01 Mar The Lato Letter: Volume 1, Issue 7.
North American equity markets have been very strong since the beginning of the year with the S&P 500 up 8.6% and the S&P/TSX up 5.8% to the end of February. With the Greek situation still not resolved and potentially causing further European troubles, Middle Eastern tensions rising again in Syria and Iran and the US political situation creating more questions than answers, you might be asking what has changed to propel the markets to their highest levels prior to the 2008 financial crisis?
Part of the answer lies in a steadily improving North American economic recovery. The charts below, which are courtesy of Hays Advisory Inc., depict three important areas of improvement in the US economy. The first chart shows the recently improved outlook for the US manufacturing sector as measured by the ISM Purchasing Managers’ Index and the Fed Manufacturing Surveys.
The next chart (just below) shows the continued recovery in home sales since they bottomed in 2010. Sales have recently accelerated as the process of clearing housing inventories continues before a significant increase in new home construction can begin. In a CNBC interview yesterday, Douglas Yearly, the CEO of Toll Brothers said, “We feel about the best we have in five years. We’re really seeing improvement everywhere.” A recovery in the home building industry, which may be starting, will provide a significant boost to the US economy.
The final chart, just below, shows the sharp improvement in the last couple of months in the percentage of the population that is unemployed for various periods of time. The percentage of the population that is unemployed has been improving since 2010 but that improvement has accelerated in the last few months.
After two months, I admit that the strength so far this year has been surprising but I also continue to believe, as I have stated before, that if there is a major surprise this year it will be a positive surprise. Nothing ever goes straight up, even Apple, so setbacks are inevitable and conditions do change but the bottom line is that a positive medium to long term outlook is the correct outlook at this point.
PS I will be appearing on Market Call on BNN at 1:30pm tomorrow (Friday, March 2nd). If you miss it you can catch the replay at 8:30pm, or go to the Library section of this website to find the link to watch it online at any time.
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