US economy gains strength

Global markets resumed their upward climb last week, led by the US share prices which rallied on positive US economic data. The 3rd quarter GDP (annualised growth rate) for the United States came in at 7.2 percent, the largest growth figure the US has seen in almost two decades. The 7.2 percent expansion was substantially higher than analysts had forecast, and was driven by both higher consumer spending and higher corporate spending. In its release, the US Commerce Department acknowledged that the surge in consumer spending was boosted by lower income taxes. The figure also supports economists’ view that business spending was turning positive. Yields on ten-year treasuries rose to a two-week high following the announcement. Following its latest meeting, the US Federal Reserve left interest rates unchanged at 1 percent.  The US policy makers decided to keep borrowing rates at their lowest level in 45 years to reduce the risk of inflation falling to an undesirably low level. It is generally felt in the market place that interest rates are unlikely to be increased in the short term, until the US lead economic recovery becomes more defined.

In a separate report issued by the US Commerce Department, released data showed that the US housing market continued to underpin and strengthen the US economy. Sales of new homes held above 1.1 million (on an annualized basis) in September, after economists had expected that sales of houses would fall. The sale of new homes accounts for around 15 percent of all house sales, and analysts are waiting with eager anticipation for the National Association of Realtors existing home sales figures this week. Also, the ISM Manufacturers number for October rose to 56 from 53.1 — a number over 50 shows growth. Still on the US Economic front, US corporate profits rose by the highest amount in three years in the third quarter as higher consumer spending, and a weak dollar boosted demand for manufactured goods. Profits were up by over 21 percent for the 323 companies in the S&P 500 Index that had reported earnings by Friday October 24. The average P/E ratio for S&P companies is 18 and we note that inventories remain at all time lows, leaving room for growth in sales and inventories. As a final note on the US economy, we comment on the US Dollar which showed some strength, earlier this week. Although the trade imbalance should dominate over the long term, the recent strength of the US economy is a positive for the country and we look for the USD to bounce between 1.10 and 1.18 on the euro until the other economies gain economic strength as well. Japan is doing better, but continues to dump significant US Dollars on the market and the Yen may well settle into the 105 range on the greenback before mid 2004.

It is expected that the Monetary Policy Committee in the UK will announce a quarter percentage point rise in interest rates at their meeting this week. In anticipation, the Pound rose to a five-year high against the dollar of nearly $1.71. We are forever reminded that the US Government has no strong dollar policy, so despite the recent moves, plan your business accordingly. Scandals once again hit the headlines as some of the Mutual Fund companies, most notably Prudential, have been caught by the regulators skimming money via market timing operations. Five Prudential ex brokers and one manager have been charged in this latest scheme of defrauding investors. Also in the news Health South CEO Richard Scrushy has been indicted for every kind of fraud imaginable. It is alleged that he deliberately falsified SEC reports and accounts and in general lied. He is facing 250 plus years in jail, a forfeiture of some 267 Million USD in ill-gotten gains and some 36 million in fines. Should the US employment report due out Friday this week come in at all positive, the market seems hell-bent on moving forward apace, crushing the DOW 10,000 barrier with some measure of certainty. It remains a stock pickers’ market as some stocks are fairly valued and some not. Given the US economic data and earning reports, slow and steady gains can be expected to year end and given that in the past 75 years, 87 percent of Decembers have been up months, and against the background of all the economic parameters falling into place, it seems a certainty that this December will be an up one as well.

e-mail: darcy@investments-intl.com