Stocks continue to suffer amid signs of renewed strength in the economy. Renewed strength raises the odds of an extended period of monetary restraint and greater problems in 2024.
The Week That Was
Last week’s economic news was mixed.
July retail sales soared at an 8 percent annual rate. Last week’s report warned of a potential surge due to prior months being unusually weak. Even with the latest surge, retail sales are up at only a 1 percent annual rate over the past six months.
In contrast to the spike in retail sales, the August Homebuilders’ survey fell from 56 to 50
(break-even). This is probably the first sign the tentative pickup in new home activity since last fall will not continue.
July housing starts and permits were up slightly for the month. However, they remain 20 percent below the levels in the spring of 2022.
Weekly unemployment data continue to show little evidence of an easing in labor market conditions. Initial unemployment claims are mostly unchanged.
Things to Come
Most of the upcoming data deal with July housing activity. With mortgage rates reaching a point where homebuilders are less optimistic, we can anticipate housing activity will encounter further problems.
Wednesday’s S&P survey of early August business activity is likely to continue to show the service sector growing at a modest pace while manufacturing continues to decline.
Thursday’s report on July new orders for durable goods should help provide an indication as to whether the June increases were an anomaly.
Money, Money, Money
Federal Reserve board minutes released last week show Fed members are counting on a slowdown in spending to contain inflation. Without such, they are inclined to raise interest rates at next month’s meeting.
The prospects of another upward move in short-term interest rates lifted the yield on 10-year T-Notes to 4.2 percent.
Stocks moved lower for the third consecutive week.
The S&P500 is down 5 percent from its recent peak at the end of July. Although the decline still is relatively modest, near-term technical indicators have turned negative, with all major indexes below their 50-day moving averages. If the 10-day average crosses below the 50-day average, medium-term technical indicators also will turn negative.
The recent market weakness is associated with apparent good growth in the surrounding economy. The Atlanta Fed’s latest estimate of real growth is 5.8 percent. If correct, it means spending is accelerating instead of slowing—the exact opposite of what the Fed is expecting.
The Biden administration is taking credit for the latest signs of economic strength. The combination of a 10 percent increase in federal spending and hundreds of billions of dollars in incentives to promote green energy continues to provides a false and temporary lift to the economy.
As with the surge in the money supply, the stimulus is temporary. It comes at the expense of a lack of spending in more productive areas, which will hit the economy this coming year along with the delayed impact from monetary restraint.
The signs of strength are bad news because the Fed is likely to increase interest rates next month. With longer-term rates moving above 4 percent, stocks remain vulnerable.
Economic Fundamentals: negative
Stock Valuation: S&P 500 overvalued by 12 percent
Monetary Policy: restrictive
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