Dow Stocks Spike Following Strong Economic Reports

The Dow Jones Industrial Average (^DJI 0.06%) is up as the market digests yesterday's Federal Open Market Committee statement and today's positive reports on the U.S. economy. As of 1:15 p.m. EDT the Dow was up 114 points, or 0.73%, to 15,613. The S&P 500 (^GSPC -0.22%) is up 1.02% to 1,703.

There were four U.S. economic releases today.

Aside from construction spending, the reports were positive for the economy. New unemployment claims fell by 19,000 to 326,000 -- their lowest level since 2008. The less volatile four-week moving average fell by 4,500 to 341,250.

US Initial Claims for Unemployment Insurance data by YCharts.

July can be an abnormal month for unemployment claims due to holidays and annual shutdowns in the auto industry for retooling. That said, the four-week moving average continues to be below last year's level of 360,000 to 370,000, indicating a stronger employment market. There were also signs of a stronger employment market yesterday when ADP reported that, by its estimates, the private sector added 200,000 jobs in July. We have to wait until tomorrow for the government's jobs report, which includes both public and private-sector jobs.

Also released were purchasing managers' indexes by Markit and the Institute for Supply Management. Markit's U.S. PMI came in at 53.7 for July, better than the earlier reading of 53.2 and June's 51.9. The ISM's PMI jumped to 55.4%, up from June's 50.9%. Both readings are above analyst expectations and show a stronger-than-expected manufacturing sector. It's unclear whether this is a temporary blip resulting from the inventory build seen in second-quarter GDP or a sign of a resurgent manufacturing sector.

The other bit of information the market is mulling over today is the Federal Open Market Committee's latest policy statement, released yesterday afternoon. As expected, the Fed is continuing its long-term asset-purchase program. In the committee's economic outlook, the Fed said economic growth is moderating. The Fed also acknowledged that mortgage rates have risen and said it expects that to restrain growth.

The two big determinants of the Fed's future actions are unemployment and inflation. On Friday we get both the government's nonfarm payrolls report and the personal-consumption expenditures price index, which is the Fed's favored measure of inflation. According to the statement, the committee "recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term."

Inflation has been running below the Fed's target of 2%, but not by much. While we won't get the PCE inflation rate until tomorrow, the year-over-year change in the CPI is 1.64%. Implied expectations for future inflation have risen and are now running at the Fed's target of 2% for five-year expectations and 2.5% for 10-year expectations. If implied expectations continue rising, the Fed could taper more quickly than the market currently expects.

While studying Fed statements is crucial to traders and short-term investors, it is of limited value to long-term, fundamental investors. Long-term investors are better off using their time identifying superior businesses trading at reasonable valuations -- a prospect made harder by the constantly rising market.