The Fed Has Spooked the Markets Again. Should We Be Worried?

Last week may have brought Friday the 13th, but this Friday seems to be especially unlucky for Wall Street. To start, stock index futures, stock index options, stock options and single stock futures all expired today. This phenomenon, known as “quadruple witching,” has churned up the stock market today. Add to the fact that St. Louis Fed President James Bullard alluded to winding down asset purchases, and the recent House vote to defund ObamaCare, and we have a recipe for a bearish trading day.

Even so, this week brought several encouraging economic reports from various public and private organizations. At this time, the growth still isn’t strong enough to lift the economy to the benchmarks that the Fed has set. This has big implications for when the Fed will actually start tapering, regardless of what Bullard may think. So in today’s blog I’ll help you sift through the barrage of economic data out there and determine what this will mean for your stocks. Here are the most important data that came in:

Pro: Manufacturing Output Spikes on Auto Activity

In August, industrial production rose 0.4% amid the biggest increase in manufacturing output since December, particularly among the auto industry. This was just under economists’ expectations of a 0.5% rise in production, but ahead of the previous forecast of just 0.2% growth. This was a much better sign compared to the previous month’s flat growth, and it’s being looked at as a hopeful sign after the economy got off to a slow start in the third quarter. Overall, the growth last month was relatively broad based, and this points to some potential momentum in the months ahead.

Pro: Consumer Inflation Remains Tame

In August, both the Consumer Price Index and the core consumer price index—which excludes the more volatile energy and food costs—rose just 0.1%. This was under economists’ expectations for a 0.2% gain in both indices. Consumer prices have increased 1.5% over the past 12 months, and the core has increased 1.8%. This is down from the 2% year-over-year gain in July and below the Fed’s 2% inflation target, which gives the Fed plenty of room to keep its pump on.

Con: Housing Activity Misses The Mark

In August, housing starts rose 0.9% from July to a seasonally-adjusted rate of 891,000 and 19% above last year’s levels. This was a little under the consensus estimate, which called for a 910,000 annual pace. At the same time, building permits declined 3.8% from July to a seasonally adjusted rate of 918,000. Again, this was below economists’ estimates of 943,000-unit pace. The big news here was the single-family home starts were up 7% from July and hit their highest level in six months. And I’m not too worried by the miss, since it was largely due to the volatile apartment sector, and so far it doesn’t look like higher interest rates had too big of a dampening effect since they matter much more for single-family homes, which were strong. In addition, homebuilder confidence has held steady in September after four consecutive monthly gains.

Neither: Computer Glitches Continue to Skew Jobless Claims

Last week, jobless claims climbed 15,000 to an annual rate of 309,000. Economists had expected the measure to rise to 340,000, so these results were better than expected. At the same time, the four-week moving average inched fell 7,000 to 314,750. These numbers were once again affected by computer glitches and two states—California and Nevada—weren’t able to process all of their jobless claims on time. So I expect that we’ll see an upward revision to these numbers.

Pro: Existing Homes Sell Like Hotcakes

In August, existing home sales climbed 1.7% to an annual rate of 5.48 million and significantly higher than economists’ consensus estimate of a 5.2 million annual pace. The National Association of Realtors also reported that median home prices rose to $212,100 in August, which is up 14.7% in the past 12 months. The inventory of new homes rose slightly in August, but remains at a low 4.9-month supply, which should allow continued home appreciation in the upcoming months. We continue to see strong growth in the housing market, and the August numbers represented a six and a half year high as buyers flocked back to the market to lock in cheap borrowing costs amid rising mortgage rates—currently at about 4.5% from a low of 3.35% in May.

Pro: August Brings Broad-Based Economic Improvements

In August, the Leading Economic Indicators (LEI) rose by 0.7%. This came above economists’ consensus estimate 0.6% gain. Seven of the 10 components expanded in August, led by the spread on interest rates, new orders for manufactured goods and declining applications for U.S. unemployment benefits. This is a good sign of continued broad-based economic improvement and it bodes well for economic and job growth in the second half of this year. If we see this pace continue in the coming months, we should see a solid strengthening in economic growth through year-end. 

Have a nice weekend,

Signed Louis Navellier

Louis Navellier

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