Few commentators would have predicted that the unfancied US stock market would have established su...
Few commentators would have predicted that the unfancied US stock market would have established such a clear lead over all other leading equities during the year to date.
More surprisingly, who would have predicted that Nasdaq Composite Index, which is dominated by highly valued technology stocks, such as Cisco, IBM and Intel, would actually deliver a positive return over the same period?
The pattern of economic news is certainly providing little support for this trend. Investment spending has remained in the doldrums, unemployment is edging upwards and manufacturing activity, which was showing signs of recovery, appears to be ebbing.
Moreover, despite the continuing steady growth in real incomes, the pace of consumer-related activities, which have hitherto sustained the economy, is beginning to slacken. House prices have remained solid, more than outweighing the impact of weak stock markets on household wealth.
Low long-term interest rates have stimulated a strong trend in mortgage refinancing, a substantial part of which has been spent by consumers.
Yet personal borrowings are high and consumer confidence has recently succumbed to the combined influences of rising oil prices, employment uncertainties and mounting preoccupations with Iraq.
The Fed's latest Beige Book struck a distinct note of caution on the near-term outlook. Forecasts of economic growth in 2003 are being edged downwards to under 3%, but only a handful of economists predict a double-dip recession. Given this uninspiring economic news- flow and the continuing rumblings over corporate excesses and misdemeanours, how has Wall Street maintained its comparative resilience? It is not due to overseas buyers, who are proving reluctant to continue funding a rising Federal budget deficit.
President Bush's action in announcing a larger than expected $674bn 10-year programme of tax reductions might be seen a mark of anxiety, especially in the light of news that GDP in the final quarter of 2002 was stagnant.
Furthermore, it has been criticised for its long-term emphasis and for his lack of a near-term boost for middle class Americans. Investor confidence, especially among private investors is depressed, with sales of cash-based mutual funds comfortably beating the net uptake for equities.
The next opportunity for this is in April when first quarter results are due to be announced. At present, with uncertainty over Iraq and the lack of clarity on the economy, prospects for an imminent improvement in newsflow appear limited.
On the other hand, with continuing cost-cutting and the benefits of the weaker dollar there is potential for corporate profitability to strengthen and for company results to begin to exceed analyst expectations.
This might occur as early as the summer with the reporting of second quarter results. Morale in the US corporate sector remains intact even after the buffeting it suffered in 2002.
US growth rates will be stronger than peers.
Corporate America is cutting costs.
Falling dollar is helping US businesses compete.
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