Israel’s attack on Iran adds another unknown to a market already facing downward pressure from rising interest rates.
By Robert Genetski
The Week That Was
Highly volatile retail sales data increased at a strong 9 percent annual rate in March. Even so, the total was up at only a 3 percent rate for the past three months and only a 1 percent rate for the past months. Sales are much weaker than the latest monthly surge suggests.
The March Homebuilders Index remained stable at 51, indicating the subdued recovery in new housing continued. Demand for new homes has been strong enough to slightly overcome the cost of higher interest rates.
Housing starts and permits were down sharply in March. Monthly data at this time of year are unreliable. A much better guide to housing is the Homebuilders’ survey. It tells us that new housing activity is currently stable and not declining sharply. The same is true for housing starts and permits, which have been essentially unchanged this past year.
As for first quarter S&P500 profits, with 12 percent of the company’s reporting, S&P shows operating profits down 1 percent and reported profits down 4 percent from the fourth quarter. On a year-over-year basis, operating profits would be up 1 percent and reported profits down 5 percent, well below most current estimates.
Things to Come
We were surprised when the March Homebuilders Index came in at 51 (slightly above break-even). Driving the index higher was builder confidence that mortgage rates would be coming down and attracting new buyers.
We believe the recent surge in interest rates might send the April Index below 50. There is no other significant economic news scheduled for this week.
Market Forces
Stocks moved sharply lower last week, with losses ranging from 2 percent (Dow) to 5 percent (Nasdaq). The S&P500 was down 3½ percent.
Israel’s attack on Iran adds another unknown to the recent down trend.
Two weeks ago, the S&P500 broke key technical support for the first time in six months. This past week it broke its 50-day moving average. A third and final support is the 200-day average.
The latest declines have been broad-based, with the Dow showing the weakest technical signal. Nasdaq 100 and small cap ETFs were also weak, with 10-day and 21-day averages either at or below the 50-day averages (which is another bad sign).
The main reason for this week’s stock decline was Federal Reserve Chairman Jerome Powell’s embarrassing redirection. Only a month after the Fed signaled an expectation of three interest rate cuts this year, near-term cuts are now off the table for the foreseeable future. This puts more downward pressure on markets.
Apart from a weakening in technical indicators, the recent 5 percent decline in the S&P500 would appear to be a healthy correction in an overly hyper market. Nonetheless, we remain cautious about a potential for further increases in interest rates and some further weakness in stock prices.
The Treasury’s need to borrow $9 trillion this year at higher interest rates will continue to blow holes in this year’s federal budget deficit. Two months ago, the Congressional Budget Office predicted a yearly deficit of $1.4 trillion. The deficit was $1 trillion in the first half of this fiscal year. As long as debt and interest expense continue to soar, financial markets
remain vulnerable.
Outlook
Economic Fundamentals: tilting negative
Stock Valuation: S&P 500 overvalued by 25 percent
Monetary Policy: restrictive
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