The Stock Market Is Overpriced.
The S&P 500 jumped over its 1,800 hurdle, but is scared to go even higher.
Why the Stock Market Is Down Today, But Up Earlier In the Day
The Pending Home Sales Index has now been down for 5 months in a row, indicating declines for final sales of existing homes. Sales of existing homes have already been decreasing for two months. Although some of the weakness in sales could be attributed to the government shutdown, higher interest rates may also be the culprit. Overall, this leading indicator did not have positive implications for the future and dwarfs the other indicators. It is important to note weak home sales are very bad for the economy, since home sales have an enormous multiplier effect. This means that if an individual were to buy a home, he/she would also likely be buying other goods for his/her house. Because housing induces additional spending, it is considered an industry with a large multiplier impact.
The Dallas Fed Mfg Survey indicated strength with its Business Activity Index coming in at 1.9 and its Production Index coming in at 16.9. Overall, new orders came in a little lower than expected and capacity utilization jumped to its highest level since March 2011. Capacity utilization is the rate at which potential output levels are being met. For example, if a company is running at 85% capacity, this means that it has room to increase its production 15%. Usually, when capacity utilization roams above 80%, inflation starts to appear in the economy. Of course, this is only the Dallas Fed Mfg Survey, which is not representative of the entire economy. However, it is important to keep an eye on capacity utilization as an indicator for inflation and potentially consumer demand.
Some of the rise in the market today was a result of the international accord between the US and Iran that was reached over the weekend. The deal would ease sanctions against Iran and push the country to stop pursuing a nuclear weapons program. Most actions that decrease international political risks generally result in upward movements in the stock market.
Markets Are Nervous About Rising Interest Rates.
Markets are nervous about Fed tapering and rising interest rates. The economy is doing much better in many respects. But investors are worried rising interest rates influenced by the tapering of the Fed’s asset purchases, currently at an $85 billion monthly pace, could slow the economy down. The market may be looking for a good reason to sell off at these elevated levels. This is why any negative news may move the market downwards since many are expecting some sort of correction anyways. This prove to be a self-fulfilling prophecy.