The world seems awash in unrest. Territorial disputes and religious wars fill most newscasts and almost everywhere we look there is conflict. However, the market seems relatively immune to these issues. We believe that the market is looking past these distractions and seems to be more focused on low levels of inflation worldwide, and continuing to thrive on low interest rates.
Many forecasts have been surprisingly wrong coming into this year. With the Federal Reserve reducing its Quantitative Easing and the economy gaining traction, the broad consensus was for higher interest rates. Long term Treasuries, in front of that consensus and the actions of the Federal Reserve, dropped from 3.95% to 3.20%. Our feeling is that as long as rates remain moderated, the market will continue to do well.
We continue to move farther away from the recession and it shows. As revealed by yet another quarter of positive earnings, companies have increased their profit margins by improving overall efficiency. This growth in earnings plays a large role in our faith in the continued resilience of equities as prices move forward. When we combine this with the strength in recent economic numbers, building a case for continued growth becomes even more reasonable.
The U.S. economy is experiencing a revival in manufacturing and positive wage growth has returned. The unemployment rate is hovering around 6.0% and jobs are available to those with useful skills. How long can this last? We believe that this story could continue for quite some time. The United States seem to be leading the world out of the severe global economic downturn of the last five years. This is not a unique situation; America has played this role many times in the past.
As observers of recent political farces and deteriorating economic might, we have become accustomed to focusing on a half empty glass when it relates to the strength of the United States. The market seems to be telling a different story, and seeing the glass as half full. As usual, it’s never smart to bet against America.
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