Too Much Growth Is Killing Growth Stocks

Summary

• This is a weekly series focused on analyzing the previous week's economic data releases.
• The objective is to concentrate on leading indicators of economic activity to determine whether the economy is strengthening or weakening, and the rate of inflation is increasing or decreasing.
• This week, I will examine new home sales, consumer confidence, durable goods orders, weekly unemployment claims, and personal income and outlays.
• The economy is strengthening and the rate of inflation is increasing, both of which are killing growth stocks valuations.
• This idea was discussed in more depth with members of my private investing community, The Portfolio Architect. Get started today »

I have been suggesting in this weekly economic report that as the economy starts to roar back, the stock market may struggle. We got a glimpse of that yesterday, as the major market indices plummeted across the board under the weight of higher long-term interest rates, which are indicating investors see faster rates of economic growth and inflation ahead. While a 1.5% yield on the 10-year Treasury may not seem like a big deal to the average investor, it is extremely consequential to the large institutions that manage the majority of market wealth. Yesterday the yield skyrocketed as high as 1.61% after a 7-year Treasury note auction was met with far less demand than normal. The yield on the 10-year closed at 1.51%, surpassing the dividend yield of the S&P 500 for the first time in several years.

New Home Sales

New home sales rose 4.3% to an annualized 923,000 from an upwardly-revised 885,000 in December, which is up 19.3% from a year ago. The median price of a new home has risen 5.4%% from the year prior to $346,400 and there is now 4 months of inventory, which is still less than the six months experts considered to be balanced. Housing suddenly has a new headwind - rising mortgage rates. That is likely to moderate the rate of growth in existing and new homes sales moving forward.

Consumer Confidence

The Conference Board's Consumer Confidence Index rose to a three-month high of 91.3 in February from the 88.9 reading in January. There is lots of room for improvement, which I expect we will see once another round of stimulus checks are distributed, vaccines become more widely available, and the economy gradually reopens this spring.

Durable Goods Orders

Orders rose for a ninth consecutive month in January, surging 3.4% after the prior month

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Lawrence Fuller is the Managing Director of Fuller Asset Management, a Registered Investment Adviser. This post is for informational purposes only. There are risks involved with investing including loss of principal. Lawrence Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Fuller Asset Management. There is no guarantee that the goals of the strategies discussed by will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security.