Stocks are Surging. What About the Economy?

Last update on: Oct 24 2019

The strongest responses to the election have been in U.S. stocks, the dollar and sentiment surveys.

Each has had positive responses, with the consumer confidence and sentiment surveys soaring. The business sentiment surveys also have been strongly positive since the election.

Historically, certain actions follow changes in sentiment. Rising retail sales follow surges in consumer sentiment. Increases in business confidence are followed by capital investment and hiring.

We haven’t seen those responses yet.

Retail sales are fine, but they remain in the same range they’ve been in since the economic recovery began in 2009. Also, the sales increase isn’t broad-based. About one third of the increase in retail sales went to autos and trucks. Another chunk went to gasoline, thanks to higher gas prices. Sales in other sectors have seen very modest increases, and there have been declines in electronics and sporting goods over 12 months.

Non-store retailers, such as Amazon.com, have done well, and that might explain some of the tepid retail sales data for some categories of retailers.

Another explanation is that when broken down by age group, consumers ages 55 and over had higher increases in confidence than other age groups. There hasn’t been much change in confidence for those 35 and under. There also are indications from some of the survey issuers that confidence increases are much higher among supporters of the new administration. Other groups have modest or no confidence increases.

Even if the confidence increases aren’t broad-based, however, the high confidence increases normally lead to higher economic activity by now. It could be that the confidence increases are being offset by the high debt levels that remain from the boom period, the rise in interest rates, higher gas prices and other obstacles to growth.

The next few months will be very interesting. It won’t take much of a change in consumer and business behavior for growth to increase above the tepid level that’s prevailed in this recovery. But will households and businesses take those steps?

The Data

There was a relatively small amount of data issued in the last week, and most of it was related to either manufacturing or housing.

The manufacturing news continues to be positive and indicates the manufacturing depression is behind us. The Richmond Fed Manufacturing Index reported its third consecutive month of strong increases, rising four points to 12. Most of the components of the index were strong, but expectations were particularly strong. Manufacturers in the region are very optimistic.

The Kansas City Fed Manufacturing Index also came in with a strong number and unchanged from last month. The Kansas City Fed Index was one of the weakest the last couple of years, because it is heavily-influenced by the state of energy operations in the Midwest. With the recovery of oil prices and more energy activity, the index is doing better.

The mid-month flash of the PMI Manufacturing Index rose 0.8 to 55.1. This is a strong reading and the highest since March 2015. The main weakness in the report was a flat reading for exports.

The nonmanufacturing sector of the economy might be improving. The PMI Service Index midmonth flash increased to 55.1, the strongest reading since November 2015.

The Index of Leading Economic Indicators also increased by 0.5%. That’s above expectations and well above the recent flat readings.

Existing home sales declined in December, but for all of 2016 they hit their highest level since 2006. Existing home sales are being held down partly by a lack of inventory of homes for sale in many areas. Inventory is the lowest since at least 1999, according to NAR. Sales might decline in the coming months because of the increase in mortgage interest rates.

But home prices did well. The House Price Index from FHFA rose 0.5% for the month and 6.1% for 12 months. This contrasts with the Case-Shiller House Price Index that has the 12 month increase at 5%.

New home sales took a sharp 10.4% drop. This number is volatile from month-to-month. The three-month average still is down by about 12,000 units. Over 12 months, sales are down 0.4%. Yet prices increased 4.3% for the month and 7.9% over 12 months.

New unemployment claims increased by 22,000. That’s a hefty number, but readings during holiday weeks often are volatile and unreliable.

The Markets

The post-election stock rally resumed this week. The S&P 500 rose 1.17% for the week ended with Wednesday’s close. The Dow Jones Industrial Average closed over 20,000 for the first time, rising 1.33%. The Russell 2000 gained 1.78%. Plus, the stock rally was global, with the All-Country World Index jumping 1.17%. Emerging market stocks rose 1.61%.

Bonds didn’t do as well. Long-term treasury bonds declined 2.13%. Investment-grade bonds lost 0.73%. Treasury Inflation-Protected Securities (TIPS) lost 0.29% but high-yield bonds rose 0.08%.

The U.S. dollar declined 0.89%. However, energy-based commodities rose 0.65%. Broad-based commodities dipped 0.02% and gold declined 1.63%.

Bob’s News & Updates

Some business owners have found that a good way to put employees and family members on the road to a solid retirement is to give them copies of my latest book, the revised edition of “The New Rules of Retirement.”

We’re getting near to the last call for the MoneyShow Orlando, February 8-11 at the Omni Orlando Resort at ChampionsGate. For free registration use my priority code, 042315, and mention it when you call 1-800-970-4355 to register.

Some Reading for You

Here’s a good review of existing home sales trends.

A number of wealthy people are preparing safe havens in case of civil unrest, according to this article.

Wilbur Ross outlines the new administration’s trade strategy in this article.

I comment and link to these and other items on my public blog.

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