Yesterday we parsed the Fed’s message from this week and concluded a strategy pivot has indeed take place. If we block out all of the chatter from those Fed members not named Yellen, since March, it’s been a 180.
Instead of promoting optimism about the future, and telegraphing rate hikes to accommodate that view, they’ve taken Bernanke’s advice and Yellen has gone gloomy, hoping that markets, consumers and businesses will take that view to mean nothing is going to constrain the current grind higher in the economy, driven by cheap credit and asset reflation.
If you agree with that, you should be thrilled about the potential for positive surprises to come down the pike in economic growth.
Keep the above in mind, and take another look at a series of charts I’ve shown a couple of times in recent months.
I’ve said this before: If you awoke today from a decade-long slumber, and I showed you these charts, and told you the stock market was near record highs, you would probably tell me the outlook for the economy looks really, really good.
We have unemployment under 5%…
Mortgage rates are near record lows – a 30 year fixed mortgage for about 3.75%.
Car loans are near record lows. This Fed chart shows rates likely much higher than what you would find at a local credit union or car dealer (many of which are 2% on used cars and 0%-1% on new cars).
What about gas? Gas is cheap relative to the past fifteen years, and after adjusted for inflation is near the cheapest ever.
Add to that, household balance sheets are in the best shape in a very long time. This chart goes back more than three decades.
Add to that, we recently had a report that household income has its strongest annual gain on record, at 5.2% growth in 2015.
These are all powerful fundamental forces for continued economic recovery. With inflation running low, the Fed is in the sweet spot.
Keep rates low and let the recovery continue. Don’t screw it up. Add to that, the Bank of Japan just helped the Fed by anchoring their 10 year yield at 0% — that should keep the market interest rate on the U.S. 10 year yield anchored as well (i.e. we shouldn’t have a violent run-up scenario, which could/would threaten housing and credit demand).
This should greenlight a fourth quarter run in stocks. People have turned focus to valuation concerns today. Remember, history shows us when rates are low, the P/E on the S&P 500 runs closer to 20. It’s currently under 17 on next year’s earnings estimates. An expansion to 20 on next year’s earnings gets us to about 19% higher in the S&P 500.
Have a great weekend!
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