When market valuations are being called into question, the most galvanizing scenario that would justify the primary uptrend continuing into further record territory is for the economy to deliver empirical data that support a higher market. Last week, investors got an early Christmas gift of strong data points that argue well for further stock market gains.
The Conference Board’s leading economic index increased 0.9% in October, up from a downwardly revised 0.7% (from 0.8%) in September. Consensus expectations were looking for a reading of 0.6%. Leading indicators reveal strong growth and are, as suggested by their names, forward-looking. Ironically, the only component to contribute negatively to the index was stock price. Yes, there was a 10% correction.
In a truly eye-popping report, the Philadelphia Fed’s Business Outlook Survey jumped to 40.8 in November from 20.7 in October. Expectations were for a reading of 18.3. Business activities in the Philly region reached their highest point since December 1993, and 49% of firms surveyed saw the pace of business improve in November, while only 9% that saw decreased activity. Within the report, the shipments index rose to 31.9 from 16.6 in October. The production gain was triggered by a spike in new orders: 35.7, up from 17.3.
Weekly employment conditions also improved. The employees index increased to 22.4 in November from 12.1 in October. The average workweek returned to an expansion cycle, rising from -1.3 in October to 7.8 in November. Continuing claims hit their lowest point since December 2000, falling to 2.3 million, while initial claims decreased to 291,000 for the week ending Nov. 15.
Existing home sales showed year-over-year sales growth, increasing to 5.3 million in October from an upwardly revised 5.2 million in September. Home sales increased 2.6% year-over-year; that was the first gain since last October and also represented the most homes sold since September 2013. A sharp drop in mortgage rates and strong improvements in labor markets have made housing more affordable.
At the same time, inflation trends remain benign:
- Consumer prices (ex-food and energy) were unchanged in October after increasing 0.1% in September.
- Falling energy prices fueled a 1.9% drop in the producer price index for October.
- Gas prices declined 3% last month, following a 1% decline in September.
- Food prices rose, which increased the overall core rate by 0.2%, but even factoring this in, year-over-year price growth remains a very modest 1.8%.
These kinds of data points are exactly what are needed to put market critics out in the cold, especially in conjunction with central-bank stimulus in Japan, China and Europe. The table is set for investors to feast on more market gains this Thanksgiving week, and also right through the holiday season. The numbers are there to support it — and I’ll toast to that.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. And most recently, Bryan introduced Cash Machine Trader. With this service, he’s increasing the income stream potential even further by using covered call writing strategies to generate yield in the form of option premium — on top of capital appreciation income from well-known stocks.
