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Strength in global stock markets so far in 2012 has been supported by the fact that the U.S. economy is recovering, as demonstrated by the series of better overall economic indicators since the summer of 2011. The key reason for this recovery is because the two most important industries to U.S. growth are moving back to normal levels; housing and autos. After falling from an annual construction run of close to 2 million new homes per year in the 2002-06 period, new housing starts fell to an annual rate of around 500,000 over the last three years as excessive inventory levels and reduced demand lead to a collapse in home prices. While prices haven’t begun rising, they have stabilized and housing starts have risen back to the 700,000 range. This is still well below the ‘normal’ rate of around 1.0-1.2 million annual starts (which is the number of ‘new household formations’ in the U.S. each year), but clearly the trend has improved. A similar situation exists in the auto industry, where normal ‘replacement demand’ would put annual auto production at around 13 million vehicles. This number dropped to under 10 million after the 2008 recession but has now climbed back up to the 11 million range. This recovery in two key industries is also showing up in the ISI Corporate Surveys, which have recently moved up to highest level in over four years and show expansion of better than 3% in coming quarters.
The better economic results have prompted Goldman Sachs to become more bullish on stock prices. They recently put out a new trading call saying that stocks will probably begin a “steady upward trajectory” over the next few years as any declines in economic growth are already reflected in share prices. Their overall view is that they think it’s time to say a ‘long good-bye’ to bonds, and embrace the ‘long good buy’ for equities. The prospects for returns in equities versus bonds “are as good as they have been in a generation,” according to Goldman. They also suggest that gains in bond yields also can support equities. Ten-year yields have climbed from a record low of 1.67% set Sept. 23, to a recent high of 2.37%. Equities offer an opportunity now, and emerging markets may still generate the strongest longer-term results as those economies continue to grow faster than the developed economies.
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