GDP & PCE and the stock market this week

Big data arrives this week and the stock market will move - here is what I am watching

SPY Stock: 2-Hour Chart

We get two key pieces of economic data this week that are typically market movers. First up on Thursday is the revised GDP number with expectations of a slightly lower number. Then on Friday, we get Personal Incomes and Personal Expenditures, along with the PCE price index - the Federal Reserve’s favored inflation gauge. The stock market will likely move off of these numbers. However, the stock market may not move appropriately considering the future expansion possibility of the economy.

The US economy should continue to expand. But, the pace will decline - something I have focused on for some time. While interest rates have been sliding slightly lower the past few weeks, this is because the future of interest rates will be more accommodative than the current restrictive stance. This policy accommodation is more in line with bringing the economy back into an expansionary phase. This is the key that the stock market continues to ignore: The pace of economic growth will decline. Revenues for companies will still grow but at a much slower pace. This is because the pace of income growth for consumers is below the median and will likely move lower. With income growth slowing, companies' profit growth will decline. The possibility is that this will drive stock valuations downward.

But, the stock market has continually ignored this analysis. At some point, however, there will be a reckoning of the facts, and that point is likely closer than market participants hope.