Monday, 26 March 2012

Wall Street’s breadth reflects Main Street’s recovery

This year’s action on Wall Street is not just impressive; it is spectacular! We are not talking just about the S&P 500’s climb to a new post-Lehman crisis high but about the breadth of the equity market and the performance of the second liners and smaller companies. The rise by the S&P mid caps to new record highs has not gone unnoticed. Nor has the rise in the S&P mid cap index. The index has climbed to within a whisker of the record set last year. The interesting feature though is that the US equity market is on its own in demonstrating such breadth. Neither the FTSE World ex US mid cap index nor the small cap index is any where near its former peak.

It is not stretching the imagination to say that the US equity market’s breadth reflects the transfer of the recovery in the US economy from the corporate sector to the personal sector by way of employment. The firm upward trend of job creation is a convincing sign of the sustainable expansion the economy now looks to be establishing.

For the corporate sector this transfer may spell some erosion in margin growth because of the resulting loss in productivity gains reaped previously and now also the associated rise in unit labour cost growth. But the good news is that more jobs mean more spending, which is likely now that consumer confidence is on the rebound, and a better tone to the housing market. Not only does this give breadth to the economy’s expansion but it also provides for greater breadth in earnings, which is good news for those second liners and smaller companies with sales more aligned to the domestic economy than say for the larger international blue chips. More >


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