3 Stories in the global economy that should not go un-noticed
Markets turned out another solid performance last week as all three major indices reached new highs. As we near the end of earnings season, 90% of S&P 500 companies have reported in, with 67% beating earnings expectations. If all remaining companies post numbers in line with estimates, earnings will be up 5.3% over the first quarter of 2012.
For the week, the S&P 500 added 1.19%, the Dow gained 0.97%, and the Nasdaq increased 1.72%.
Here are the 3 stories this week that rose above the noise:
Are Stocks Cheap? A Review of the Evidence
While the rising stock market has many concerned that financial markets are becoming overheated due to the Fed’s policies, a recent study published by the Federal Reserve Bank of New York suggests that the equity market is trading at its most undervalued levels ever.
In the study, the authors surveyed banks, economists and central banks around the world regarding their preferred models of equity risk premiums. Using a weighted average of 29 models, the authors found that “we will enjoy historically high excess returns for the S&P 500 for the next five years.” While the study contains a number of qualifiers, it is interesting on several levels, including its implied message regarding the future of U.S. monetary policy if the Fed believes equity prices are undervalued.
Oil Plunge Cools U.S. Import Prices in April, Tames Inflation
After years of quantitative easing and Fed-induced liquidity, many are worried about the prospects of rampant inflation in the future.
However, the data continues to show inflation is not a concern for the economy right now. Import prices dropped in April as a result of cheaper energy prices. As long as inflation remains subdued, the Fed will have less of a reason to discontinue its current easy monetary policies.
U.S. Economic Path since ’07 Proves Superior to EU Slump
The United States and Europe have traveled down separate paths since the 2007-2009 recession. The United States implemented a stronger and more immediate response to the financial crisis and focused on bank liquidity and strong fiscal and monetary stimulus. Europe, on the other hand, was less urgent in its reaction and focused on austerity over fiscal stimulus. The U.S. plan was more effective.
Today, the U.S. unemployment rate is 7.5 percent, which is high relative to other post-World War II recoveries at this stage, but much lower than in Europe, where unemployment is at 12.1 percent. Additionally, the U.S. is achieving positive GDP growth and expansion in manufacturing, while Europe is stuck in another lengthy recession and is suffering from a contracting manufacturing sector.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
