The recent economic data from the U.S. undoubtedly indicates that the world’s biggest economy is presently inching closer in attaining self-sustaining growth. The Institute for Supply Management’s (ISM) Manufacturing Index is continuing to show expansion with its recent reading at 53.5 despite the fractionally down result from last month. The services-oriented ISM Non-Manufacturing Index rose to 56.7 in January while the standing orders further strengthened to 59.5.
The jobs market is reinforcing the momentum of the U.S. with the preliminary unemployment claims battling volatility yet remaining consistently below the key 300,000 level. The economy continues to make more jobs with another 257,000 added last month, while the previous two months were modified higher by 87,000 jobs collectively. The unemployment rate did not tick up to 5.7 % which is indicative that more people entering the workforce as the labour participation rate goes on the rise.
However, the strength of the labour market might be starting to be reflected in a simple increase in wages as the Employment Cost Index (ECI) revealed that a 2.3 % year-over-year gain as reported during the 4th quarter of 2014.
Stocks, what about them?
While the economy is continuing to gain momentum, the U.S. stock market has been particularly been volatile with 18 out of 20 trading days in January having witnessed greater than 1 % moves in the S&P500. Although February appears to have settled, this year will possibly be marked by a sharp pullbacks and while there is the secular bull market which is well intact. There is not marked possibility of a decent-sized correction in the U.S. for the first time in several years.
The valuation expansion has been remote in this kind of environment, leaving earnings to do more of the work which resulted mounting pressures on earnings, since the market may have a much more difficult time generating the kind of turns which investors have recently enjoyed.
Along with the ambiguity regarding global growth and U.S. Fed policy, the possible spark for a sell-off might come from a crisis associated with the fall in the oil prices, sudden moves in the U.S. dollar and the ever present geopolitical concerns. Noted also is the time required for a market correction; presently three and a half years. From a historical point of view, U.S. markets typically undertake a correction every 18 months or so.
The third year of an election cycle has since been historical to the U.S. stock market. Back in the late 1920s, the market return of the third presidential year only averages at a remarkable 13 % with the year ending in positive territory, almost always 86 % of the time. The recent strength of the dollar was taken into consideration when the dollar index rose more than 10 % as it did last year with the year prior to which saw an average return of almost 15 % with no negative years so far.
Continuing bull market
Although there may be high degrees of volatility in the short term, the foundation of a strong economy inspired by job creation and a resurgent consumer will result to the U.S. bull market. On a relative and unqualified basis, the U.S. continues to be ahead its developed peers and while the stock market might not be able to be classified as great value, in bull markets valuations can be continued to be extended.
U.S. investments is an essential consideration for any stock investor due to the sheer size of both the economy and the market. More often than not, a home bias most likely lead to the underexposure the world’s biggest and most liquid stock market. Almost all homes in the U.K. will purchase U.S.-generated products and services but only a small amount of households invest in the opportunities that the U.S. market can better provide.
Although there may be several short and medium-term volatility, a strong economy means that the outlook for the U.S. is positive in the longer term. Although there may be more gains to be earned, more speculative markets are more suitable for those investors who feel that they have more or less adequate U.S. exposure or for those who may be willing to take a little more risk in their portfolios.