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Classical Economic Principles - June 10, 2022

Robert Genetski Economics 10 June 2022

Market Outlook

After two consecutive weeks of sharp increases, stock prices moved erratically lower. Although the Dow rose by ½%, the Nasdaq fell 3% and the rest of the indexes fell 1% to 2%.

The economic news was not good. Oil prices rose to $122 from $117 a week ago. Interest rates are also higher, with the 10-year Treasury yield moving above 3%. Although weekly unemployment data are highly erratic, it didn’t help that initial unemployment claims continued to rise.

For some time, the market’s technical indicators have been very negative. The latest downturn lower took out keep support areas for all key indexes. Stock prices are down 11% to 26% from their all-time highs. Technical indicators point to likely further loses.

This remains a highly risky environment for stocks, particularly with the Fed intending to restrict the money supply.

If the Fed is successful in reducing the amount of money in the economy, it will drive interest rates higher and drive stock prices still lower.

The combination of an overvalued stock market, weak technical indicators and the Fed’s attempt to restrict money provide for a highly risky environment for stocks. With these elevated risks, I’m increasing the cash portion of my portfolio and suggest you do the same.

A Look Back

Today’s inflation report shows May consumer prices increased at an 11% annual rate from April; core inflation rose at a 6% rate. The yearly increases were 9% for all prices and 6% for prices ex-food and energy.

With energy prices soaring in June, and with business surveys showing little in the way of relief, the Fed will be under pressure to become even more aggressive in its efforts to adopt higher interest rates and sell securities.

The upward drift in initial weekly unemployment claims continued into the first week in June. For the week ending June 4, claims were 229,000. This is up from 200,000 in May, 188,000 in April and 175,000 in March. Although highly tentative, the upward drift in unemployment claims could be an early sign of businesses cutting workers due to concerns over the economic outlook.

A Look Ahead

Later today there will be one of many indexes measuring consumer sentiment. Ignore all of them. There is no doubt inflation, declining real incomes and a depressed stock market means sentiment is tumbling for any conscious person. We don’t need surveys to confirm this.

On Tuesday, the May producer price index will reflect the ongoing surge in inflation. Oil prices dominated the inflation news with a 7% increase to $109 from the previous month. Prices have since continued to surge to $120. Business surveys continue to report sharp increases in wholesale prices.

On Wednesday the Fed will meet and present its latest monetary policy decisions. The Fed has made it clear it intends to raise its interest rate target from 0.8% to 1.3%. The Fed also said it will sell $47.5 billion of securities monthly beginning in June and then increase monthly sales to $95 billion a month beginning in September.

No one, including those at the Fed, has any idea how these moves will impact either the money supply or the economy. We’ll have to wait until the end of the month to see if the Fed’s intended restraint is real.

Also on Wednesday, May retail sales data will be higher due to soaring gasoline prices. However, weak auto sales will limit the gains. Monthly retail sales numbers are highly erratic and are unlikely to provide much insight into state of the economy.

June’s Homebuilders’ Index (also on Wednesday) should help gauge the extent of upcoming weakness in housing. May’s Index fell to 69, the lowest level since June of 2020. A further decline would signal developing problems in the single-family housing market.

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