Category: US

In the complex tapestry of global equity markets, the United States has recently stood out, showcasing an impressive rally reminiscent of the robust beginnings observed back in 1995. This rally spanned various regions, conspicuously leaving China on the sidelines. This surge in equity momentum marks a significant turnaround from the dovish stance that characterized market sentiments at the close of the previous year. According to insights from Goldman Sachs strategists, the US momentum factor has witnessed an extraordinary period, boasting a Sharpe ratio nearly eightfold over a three-month span, a figure that significantly eclipses the risk-adjusted returns of the S&P 500.

However, the journey has not been without its obstacles. A notable concentration within the market has raised alarms about the possibility of a market correction that could diminish equity values. Despite these fears, analysis by US strategists suggests that such phases of heightened market concentration and momentum outperformance usually pave the way for periods of ‘catch-up’ rather than ‘catch-down’, buoyed by an improving macroeconomic backdrop.

The driving forces behind the US momentum factor’s stellar performance this year can be traced back to a surge in reflationary growth. Initially, the spotlight was on the quality and growth sectors for their contributions to equity momentum. Yet, a shift has occurred, with cyclicals now taking the lead as the primary contributors to this outstanding performance.

Amid these developments, equity momentum has lent support to the broader risk appetite, although the consensus among analysts is that the chances of a continued reversal remain slim unless there’s a substantial shock to US interest rates. Such a shock could potentially arise from unexpectedly hawkish stances in the upcoming meetings of the Bank of Japan or the Federal Reserve, which might then exert a downward pressure on momentum and dampen risk sentiment.

In this environment, Europe’s GRANOLAS stocks appear poised for a defensive stance when compared against their counterparts in the ‘Magnificent 7’. Despite Goldman’s bullish stance on equities, analysts point out that the near-term price targets offer limited room for upside gains.

In light of these dynamics, analysts propose a strategic maneuver in the event of a market downturn precipitated by a rate shock. They advocate for seizing the opportunity to ‘buy the dip’, aligning with a macro baseline that anticipates robust growth coupled with a normalization of inflation rates.

Conclusion

The current landscape of the US equity market is a testament to its resilience and dynamic nature, underpinned by a remarkable momentum that has its roots in both traditional and cyclical sectors. While concerns over market concentration and potential rate shocks loom, the strategic perspective emphasizes a proactive approach, leveraging periods of volatility as opportunities for investment. As we navigate through uncertainties in interest rates and global economic policies, the advice remains clear: in the face of adversity, there lies an opportunity for those prepared to act decisively, underlining the importance of agility and foresight in investment strategies.

Recent government data has highlighted a critical economic issue facing the United States: a significant housing shortage that has become a major driver of inflation, overshadowing broader price increases. Over the past year, inflation recorded a 3.1% increase, a notable decrease from 2021 levels but still sufficient to prompt the Federal Reserve to maintain high interest rates. This inflationary period is distinct from earlier phases post-pandemic, primarily fueled by surging shelter costs as outlined by the Consumer Price Index, which includes both actual rent and the hypothetical rent for owner-occupied homes.

Contrary to the alarming inflation trends of the past, the recent data reveal a relatively stable price landscape outside the housing sector. Goods prices have shown a marginal increase of just 0.1%, and food prices rose by less than 3%. Additionally, there have been reductions in household energy prices by 2.4% and a slight decrease in car prices. Excluding housing, the inflation rate would be a modest 1.5%, a figure that would typically signal a win for the Federal Reserve, assuming housing prices followed historical growth patterns.

However, housing costs have soared beyond historical norms, recording a two-year price surge unprecedented in the last forty years. This phenomenon has created a bifurcated inflation experience among the population, benefiting homeowners through increased housing wealth—over $2 trillion since early 2022—while disproportionately burdening renters, especially the younger generation and those without home equity.

The disparity in housing cost inflation has intergenerational implications, with younger individuals facing heightened financial stress due to escalating housing expenses and being excluded from the wealth accumulation benefiting older homeowners. In contrast, retirees enjoy the perks of increased housing wealth alongside inflation protection measures like Social Security and Medicare.

Addressing the inflation driven by housing costs requires a nuanced approach, distinct from traditional inflation mitigation strategies. The Federal Reserve’s decision to hike interest rates, leading to higher mortgage rates, was anticipated to temper housing prices. Yet, the desired outcome was hampered by a significant drop in residential listings during the pandemic, resulting in a persistently tight housing market.

The consensus among economists and policymakers is that the solution to this crisis lies in significantly increasing the housing supply. Estimates suggest a national shortfall ranging from 1.5 million to 5.5 million units. A legislative effort in 2022 aimed to address this through a proposed $40 billion investment in housing supply enhancement programs. However, this initiative stumbled in the Senate, highlighting the challenges in enacting substantial federal solutions.

In the interim, smaller-scale initiatives have emerged as critical pathways to addressing the housing shortage. The Biden administration’s announcement of reforms to generate new homes and California’s legislative efforts to streamline housing construction signal incremental but essential steps towards resolving the crisis. Despite these efforts, the stark reality remains that a massive and coordinated response is required to significantly impact housing supply and, by extension, curb shelter cost-driven inflation.

In conclusion, the United States faces a dual challenge: managing inflation and addressing a deepening housing shortage. While recent inflation rates reflect a complex economic landscape, the disproportionate impact of shelter costs points to an urgent need for comprehensive housing policy reform. Without a concerted effort to boost housing supply, the economic ramifications will continue to affect American households, particularly those least equipped to weather the storm. The path forward requires innovative policy solutions that can reconcile the demand for affordable housing with the economic realities of inflation management.