Are global markets underestimating the strength of the US economy?

Workers Welding Boilers
There's plenty of domestic and global uncertainty, but confidence is rising and inflation is ticking higher (Source: Getty)

David Morrison, senior market strategist at Spread Co, says Yes.

While GDP growth is somewhat tepid (annualised, the economy grew 1.4 per cent in the fourth quarter of 2015), there is evidence that the US economy is picking up steam. Just last week we saw strong numbers for pending home sales, Chicago PMI and the all-important ISM manufacturing PMI. This shot back above the 50 threshold indicating a return of expansion in the sector. Unemployment has risen slightly to 5 per cent from 4.9 per cent. But this was a result of previously disillusioned workers returning to the jobs market and is still well below the 5.8 per cent average since 1948. Average earnings are picking up and this should boost consumption and overall economic activity. Confidence is also rising, and inflation is ticking higher. Sure, there’s plenty of uncertainty both at the domestic level (with the Presidential election at the end of this year) and globally. But the US is well placed to move forward, and Fed chair Janet Yellen has made it clear she won’t be hiking interest rates anytime soon.

Chris Bailey, strategist at Raymond James, says No.

If you are prepared to value a stock market with little anticipated year-on-year earnings growth in 2016 at a price to earnings ratio of just under 17 times, then it is very difficult to argue investors are underestimating the US economy. We may live in a strange time of near-zero interest rates which heighten the excitement – and target prices – of those complicated financial models beloved by analysts and fund managers, but such a valuation indicates optimism. Yet confusingly, if you ask investors if they are bullish or bearish, the largest quotient opt for a neutral tone. Against a backdrop of very mixed anticipated earnings growth and non-euphoric sentiment, markets are still valued as if a growth spurt is around the corner. Either there is no investment alternative or Mr Market is optimistic. Meanwhile, the Fed slowly tempers expectations about further, multiple interest rate rises in 2016 as US economic growth expectations wane. Reality feels much closer to the roundhead views of the Fed than the cavalier current optimism of the market.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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