Genetski: Stocks surged on news of low price inflation in October, but that is unlikely to last.
The Week That Was
The upward surge in stocks continues. This past week the major indexes were up 3 percent to 5 percent. For the past two weeks stocks rose 7 percent to 11 percent. Technical indicators are now mostly positive. This often indicates the upward momentum is likely to continue.
The main impetus for the market’s rebound came from last week’s inflation report. It showed little to no inflation in October. However, we believe inflation is in the 3 percent to 4 percent vicinity. However, investors apparently believe the Fed’s policy is working and there are blue skies ahead.
Financial markets agree. The 10-year T-Note rate is down to 4.4 percent and the 2-year rate is down to 4.8 percent. The 30-day fed funds futures market currently points to four upcoming interest rate cuts. The first in March 2024 and the last in December, with a year-end fed funds range of 4¼ percent to 4½ percent.
We believe financial markets have overreacted to one month’s inflation report. Only two weeks ago stocks were moving sharply lower amid reports the economy was soaring with more inflation ahead.
Markets can react to economic news in irrational ways. The economy is often more reliable. The downward pressure on the economy from monetary restraint has occurred. For housing the downturn has been severe. Real wages are down 4½ percent over the past three years.
Economic reports continue to suggest the economy is growing at a 2 percent to 5 percent pace. However, we continue to believe the main areas of growth (and future problems) are those areas favored by federal policies. Such policies tend to weaken, not strengthen the economy and incomes.
Things to Come
There is little in the way of significant economic news due this Thanksgiving week. The next important news releases will be the revised estimated for third quarter GDP. The report will provide new information on corporate profits and GDI (Gross Domestic Income). The income measure has signaled a weaker economy than the GDP measure. The upcoming income measure can help determine if the economy remains as weak as prior numbers had indicated.
On Thursday, November 30th, October data for consumer spending and incomes will show the strength in the economy going into the fourth quarter. Previous monthly data show consumer spending booming, but incomes sluggish to down. October data may help resolve this conflict.
On Friday, December 1, business surveys for November will provide insight on how the manufacturing economy performed in November.
I will be spending Thanksgiving with family and do not have a scheduled report until December 1st.
Market Forces
October CPI data show the total index was unchanged and core inflation was up only 0.2 percent (a 2¾ percent annual rate). More important, the three and six-month rates of core inflation are at 3.3 percent.
This unwinding of core inflation is also apparent in inflation at the wholesale level. The three- and six-month rates of core producer prices are up 1½ percent and 2½ percent, respectively.
The good news on inflation will only continue if the increases in consumer spending are slower than the 6 percent to 8 percent annual rates of the past three and six months.
October retail sales data also show strong increases at a 6 percent rate for the past three and six- month periods. However, retail sales data show a weird pattern—up at a 6 percent rate in the past six month, but down at a 1 percent rate in the prior six months. Year over year sales are up only 2½ percent.
The yearly growth of 2½ percent in retail sales is more consistent with a slowdown in the economy than with the 6 percent to 8 percent increases in consumer spending. We are convinced many economic reports continue to overestimate the strength of the economy.
November’s Homebuilders’ survey fell to 34 (50 is breakeven), Builders were depressed amid mortgage rates of 7 percent plus. If the recent decline in longer-term rates continues, next month’s report is likely to be a bit less negative, but still negative.
Outlook
Economic Fundamentals: negative
Stock Valuation: S&P 500 overvalued by 18 percent
Monetary Policy: restrictive
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