Good Economic Growth to Support Stock Market Rally

The stock market could be subject to some caution ahead of the key earnings releases this week and next.  But, the impeachment trial should remain as background noise for the markets.  And, unless there are major earnings disappointments, the stock market rally should continue into February, as evidence mounts of decent economic growth in Q120 -- with one caveat. 

Last week's data shows the economy moving on all cylinders in December.   Ex Auto/Ex Gasoline Retail Sales rose a solid 0.5% m/m, putting them about 1.0% (annualized) above the Q419 average.  While these sales can be volatile, so there is no guarantee they'll continue to rise in January or February, the December jump is a good take-off point.  Similarly, the surge in Housing Starts is probably one-off (weather related?), but should translate into continued growth in Residential Construction in Q120.  And, the 0.5% m/m increase in Non-Auto Manufacturing Output raises the possibility that this sector's growth will speed up now that the US/China trade agreement is in place.  The one caveat is that the stoppage of Boeing 737 Max production should subtract significantly from Q120 GDP and Industrial Production growth.  But, this will be one-off.

The Claims data, the broadest high-frequency measure of the economy, are encouraging.  Initial Claims fell to the low end of their range in the latest week.  Continuing Claims also fell, but they remain at a high level.  They need to fall further to confirm a speedup in growth.  However, as they now stand, the data raise the risk of a speedup in January Payrolls.

Forward-looking evidence regarding the economy is strengthening, helped in part by the stock market rally.  The ECRI Leading Index rose to a new high over the first two weeks of January (see chart below).  And, the Phil Fed's daily ADS Index shows a sharp improvement since Christmas week.  Regarding economic data, it will be important for the outlook and the markets if the forward-looking indicator of capital spending -- nondefense capital goods orders excluding civilian aircraft -- continues, if not accelerates, the upward movement seen in October and November.
 
 ECRI Leading Index (level)

             Dec 2018                                                            Jan 2020


Two Reminders:

1.  I post comments on many US economic data releases on Linked In and Twitter.

2.  My book "Finding Judaism in the Torah" is available on www.amazon.com.  It offers new insight into old ideas, regardless of religion.