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Weekly Economic and Stock Market Commentary – May 17, 2021


Weekly Economic and Stock Market Commentary – May 17, 2021

As for the stock market specifically:

The major market averages each fell by substantial amounts last week. The losses came despite the valiant effort on Thursday and Friday to climb back to record levels. The Nasdaq Composite suffered the largest loss for the week.

Long-time readers may recall that I occasionally discuss the average duration of markets being on offense when the NYSE Bullish Percent crosses above the 70% level is about 100 days.  That is based upon data going back to the 1950s. This year, the indicator crossed the 70% level multiple times only to reverse. All of these occurred within the average of 100 days. Similar action occurred with the OTC Bullish Percent indicator and the 60% level.

We know from looking at the major market averages the markets are in pretty good shape. The major market averages either made record highs or are close to them. The good news is that the moves towards record levels occurred even when the bullish percent readings fell.

The problem is that I am not smart enough to tell you in advance when this phenomenon will end.

I still am of the opinion that I am going to manage the situation on a position by position basis, and not have a major reallocation.

All the indicators fell last week, but the good news is the short-term indicators became oversold. My new recommendation is for WEALTH PRESERVATION across the board.

Remember, Xs mean OFFENSE or wealth accumulation, while Os mean DEFENSE, or wealth preservation.

Below is where our indicators stand as of May 14, 2021 (Courtesy Dorsey, Wright, and Associates).

On a general note:

The Department of Labor gave us inflation news last week. I believe it is important to be careful with the inflation numbers for a bit since these numbers are comparing economic shutdown lows with reopening strength. The said the Consumer Price Index rose 4.2% in April when compared to April 2020. However, on a sour note, prices did rise 0.8% compared to March 2021. Car prices rose a record 10% during the month. Core prices, which do not take into account the impact of food and energy costs, rose 3.0% in the year. The report noted the 2-year average of inflation is 2.2%. The Federal Reserve called the numbers transitory – as if each month’s data releases are stagnant.

At the same time inflation was rampant, the American consumer was silent. The Commerce Department reported April retail sales showed an unchanged figure compared to March. Another way of putting it is that consumers in April continued to spend as if federal stimulus money was coming in the door. The March rate was revised to show an increase of 10.7% over February. Consumers cut spending in clothing, furniture, sporting goods, big box stores, and general online retail. Hotel and restaurant spending rose.

The Treasury Department released the budget report for the month showing the state of fiscal affairs so far this fiscal year. The United States government ran a deficit of $1.9 trillion dollars since October 1st. That is a 7-month record.

I am not so sure we should be proud of that.

Once again, spending rose 22% while tax collections rose 16%.

Since spending has outpaced tax collections in nearly every year going back to the late 1960s, we keep getting more evidence for Rongo’s Rule of Taxation. Unfortunately what used to be a ratio of 1.32:1 ($1.32 cents of spending vs $1.00 of tax collection) is growing larger.