Paul Reilly Discusses the Markets, the Fed and the Economy
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As I look forward to the new year a few things seem evident. Here are some facts:
1. Housing values are up 12% nationwide in 2013. Sales of homes are rising, the supply of homes to sell is falling, home building is slowly increasing, and it is one of the largest creators of jobs in our country. It's been 7 years since we have built the 1.5 million new homes we require annually.
2. The US auto industry is a major force to our economy, and car sales have improved each year since 2008, but they still have not reached the 16 million car a year mark necessary to replace ageing cars. The average car on the road in the US today is 11 years old.
3. The net worth of US households is at record highs. This is created by higher home values, higher 401k's, higher investment accounts. This wealth effect usually leads to higher consumer spending on big ticket items like cars, remodeling, appliances etc.
4. Americans' debt burdens are as low as they have been in a generation. The mortgage refinancing boom has lowered mortgage costs, and those savings have paid down credit card and installment debt
5. Corporate profits are at record highs. Inflation (as measured by CPI) is running at 1.7% annual rate....below the Fed's 2% target rate. Why? Low wage growth, and excess industrial capacity to name a couple reasons.
6. The US is among the largest manufacturers in the world with the highest productivity and the lowest energy costs. We are witnessing a major on-shoring of US manufacturing. This should have a large impact on the US economy, increasing jobs and exports, decreasing imports.
7. In 2013 the US surpassed Russia to become the largest energy producer in the world. Our production of 25m barrels a day is an increase of 40% since 2008.
Given these facts, I believe that:
1. GDP growth in the US increased as the year 2013 progressed (0.1%, 1.1%,2.5%, and 4.1%) and should end 2013 at about a 2.3% annual growth. Consequently, greater capital spending, a growth oriented Federal Reserve posture, increasing residential construction, tame inflation, growing manufacturing, and rising employment should support US GDP growth of 2.5% to 3% in 2014.
2. The stock market (the S&P 500) is trading at relative prices below historical averages. This isn't a bubble. We're not seeing heavy money flows into equities, not seeing lots of IPO activity, not seeing large pickup in mergers. Pension funds and big institutions are still very underexposed to equities. The market is not overpriced, nor "too high"
3. Given all these indicators of improving economic conditions, earnings for US corporations should increase by about 10% this year. Over the long term, stock market prices reflect the profitability of companies, and growing earnings should equal rising stock market prices. I conclude that we should expect a rise in stock market prices of 8 to 12% by the end of 2014.
As always, I look forward to talking to you about this and anything else that you might like to chat about. Give me a call, or drop me an email and we’ll schedule some time to talk.
Richard T. Holden CFP
Raymond James Financial Services, Inc. Member FINRA/SIPC
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Newport News, VA 23606
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