U.S. stock prices pulled back over the past four days after rising to overbought territory during the week ended September 21 in response to mixed readings on some key economic data.
In regard to positive economic developments, The Conference Board reported on September 25 that Americans during September became the most optimistic since September 2000 about their personal financial situations, job prospects and outlook for the U.S. economy.
Separately, the U.S. Department of Commerce reported on Thursday that new orders placed at U.S. factories for the production of durable goods (i.e. household appliances, furniture and office equipment) rose during August, the latest month for which data are available, to the highest level since July 2014 and at the fastest pace since June 2017.
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On a negative note, the National Association of Realtors reported on Thursday that the number of contracts signed by prospective buyers of previously owned homes declined for the eighth consecutive month during August, the latest date for which data are available, indicating that economic activity in the U.S. housing market continued to weaken during September.
In addition, the Federal Reserve reported on September 26 that it decided to raise its target range for the bank’s overnight bank lending rate, the federal funds rate, to the highest level since April 29, 2008.
Meanwhile, the U.S. Department of Commerce reported on Thursday that its primary measure of inflation, the GDP implicit price deflator, rose during the quarter ended June 30 at the fastest annualized quarterly rate since the first quarter of 2007.
As a result, I expect the Fed to continue to raise the fed funds rate through the remainder of 2018 and into early 2019. I also expect longer-term interest rates to continue to trend higher during the months ahead.
As I discussed initially in the August edition of Small-Cap Profit Confidential, and repeated in the September edition, I expect those rising inflation rates and interest rates soon to lead to a substantial pullback in stocks.
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For that reason, I’ve advised our subscribers since July 20 to allocate a large portion of their financial market assets to cash-like investments (i.e. money-market rates).
I realize that our model portfolio is likely underperform the S&P 500 Index for a few months as a result of my recommended high allocation to cash. Nevertheless, I’ve always focused as much of my financial market advice on helping investors to preserve the value of their assets as on helping them to grow the value of their assets.
As I stated in last week’s update, I’m confident that our model portfolio will begin to outperform the S&P 500 again within the next few weeks as a result of our high allocation to cash, as my research continues to indicate that stock prices in general will pull back sharply.