As we approach the end of 2014, economic data continues to support the notion that all is reasonably well with the domestic economy. Low interest rates, cheap commodity prices, stable housing, a falling unemployment rate, and strong retail sales set the stage for a US economy which looks to be continuing its broad-based expansion. Although the rest of the world seems to be lagging, the tailwinds of being both the world’s reserve currency, and an economy made primarily of domestic demand, are working in our favor.
The recent bond rally, fueled by foreign interest has been a significant factor in adding to these favorable conditions. Rates continue to remain low, which has resulted in both significant amounts of capital expenditure on the part of businesses, and a healthy housing market with inventory below the 5 month mark and building permits nearing a 6-1/2-year high.
The low price of commodities hasn’t hurt either. Cheap raw materials and a dramatic decrease in fuel costs are creating higher margins for businesses. These higher margins, combined with the recent drive to cut excess expense, translate into higher earnings. This expansion in margins comes at a time when typically margins are contracting because cost cutting has run its course.
Not only are businesses benefiting, but the consumer is alive and well. We have been able to refinance our higher interest rate loans, increase our savings rate, and we are spending less money at the gas pump leaving more money in the consumers pocket just in time for the holidays.
As long as the road ahead remains clear, these conditions should support continued growth in stocks. How much of a price increase in equities will depend heavily on the duration of this favorable environment. If businesses continue to have sustained earnings growth, equity prices can move in stride without creating unjustified valuations.
We expect to see this environment continue well into 2015 given the current momentum, and are actively seeking opportunity in both undervalued securities and those with high potential for growth. Finally, we are also keeping a close eye on international markets, looking for opportunity abroad if the continued strength of the U.S. economy proves to be enough to turn the tide for the rest of the world.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity.
Investing in commodities is speculative, involves substantial risk, and is not suitable for all investors. Investors should be aware that such investments can quickly lead to large losses as well as gains.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations. Past performance does not guarantee future results.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.