It was another tough week for world peace and for financial markets. The S&P500 is approaching a major technical level of support at its 200-day moving average, which is a danger sign. Small- and mid-cap stocks are well below that support level.
The Week That Was
September retail sales registered a booming 8 percent to 9 percent annual rate increase for the month and for the three months ending in September.
On the surface, the sharp increase in sales suggests the economy is soaring. However, even with the recent surge, retail sales are up only 3½ percent for the year. The recent increase appears to be an offset to an unusual lull, rather than a new trend.
Other economic data were not encouraging. The October Homebuilders’ Survey fell deeper into negative territory with a reading of 40, ending tentative signs of recovery in housing activity.
With September housing starts and permits down 20 percent from the spring of 2022 and existing home sales down 35 percent, housing activity is as weak as ever.
Things to Come
This week’s news will include Thursday’s advance estimate of third quarter GDP. Most measures show spending probably increased at a 6 percent annual rate, real growth at a 4 percent rate, and inflation at a 2 percent rate.
More significant will be Friday’s report on September consumer spending, incomes, and
inflation. It will provide some indication of weakness as the economy enters the fourth
quarter. In spite of the reported surge in September retail sales, we expect this report to show slower signs of activity.
Money, Money, Money
The Fed is under pressure to reaffirm its commitment to slow inflation by slowing the economy. Not only has the economic news pointed to stronger than expected spending and higher inflation, but financial markets have increased their estimate of long-term inflation from 2¼ percent to 2¾ percent.
Fed members have all but committed to refrain from raising interest rates at the November 1 meeting. Expect them to reaffirm a willingness to raise rates at future meetings. Also, expect them to continue selling securities. These sales will tighten monetary policy further.
Market Forces
Stocks moved lower last week, with all the major indexes down 1 percent to 3 percent. As we approach third-quarter GDP estimates, due this Thursday, we can anticipate they will show a 4 percent rate of real growth.
This GDP rate of growth occurred between the second and third quarters, roughly May through August. Friday’s upcoming report on September spending, income, and inflation will reveal the conditions leading the fourth quarter. Expect signs of weakness.
We continue to see the economy succumbing to the effects of monetary restraint. Sensitive indicators (stock prices and housing), already are showing renewed weakness. They are reliable indicators of more trouble ahead.
This week’s yield on 10-year T-Notes hit our estimate of the fundamental value of 5.0 percent. Our fundamental estimate does not allow for the massive refinancing of the federal debt, which has the potential to send rates higher still.
Given the uncertainty over the future course of interest rates, we expect further downward pressure on stock prices.
Outlook
Economic Fundamentals: negative
Stock Valuation: S&P 500 overvalued by 13 percent
Monetary Policy: restrictive
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