Loading ...US In A Sweet Spot!
Puru Saxena
December 19, 2014
Big Picture – The world’s prominent central banks are pursuing an accommodative monetary policy and this bodes well for the stock market. Remember, when it comes to investing, monetary policy trumps everything else and the risk free rate of return determines the value of every asset. When interest rates are low and credit is cheap and plentiful, asset prices tend to inflate. Conversely, when interest rates are high and credit is tight, asset prices tend to deflate.
At present, the world’s largest economy is healing and its central bank is maintaining the Fed Funds Rate at a historic low. After several years of deleveraging, American households are borrowing again (Figure 1) and this is stimulating business activity. Although the US unemployment rate has fallen significantly over the past year, inflationary pressures are well contained and this implies that the Federal Reserve will not raise interest rates anytime soon.
If our assessment is correct, the US economy is currently in a sweet spot (just enough growth and lack of inflationary pressures) and if its housing market continues to appreciate, it will unleash tremendous pent-up demand. After all, American households have deleveraged for several years and by doing so, they have postponed the purchase of big ticket items. However, it appears as though they are now beginning to open up their wallets again and this shift in sentiment is benefiting the cyclical industries. For instance, it was recently reported that America’s auto sales have now jumped to levels not seen since 2003! In addition to buying new vehicles, Americans are refurbishing their homes, upgrading their properties, travelling more and spending more money on discretionary items.