THE BIG PICTURE: Strong fundamentals reflected in US market high

On Tuesday, March 5, the blue-chip US Dow Jones share index of 30 stocks hit fresh record highs. To many this would seem remarkable.

The US gave the world the global financial crisis; the US economy is still struggling with unemployment near 8%; and Congress has failed to stop the sequester from going through.

The sequester translates into budget spending cuts of $85 billion being applied, cutting US economic growth by around 0.5%.

But while there are negatives, there are also significant positives. Interest rates remain at zero and the Federal Reserve is still effectively printing money (quantitative easing). The housing oversupply situation has also been arrested with new homes available for sale at the lowest levels since data was compiled 50 years ago. And home prices are rising again, up 6.8% on a year ago. The low US dollar continues to boost exports – the exports component of the ISM services index is at six year highs.

And more importantly, companies continue to make money. If the gains for the US sharemarket are to be sustained, they must be supported by company earnings. Since the US Dow Jones bottomed in March 2009, it has lifted by 117%. Over the same period non-financial earnings have risen by 113%.

Add in the fact that interest rates are super low (boosting the attraction of the sharemarket) and the US dollar is low (boosting the attractiveness of US shares to foreigners) the gains for the US market make sense. The US dollar is down 8% on the highs set when the sharemarket bottomed in March 2009.

The forward price-earnings ratio for the Dow Jones stands at 15.87, cheaper than the 2007 high when the PE ratio stood at 17.0.

The week ahead

The ‘Autumn Avalanche’ is now behind us and there is only a spattering of economic statistics to be released in the coming week with the focus on Thursday’s jobs numbers. In the US, inflation, retail sales and production are in focus. And in China, after Saturday’s (March 9) data dump of inflation, sales, production & investment; money supply and lending figures are due in the coming week.

In Australia, the week kicks off on Tuesday with the NAB Business survey. Consumers are more optimistic and both published data and anecdotes indicate that spending is increasing. Eventually this will lift business confidence and conditions. It may not be reflected in the February survey, but stronger readings can be expected in coming months.

Also on Tuesday the Reserve Bank releases credit and debit card lending figures for January. Consumers are spending again but the preference is to use your own money to make purchases rather than put it on credit.

On Wednesday, consumer sentiment data is issued alongside data on housing finance. Consumer sentiment soared by almost 8% in February and another rise is expected in March – although perhaps a little more modest than last month. Interest rates are stable, the Aussie dollar is healthy and sharemarkets across the globe are at multi-year highs. And there are even signs of stronger spending and employment.

The positive economic data is expected to continue with the January home loan data. Based on data from the Bankers Association we expect that the number of loans rose by 2% in the month with the value up by 1.6%.
On Thursday the Bureau of Statistics releases the February jobs data. Interestingly, wherever we travel the job data is viewed with scepticism. But the data has been compiled the same way since the 1970s and results last year lined up with census figures.

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