As far as equity markets are concerned, the year has not started well, with most equity markets expe...
As far as equity markets are concerned, the year has not started well, with most equity markets experiencing falls from the year end positions.
There has been little comfort for investor confidence with the Iraq crisis still dominating the news and whatever happens next with Iraq will have strong ramifications for private investors.
However there is some positive news. For example, the US economy continues to improve, albeit slowly. Low interest rates will allow re-liquification of the corporate sector and the US personal savings rate is up to 4%, a nice gain from zero not long ago. The good news for consumer spending is that month after month, personal income continues to trend upwards and the housing market remains strong.
US inflation is negligible, allowing the Federal Reserve to keep interest rates low which should also be good news for the US economy.
The basic US money supply is growing at around 8%, ensuring there is plenty of liquidity. The Federal Reserve has also stated they will do anything to get things going, including buying back long Treasury bonds. Alan Greenspan recently indicated he was satisfied with the direction of the US economic recovery, although the only part of George Bush's tax relief programme he would support is the elimination of double taxation on dividends.
As far as the Iraq crisis is concerned, a resolution to the Iraq situation may now be near, and a swift victory over Saddam Hussein would probably ignite the equity markets around the world.
However this scenario would be unlikely to occur if oil facilities are targeted as part of Iraq's war effort. This could lead oil prices surging upwards with damaging economic consequences ' oil prices would probably decline initially, but a price of $25 per barrel is estimated for the remainder of 2003.
But war does seem likely and if drawn out could further demoralise the stock markets. In the event of war, stocks will probably sell off on the initial news, but depending on how successful the coalition is, a good rally could occur.
There is also the continued threat of another terrorist attack on the US, persuading the public to stop flying and to stay at home. This would slow the economy down and probably help lower the value of the dollar further, although not as a result of the efforts of Euroland.
An economic lift in the US would, however, bring help for the dollar, but a current account deficit of 5% of GDP continues to bother investors in US assets. The upside here is that US products are cheaper and this should help the manufacturing sector.
We like to say 'it's always darkest before the dawn.' At the moment, things do look bleak for the US, but it is just such a time when investors in shares might become more aggressive. There are certainly a number of positive factors that indicate things could go well for the economy and the stock market and a successful resolution to Iraq could witness a US market rally of 25% or more. It will not pay to be sitting on the sidelines if this happens.
Economy continues to improve.
Low inflation and low interest rates.
Possibility of resolution to the Iraq crisis.
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