Stocks suffered their worst weekly losses this year. Although futures markets point to rebound, the correction in the market may still have a way to go.
The Week That Was
Today’s report on August shows spending up at a 10 percent annual rate and wages up at a 6 percent rate.
Inflation increased at a 5 percent rate.
August Consumer spending was 8 percent above its pre-Covid peak, and
wages were 6 percent above that peak.
After removing the effects of inflation, spending is up 3 percent and wages are up only 1 percent from their pre-Covid peaks.
Earlier in the week, a report on August new orders for durable goods set new record highs. The same was true for housing prices, which are up 20 percent over
the past year.
Weekly initial unemployment claims rose slightly in the last week of September.
The monthly average is close August’s 350,000. The number receiving unemployment payments is 2.8 million, down slightly from August.
Things to Come
There are some key economic reports due this coming week.
The first will be September’s ISM survey of manufacturing companies due today. An earlier Markit report on manufacturing showed a reading of 60 (strong) for output, but 55 (not so strong) for overall conditions.
Based on the Markit survey, the ISM manufacturing report is likely to be in the high 50s or low 60s. Either one is down from 67 in August.
Tuesday’s ISM survey for service companies is also likely to be down.
The advanced Markit survey registered a 54 for service companies. This is the lowest reading in 14 months. It indicates the ISM survey for September activity will be in the mid- to upper 50s, down from 63 in recent months.
Friday’s September employment report is also likely to show only moderate gains of about 200,000 in private employment.
This would be down slightly from August and down sharply from the 800,000 monthly gains in June and July.
The estimate of more modest gains reflects widespread reports from businesses of a lack of qualified workers.
Market Forces
Stocks experienced their biggest weekly loss of the year.
All the major indexes were down 2 percent to 4 percent, bringing them to 5 percent to 6 percent off their all-time highs.
Stocks had been overdue for at least a modest correction. That’s done.
Looking at upcoming developments, however, indicates the correction may not be over.
Inflation is the main reason for the sell-off. It has become so apparent even the Fed is aware of it. Fed Chairman Jerome Powell now admits inflation will not be as transitory as the Fed expected.
This realization woke up somnolent bondholders, who sold bonds. Falling bond prices sent the yield on 10-year T-Notes to 1.5 percent, up 20 basis points from two weeks ago.
This upward move led the 10-day average of rates above the 50-day average for the first time since May. Such a move is often a precursor to of higher
interest rates.
As for stocks, a similar negative technical situation exists. The 10-day averages have fallen below the 50-day averages for all major indexes. This has
often been precursor of lower stock prices.
Contributing to these trends is an emerging shortage of fossil fuels in China and Europe.
China’s efforts to cut its use of fossil fuels have led to cutbacks in factory production and even to some people freezing in their homes.
The global shortage of fossil fuels is a manmade crisis created by the green movement. It will continue to drive up energy prices, adding to U.S. inflation.
While stocks can quickly reverse direction and soar, upcoming news could be a problem.
The ISM business surveys are likely to show slower growth amid shortages in labor and materials. Next Friday’s employment report may also disappoint. If so, stocks could be in for yet another difficult week.
Traders are likely to be selling into this market, while long-term investors should stay the course or trim weak performers.
Outlook
Economic Fundamentals: neutral
Stock Valuation: S&P500 overvalued by 23 percent
Monetary Policy: expansive
