The July business surveys arriving tomorrow and Thursday are expected to be unchanged from June.

Manufacturing is expected remain slightly negative, and service businesses are expected to show moderate expansion. We continue to look for additional signs the economy is weakening from the delayed impact of monetary restraint, which should begin to appear shortly.

Friday’s job report for July is widely expected to show a mild slowdown in new payroll jobs from 209,000 to 190,000. The more important private payrolls number increased by 149,000 in June. We expect the July gain to be even less as the economy continues to adjust to the Fed’s restraint.

Money, Money, Money

Expect money to be a more reliable economic indicator than stock prices. This means preparing for a further weakening in the economy with a decline in output and profits
late this year and into 2024.

If this plays out as we expect, short-term interest rates are currently topping out and will be heading down by year-end.

Market Forces

Stocks continued higher last week, undeterred by the Fed’s move for additional
monetary restraint.

The good news for stocks came from reports showing a slowdown in current dollar spending, faster real growth, and certain inflation rates closing in on the Fed’s 2 percent target. Those indicators suggest the Fed will stop trying to slow the economy by raising interest rates further.

The most recent quarterly and monthly data show the economy has responded as expected to the Fed’s monetary restraint. Spending has slowed, inflation is slowing, and profits are declining. These are all normal.

What is not normal is the ongoing increase in stock prices. Stock prices often look ahead and anticipate the next move in the economy. The market anticipates more good news.

Monetary policy affects the economy with a time lag. That indicates there will be a further weakening in the latter half of this year.

Either the stock market sentiments are wrong about the future, or the money supply is wrong. So far, the economic slowdown and inflation are consistent with prior periods of monetary restraint.


Economic Fundamentals: negative

Stock Valuation: S&P 500 overvalued by 17 percent

Monetary Policy: restrictive

For more Budget & Tax News.

For more from The Heartland Institute.

Robert Genetski
Robert Genetski
Robert Genetski, Ph.D., one of the nation’s leading economists and financial advisors, has spent more than 35 years promoting the use of classical economic and investment principles for sound financial decisions. He heads ClassicalPrinciples.


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