U.S. business is growing slowly, and Business Confidence is returning.
1. The U.S. economy is poised to grow at a more rapid rate. The U.S. is not alone. In spite of fears, China is showing continued strong growth. India is picking up. Smaller Asian exporters to Europe have not picked up much yet because Europe is just at the beginning of its return to health. We believe that within a few months, the small Asian exporters will see a pickup in growth.
2. Continued QE from the US and from China. We do not see an aggressive Fed tapering anytime soon. Ms Yellen and the FOMC are more job-oriented than the previous open market committee, while the committee has long considered both inflation and jobs. We did not see any U.S. QE taper this month, and we do not expect it until March 2014 — if then. China is also engaging in QE at a rapid rate. Central bank policies — in the U.S., China, Japan, the U.K., and elsewhere — are keeping the QE spigots open.
3. Strengthening business confidence will lead to improvements in capital spending and employment. In order to grow more rapidly, the business community plans to spend money to build plant and equipment, ramp-up R& D and hire more employees.
4. This growth in GDP will lead to more corporate profits in the U.S… and higher corporate earnings, which will lead to higher stock prices — all other things being equal.
Why Stocks Continue Rallying Into 2014
Recent statements by some respected commentators that the U.S. is reaching bubble levels are misleading. While we agree that some sectors of the U.S. market may be nearing bubble levels, in our opinion, the market as a whole remains some distance from “bubblicious.”
Why do we say that? In the 42 years since we started Guild Investment Management, we have noticed four main market-ending phenomena:
1. War, terrorism, or external catastrophe of large proportions, impacting the U.S. directly.
2. Higher interest rates, especially short-term rates which rise high enough to attract money away from stocks and away from supplying capital to businesses so that they can grow. Capital is directed instead to foreign countries, or other instruments than stocks and corporate growth, due to massive interest rates paid in some locations.
3. Extraordinary popular delusions and the madness that they create. These manifest themselves as a massive return of animal spirits and over-valuation of the market as a whole, such as occurred in early 2000 during the mania that surrounded the internet investment bubble.
4. An increase in inflation that market participants believe is currently excessive or will continuing rising.
None of these problems is currently besetting the market — although some investment sectors are seeing a little bit of number 3. We conclude that after a modest correction, U.S. stocks will follow their seasonal pattern, and rally for a few more months at a minimum.