Worries calmed in Europe, good news on the domestic real estate front, and the Federal Reserve continuing policies to bolster employment and growth were all key factors in the stock market’s healthy performance in September. Here’s an overview of what’s behind that optimism. Please bear in mind the following is intended to provide general information and is not a substitute for professional tax and investment advice.
- Numbers in August were up for existing home sales and for new home construction. The increase of 7.8 percent for previously owned homes (to an annual rate of 4.82 million) is seen as a strong indication that a rebound is under way. Median existing home prices rose for the sixth straight month in a row – the first occurrence since December 2005-May 2006. All four national regions posted increased sales. Housing starts increased 2.3 percent (to an annual rate of 750,000) in August. Housing starts are 29 percent higher compared to a year ago, but still lag behind the numbers pre-downturn. From an investment point of view, a turnaround bodes well for industries involved in construction and also for banks – especially regional banks.
- The latest round of quantitative easing (QE3) is designed to maintain an accommodative monetary policy “for a considerable time after the economic recovery strengthens,” according to the Federal Reserve. Officials have indicated that short-term interest rates would remain at very low levels through mid-2015 (and perhaps beyond). The Fed’s announcement was viewed as positive by the markets. Reviewing the possible impact of round three on individual investors, many analysts think QE3 presents several challenges when it comes to building an investment portfolio. QE1 helped boost stocks that were most sensitive to the economy’s performance. In the second round, the benefits were much less broad-based. And so, where will the benefits of the current round accrue? As always, opinions vary.
- Many advisors suggest that retirees or people about to retire avoid Treasury and low-yielding bonds and seek advice on higher-yielding options that are less expensive.
- Other analysts think the Fed’s move might nudge investors towards higher-risk stocks – small caps rather than blue chips – where the potential rewards are greater.
- The financial sector is attracting the attention of some experts. They believe the commercial loan business is increasing, and that U.S. banks stand ready to pick up the slack while beleaguered European banks repair their balance sheets.
- Others, who are not advocates of the Fed’s quantitative easing strategy, are recommending commodities to some of their clients.
The majority of analysts, whatever their investment sentiments might be, anticipate volatility in the months ahead. There is still much work ahead for the European Central Bank, and we have yet to see how, or if, QE3 will bolster growth.
As always the above commentary is general in nature and is not intended to replace the advice of professional tax and investment advisors.