Stocks prices have recovered from their winter panic, but don’t take money off the table. The American economy is on a solid footing and prospects are good for equities.
Stronger consumer and business spending should power GDP growth of about 2.5 percent for the balance of the year—boosting corporate profits from domestic sales. And the dollar has fallen against major currencies, raising the dollar value of overseas earnings on financial statements.
Anemic growth in Europe and the continuing dramas imposed by its immigration crisis, half-hearted labor market reforms, and constraints imposed by a single currency and fiscal austerity compel central banks to continue negative interest rate policies.
In Japan, a shrinking labor force and resistance to immigration and deregulation limit growth and compel accommodative monetary policies too.
In China, slower growth, the absence of competent financial market regulation, reliable accounting and limits on foreign ownership leave U.S. bonds and stocks as the last best alternative for private investors around the world.
U.S. Treasury data on capital inflows indicate continued strong global demand for U.S. corporate stocks and bonds. Even if the Fed manages, as anticipated, two quarter-point increases in the federal funds rate by December, returns on 10 and 20 year Treasury securities will not increase much—mirroring 2004-2006, when the Fed last pushed up short rates.
The average rate of profits for the S&P 500, which comprises about 80 percent of the publicly traded U.S. equities, is 4.42 percent and compares favorably with the 1.88 percent paid on 10-year Treasuries.
Even if the Fed pushes up short term rates further next year, these factors will drive foreign and U.S. investors into equities and away from bonds—raising stock prices.
At the same time, long-term sustainable price-earnings ratios for stocks are rising and make U.S. equities cheap.
