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Stocks Declined Sharply, Even As Economists Expect 3% Growth In 2022
Published Friday, January 21, 2022 at: 6:37 PM EST
The Standard & Poor’s 500 stock index declined 5.7% for the week. It was the third consecutive week of losses and the worst week for stocks since March 2020.
Yet the economic data released this past week indicated strong growth is ahead for the U.S. economy.
Housing starts unexpectedly rose sharply in December, according to Census Bureau data released Wednesday.
With 1.7 million housing starts in December, growth in homebuilding has not been this strong since early 2007. In addition, 1.87 million housing permits were issued in December, an indicator that housing starts will continue to be strong in the weeks ahead.
The U.S. requires about 1.6 million new homes constructed annually to keep up with population growth.
To be clear, housing growth is more robust than it has been in many years.
Meanwhile, the newest forecast for the growth of the economy in 2022 also came in strong.
The newly released consensus forecast of 60 leading economists polled quarterly by The Wall Street Journal for the five quarters ending December 31, 2022, calls for very strong growth.
The growth in gross domestic product for the fourth quarter of 2021, which will be reported at the end of January, is expected to come in at 5.8%. The economists expect a growth rate for each of the following four quarters of 2022 of slightly more than 3%. That much higher than the 2.2% long-term U.S. growth rate expected by the non-partisan Congressional Budget Office.
The U.S. Index of Leading Economic Indicators, a forward-looking measure, rose +0.8% in December. It has soared for months since April 2020 when the recovery from the pandemic began.
The significance of the LEI is that it has historically rolled over before every recession in modern U.S. history, except for the Covid-19 recession. Nothing like that is happening now, as the index is reaching new heights.
The forecast for growth from the economics team at Conference Board, which collects the data monthly on the 10 component indexes of the LEI, is for a 3.5% growth rate in 2022.
The Standard & Poor’s 500 stock index closed this Friday at 4,397.94. The index lost -1.89% from Thursday and is down -5.8% from last Friday’s closing price. The index is up +65.12% from the March 23, 2020, bear market low.
With the S&P 500 total return of 28.7% in 2021, which followed a return of 18.4% in 2020, a correction in stock prices could occur at any time. However, the signs are the economy is continuing to grow and strong growth is expected for 2022. Economic growth drives corporate earnings, which drive stock prices.
The Conference Board Leading Economic Index® (LEI) components: 1) average weekly hours worked, manufacturing; 2) average weekly initial unemployment claims; 3) manufacturers’ new orders – consumer goods and materials; 4) ISM index of new orders; 5) manufacturers’ new orders, nondefense capital goods; 6) building permits – new private housing units; 7) stock prices, S&P 500; 8) Leading Credit Index™; 9) interest rate spread; 10-year Treasury minus fed funds; 10) index of consumer expectations.
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