Why accelerating investment supports the bull market
Back to peak levels
The below graph reflects the accelerating recovery in private-sector investment. Though private-sector investment isn’t back to peak levels, it appears to be on its way, and this is great news for investors. While the investment recovery is encouraging, investors should note that the current recovery is still modest relative to typical post-crisis recoveries. This is an issue that has bothered the Federal Reserve Bank, which has kept interest rates exceptionally low for exceptionally long. This article considers the recovery of private-sector investment and the macroeconomic outlook for equity investors.
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The Fed supports investment
The Federal Reserve Bank has been particularly troubled by the slow economic recovery in the U.S. and has maintained near-zero interest rates, as well as aggressive bond purchase programs, to support the recovery. Most disturbing has been employment growth and slow growth in private investment. As we noted in a prior series, US labor markets are finally showing signs of recovery, and as above—at long last—investment data is finally starting to accelerate while Federal deficit spending has been able to decelerate. This is a positive development in the ongoing economic recovery.
To see how both residential and non-residential investment are leading the investment recovery charge, please see the next article in this series.
To see how the exodus of Baby Boomers from the labor market is impacting the economy, please see Is Baby Boomer retirement more good news for stocks and labor markets?
Equity outlook: Constructive
Despite problems in Ukraine and China, and despite the modest consumption data in the USA, U.S. labor markets appear to be well into recovery—with the exception of the long-term unemployed. From this perspective, it would appear that the U.S. is probably the most attractive major investment market at the moment. While the fixed investment environment of the U.S. is still quite poor, corporate profits and household net worth have hit record levels. Hopefully, all this wealth and liquidity can find their way into a new wave of profitable investment opportunities and significantly augment improvements in the current economic recovery. For investors who see a virtuous cycle of employment, consumption, and investment in the works, the continued outperformance of growth stocks over value stocks could remain the prevailing trend, favoring the iShares Russell 1000 Growth Index (IWF), and growth-oriented companies such as Google (GOOG) or Apple (AAPL).
Equity outlook: Cautious
Given the China- and Russia-related uncertainties, investors may wish to consider limiting excessive exposure to broad equity markets, as reflected in the iShares Russell 2000 Index (IWM), State Street Global Advisors S&P 500 SPDR (SPY), Dow Jones SPDR (DIA), and iShares S&P 500 (IVV). Accordingly, investors may wish to consider shifting equity exposure to more defensive consumer staples–related shares, as reflected in the iShares Russell 1000 Value Index (IWD).