The bull market in stocks and soaring payroll job gains reported last week suggest further strong gains in the economy are on the way.
The Week That Was
Friday’s employment report provided another example of major conflicting economic news. Socalled establishment jobs data for December and January show payroll employment soaring by 300,000 a month. However, an alternative so-called household survey for jobs shows a decline over the past two months and no jobs added over the past year.
Both establishment and household data are from the Bureau of Labor Statistics. They use different samples to measure the labor market. Unfortunately, the end result is more confusion than insight regarding new jobs.
At last week’s Federal Reserve board meeting, Chairman Jerome Powell said
anecdotal evidence suggests business activity is picking up. Both the S&P and ISM January
manufacturing surveys show manufacturing close to break-even, with new orders and inflation rising.
Powell also said the Fed was not convinced it has achieved its inflation objective. This led to a decision to continue selling securities at a rate of $95 billion a month, which decreases the money supply. Powell mentioned Fed members discussed slowing the pace of sales but
deferred a decision to the March meeting to allow for further deliberations.
The Fed has sold $1.4 trillion of securities since April, 2022. The resulting reduction in the money supply has contributed to the substantial increase in interest rates, produced inverted yield curves, and led to a 30 percent decline in housing sales since 2021.
By the Fed’s March meeting, the nation’s money supply will be back to where it was in late
2020.
Monetary restraint also has led to a slowdown in spending and incomes and inflation.
Although a year-over-year 11 percent increase in federal spending in the fourth quarter may have temporarily lifted the economy, it comes at a price. Venture capital, the key to future growth, has suffered greatly. In 2023, North America startup funding was down 37 percent from 2023.
This key to future growth has dried up significantly, as might be expected when government is eating the seed corn.
Things to Come
There is little in the way of significant economic news scheduled for this week. The only items of significance will be January business surveys for the service sector.
S&P already released an advance service sector survey that showed a pickup in activity in January with the continued slowing of inflation. We expect a similar reading from upcoming reports by S&P and the ISM.
Market Forces
The major stock indexes continued moving at or near all-time highs. With 46 percent of S&P500 companies reporting, fourth quarter report profits are coming in at $45.92 a share. This is down 4 percent from the previous quarter, yet still 5 percent above the longer-term trend.
Fourth quarter GDP reportedly grew at a 4.8 percent annual rate measured from the spending side. On the income side, however, growth was slower.
Personal income (83 percent of all income) grew at a 4 percent annual rate. Corporate profits (11 percent of all income) may show little or no growth. If so, the income measure of GDP will continue to point to a weaker economy than the spending measure.
Nothing appears definitive. The latest economic numbers place first-quarter real growth in the 4 percent vicinity. If true, the spending measure will still have to slow before the Fed will ease the ongoing tightening of the money supply.
Conflicting data over what is happening in the economy makes decision-making difficult for the Fed and for everyone else.
We remain convinced that the decline in the money supply is a key force restraining the economy. Not only is the money supply down, but the precursors to an economic downturn are all in place. Despite recent signs of apparent strength, we look for increasing monetary policy headwinds to impact the economy and stocks.
Interest rates continue to respond to the latest news. The Fed’s announcement of further sales of securities and the postponement of rate cuts in March sent interest rates down 30 basis points last week. Friday’s strong jobs report sent them back up to 4.0 percent.
Look for the yield on the 10-year T-Note to wobble above and below its fundamental rate of 4 percent.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P 500 overvalued by 23 percent
Monetary Policy: restrictive
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