Stocks are up because the economy continues to expand

Capital goods orders are notoriously volatile from month to month, so I have long preferred to look at a 3-month moving average of the series, which is shown in the chart above. July orders for this proxy for business investment fell 3.3% from June, but the 3-mo. moving average is at a new all-time high and is up at a 8.8% annualized rate over the past six months.

The much-broader category of factory orders has also been notching new highs, up almost 8% in the year ending June. To the extent factory orders are a good proxy for the physical side of the economy, it validates the performance of the equity market—stocks are rising because the economy is expanding.

The amount of freight hauled around by the U.S. trucking industry is another proxy of sorts for the size of the physical economy. As the chart above shows, truck tonnage also validates the recent rise of the equity market, shown here in real terms. Note how both this and the preceding chart show that equity valuations were way out of line (i.e., too high) compared to the expansion of the economy in the the late 1990s and early 2000s. Not so today: no sign here of "irrational exuberance." The market is up because the economy is expanding.