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Unchanged Interest Rate Impacts US Equities Valuations

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Dec. 4 2020, Updated 10:52 a.m. ET

Higher valuations

US equities (SPY) are trading at 15.02x on a one-year forward earnings basis. Valuations rose 0.03% in the week ended September 18, 2015. They were revised mainly due to higher retail sales, more building permits, lower unemployment rate, and unchanged interest rates.

US retail sales increased by 0.2% in August compared to July’s revised increase of 0.7%. Retail sales, excluding automobiles, building materials, food services, and gasoline, increased by 0.4% in August compared to a rise of 0.6% in July.

US building permits also increased by 3.5% in August, translating to an annualized rate of 1.17 million. However, housing starts fell by 3% in August, mainly due to the expiration of an affordable housing tax credit that boosted multifamily home construction in the prior months.

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Producer prices

The US Producer Price Index remained flat in August and fell marginally by 0.80% on year-over-year basis. It fell for the seventh straight month. The US Consumer Price Index also fell 0.1% in August.

The US trade deficit fell more in August, to $41.9 billion compared to $45.2 billion in July. The strong US dollar combined with slower manufacturing led to a fall in imports.

Investors are deploying more of a top-down approach. Valuations have improved on housing and auto sales data, consumer spending, and lower inflation. Slowing growth across major emerging markets and commodity-driven nations is leading to higher investments domestically as well as in the Eurozone.

Alternative asset managers like Blackstone (BX), KKR (KKR), and The Carlyle Group (CG) are offering attractive alternative options to investors who want higher returns amid low interest rates.

Current valuations have priced in the outperformance of US equities against European (EFA) and Asian equities (EEM). However, with competitive QE (quantitative easing) due to slowdowns in China, Japan, and commodity-exporting nations like Brazil and Russia, investors are looking for investments in safer assets. As a result, investments continue to support asset prices in the United States and Europe.

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