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Stocks Break Another All-Time High. What Is Going On?

According to the Federal Reserve Bank's latest Beige Book, released Wednesday, modest to moderate gains in the U.S. economy is in the months just ahead.

"Consumer spending appears to be rising across a majority of Districts," said the U.S. central bank's report, "led by increases in nonauto retail sales and tourism."

The Beige Book, which is a summary of economic data collected by the Federal Reserve's 12 Districts, is published every six weeks.

The Fed said many Districts noted some softening in consumer spending, particularly in auto sales, which declined in half of the Districts.

But it's likely the auto sales slowdown is merely a reversion to the long-term mean run rate, after having surged way above their long-term norm.

Evidence shows retail sales in June had grown by 3.2% over a year earlier. That is even stronger than the 3.1% peak achieved in the last economic expansion.

Meanwhile, Fed Chair Janet L. Yellen, in Congressional testimony, said she expects to continue the gradual upward course of rates in the face of growing economic strength.

Consumer sentiment is strong but not overly exuberant.

When consumer sentiment rises too high, it could be a sign of trouble ahead for the stock market.

The newest consumer sentiment survey by the University of Michigan shows sentiment index at 93.1, which is about normal over the last 57 years and is not approaching the peaks seen in the late 1990s during the tech bubble.

For a bull market to continue, you could not have exuberance so widespread. Without some skeptics on the sidelines, you run out of investors willing to buy stocks.

In early July, The Wall Street Journal surveyed 63 economists on their quarterly GDP growth forecasts through Q2 of 2018, and their consensus forecast is for a 2.5% GDP growth rate for the quarters immediately ahead.

The 2.5% forecast is a revision downward, resulting from a lowering of the consensus growth rate expected for the quarter that just ended on June 30, 2017.

At 2.5%, the economy would outpace the long-term growth rate projected in the non-partisan Congressional Budget Office 10-year forecast.

It's unrealistic to expect the U.S. economy to sustain in excess of a 2% annual growth rate in the years ahead.

Despite irresponsible financial pundits and politicians hawking reports to the contrary, the math driving the economics makes growth beyond 2% unsustainable. Demographics and productivity - the factors at play - are predictable and don't support the 3% growth rate hyped by the politically motivated.

The Consumer Price Index, which is the "headline" inflation rate used in the media, has nosedived since February. CPI plunged to 1.6% on June 30, 2017 from June 30, 2016's CPI-reading of 2.8%.

However, Ms. Yellen, perhaps the nation's No. 1 labor economist before becoming Fed chair, has said in the press that wage-inflation is on the way. It can be seen in the Core CPI , which is CPI excluding food and gasoline expenses. Lower gasoline expenses have masked wage inflation evident in the Core CPI.

A strong labor market and rising imports are likely to make the disinflation temporary.

The Standard & Poor's 500 index closed on Friday at 2459.27, a new all-time high, topping the last one reached on June 19. Prices rose by 1.41% for the week.

A change in sentiment or unexpected negative news could trigger a 10% or 15% plunge at any time.

The outlook for the fundamentals that drive stock prices remains bright, however.

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This article was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used as financial advice without consulting a professional about your personal situation.

Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. Past performance is not an indicator of your future results.