KEY DATA:  Sales: +1.4%; Prices (Over-Year): +23.4%/ LEI: +0.7%/ Claims: +51,000

IN A NUTSHELL: “The surge in unemployment claims was a surprise, but not necessarily a signal that the economy is slowing.”

WHAT IT MEANS: The data this week are limited but that doesn’t mean they are not important.  The housing market is the center of attention and while demand is hardly surging, it is still quite strong.  The National Association of Realtors reported that demand rose modestly in June, which is actually good news.  Sales had fallen on a fairly consistent basis since they peaked last October, so maybe this is an indication that the downslide is coming to an end.  Three of the four regions posted similar gains and the fourth was flat, indicating that demand is stabilizing across the nation.  The problem in the housing market is inventory.  While there was a rise in the number of homes for sale, the number of months of inventory remained ridiculously low.  As a consequence, the median price of a home sold was up over-the-year by the second largest rate on record and the median price itself hit a new record high.  Affordability is fading and that, in conjunction with the lack of homes on the market, may be the reason demand is not rising.

week we get second quarter GDP, and it should be really strong.  But where do we go from here?  If you believe the Conference Board’s Leading Economic Index, growth should remain solid.  The index increased solidly and the gain was broad based.  Yes, it is signaling a moderation in growth, but, as the report noted, it is pointing to not only a 6.6% rise this year, but a “healthy” 3.8% gain next. 

Unemployment claims surge last week, which was quite a surprise.  Since these data are volatile, we should assume that it is pointing to a major economic slowdown.  An outsized gain one week is often met by a similar decline the next.  The number of workers receiving assistance fell sharply and that should continue.  IMPLICATIONS:Are investors irrationally exuberant?  It is hard to make that argument.Yes, bad news is met by shock and then an “aw-shucks” response.That is, the markets tank for a short period of time and then the rally takes off once again.  That has been the case for a very long time now, not just since the V-shaped sell and recovery of last spring.  When the Fed started tapering, the markets went into a tantrum, but the decline, though steep, was short-lived.  Basically, no matter how bad the news, investors don’t take it seriously for an extended period.  They have been rewarded as the initial sell off triggered actions by either the Fed and/or the government, that kept liquidity flowing to the markets and/or to businesses and households.  Whether this time is different is unclear.  While some government programs are slated to end, other may be expanded in President Biden’s first budget.  At the same time, the Fed is steadfast in favor of supporting the markets by keeping rates low for a very long time.  As long as the government and the Fed keep pumping things up, it is hard to see how the markets can stay down for an extended period.  Interestingly, that means earnings are not the true driving force for equities.  Government policy is supporting demand and liquidity and the outlook for the markets is no longer a function of what businesses do but what the government and the Fed do.  Earnings just determine the distribution of the economic gains, not the level of the gains.  So, watch public policy because when that changes, everything else could be up for grabs