Economy & Equity Market - US

Economy - The underlying economy is strong, not as strong as China or India but strong. Jobs are there. The most important factor is housing, a lot of Americans have a lot of savings tied into housing. A robust housing market over the last 3 years have allowed many to tap into the gains via revaluation or trading up of properties. The one thing which threatened to derail the economy was fuel prices, which caused iflationary pockets in the system. As mentioned before, if it wasn't the higher fuel prices, it would be the stronger consumer spending to put on the inflationary pressures. So, either one or the other, the higher oil prices have flattened housing stats, which was sufficient to give the Fed balls not to raise rates.

Is the US economy slowing? Not really, consumer spending is still there as the gains made or locked up in properties is still substantive. Jobs are still there. US companies have never had so much cash in their system. But its not charging ahead.

Equity - Companies never have so much cash in the books. private equity never had so much money to spend. Put them together, bigger M&A activity will follow, which will have the effect of raising industry valuations whenever A company is acquired. The government bond yield and corporate bond yield differential is in the lower end, indicating little risk of over-valuation in companies - a good set up for bull run to continue. The weaker US dollar kind of works well for everyone, including the Americans. What we want to see is a gradual weakeneing, maybe anothe 3% for the rest of the year and another 5% next year. All in all, US markets have a higher upside than most Asian markets including Malaysia. My targets for S&P 500 is 1,450 (+11.2% from current levels) by 1Q2007, and the Dow at 12,500 (+9.8% from current levels). Currently, the S&P 500 is at 1,303 while the Dow is at 11,381.

Comments