As expected, the European Central Bank announced additional monetary stimulus in its effort to jump-start the EU economies. Global markets liked what they heard and bought stocks to celebrate.
While the Fed over here is withdrawing stimulus, the ECB is adding it, as are a number of other countries around the world. All these countries are taking a page from our playbook by keeping their interest rates abnormally low. Nearly 50% of 34 central banks worldwide, according to Ned Davis Research, have negative real interest rates (after accounting for inflation). Japan and Hong Kong have the lowest real rates of return at minus 3.6%. The U.S., Canada and the U.K. have real rates of minus 1% or less.
All of this low-cost money is having an impact on global economies, but it has been slow in coming. The U.S. has been at it the longest and only now, after five years, are we seeing the economy strengthen. The ISM Manufacturing Index, which measures the strength of industrial America, for example, has just hit its highest level since March of 2011. All but one of the 18 manufacturing industries reported growth last month.
Construction spending rose 1.8%, the most since May of 2012, and the strength was across the board. The public sector led the way, jumping 3%, mostly in highway spending while the private sector non-residential construction climbed 2.1%. All of this spending should boost capital expenditures in the months ahead. Those are just two examples. Bottom line: all the leading indicators of economic growth are flashing green.
No wonder equity markets continue to make new highs in the U.S. Given our growth, low interest rate environment, and improving employment picture, what’s not to like when compared to the rest of the globe?
Weighing against all this good news is the fact that we are entering the worst month of the year. September is the only month of the year going back to 1900 that has a negative average return. It also has the lowest percentage of positive readings of any month of the year. Remember too, that this is a mid-term election year and every September going back to the Fifties has been dreadful.
The drawback in this historical data is that none of it has worked thus far in 2014. Bullish sentiment, a contrary indicator, has sparked at most a few small pull backs. Technical data that would normally indicate substantial sell-offs has been wrong time and again. Fundamentally, lofty prices have been supported by even better earnings. As a result, the market is still no more than fairly valued.
U.S. interest rates, which have also trended lower this year, continue to support stocks and the economy as well. One reason that corporate earnings have grown so dramatically is that the cost of borrowing money (a major variable in a company’s profit picture) has been so low.
And while September has historically been a bad time for stocks, the last three months of the year have been just the opposite. Given that, longer-term investors will put up with some mild discomfort in the short-term in order to profit through the last quarter of the year.