Drucker: Are US equities set to take off?

Vanessa Drucker 160 byline

American equity markets have roared higher over the past 13 months, defying the weak economic climate. You may well attribute this spurt of energy to the buckets of liquidity gushing from the Federal Reserve.

That said, it’s bewildering why equities have recently shrugged off Ben Bernanke’s September promise of unbounded and continuing asset purchases. If QEs were truly the catalyst, the latest news should have more impact, despite issues of diminishing returns.

Here’s another hypothesis, based on a more old-fashioned reading. Suppose the economy is simply healing at last, and bear in mind that markets typically anticipate movement in the real economy by six to nine months. It helps to think of the huge American economy as a great, lumbering creature. In mechanical terms, it’s like an aircraft carrier, slow to turn but powerful once directed.

A confluence of indicators suggests the aircraft carrier has finally changed course. Foremost, housing looks to be on the mend, slowly but surely. Sales of new homes reached a two-year peak in September, touching the highest level since April 2010, having soared 27 per cent over the past year. Housing construction confers added benefits on employment and consumption. Retailers, furniture stores and building material suppliers reap the rewards; homeowners themselves open their wallets, encouraged by the wealth effect created by the increasing value of their properties.

Employment meanwhile looks poised to recover, after October’s happy surprise, when unemployment dipped to 7.8 per cent. Most recently, the four-week moving average for jobless claims measured 368,000, and a number beneath 400,000 generally signals more hiring than layoffs.

Durable goods, intended to last about three years, herald the expected pace of economic growth. Orders jumped 9.9 per cent, as reported last Friday (26 October), the largest gain in 2.5 years, mainly thanks to commercial jets. True, business investments remain soft ahead of election uncertainty. Consumers though display more confidence: the University of Michigan survey at 82.6, attained its highest monthly showing since September 2007.

A message from the flight deck is to look beyond the fiscal cliff and faltering global growth. If the aircraft carrier is indeed in motion, economy and stocks can revive, once the current market downdraft plays out.

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Vanessa Drucker is the American Editor of Fund Strategy, based in New York City. She has worked as a financial journalist for 20 years. In the 1980s, she practiced banking and securities law on Wall Street, and is the author of two business novels. Vanessa can be contacted at vanessa.drucker@centaur.co.uk.