Today we got the newly released data on the state of the economy in the form of the Fed Flow of Funds. We have often cited it as a way of corroborating certain trends and potential reversal of trends when warranted.
We have seen the market grow from a hypochondriac in which every negative headline was met with a perpetuation of Chicken Little’s proclamation to a market that is far more resilient to negative headlines. Many are considering this growing desensitization to negative headlines as obliviousness and an over exuberance to potential negative effects. However, when one considers the rise in the corporate equities and mutual fund equity positions, one does not see an over exuberance of chasing the markets. Rather they see a trend in growth that mirrors the overall market growth. If a chasing was to occur, then equity assets in the balance sheets would be growing far more substantially than the markets growth rate. Since the end of 2009, corporate equities rose 185% over the four years ending in 2013. Over that same timeframe, the S&P 500 had a total return of 76%, the Russell 2000 had a total return of 93.09% and the Russell 3000 had a total return of 79.4%.
As shown below, we continue to see one of the largest byproducts of the two equity bubbles bursting and housing bubble bursting over the last 15 years and an accommodative Federal Reserve whereby a large backstop of cash and liquidity has only grown larger.
One important area that may catch the future economy for shocking boom is the replenishment rate; which we designate the net worth divided by disposable income. As the employment truly catches fire and the war for talent increases real wages, one could see a substantial increase in consumption that has not been factored in.
One area that draws particularly close attention is the recovery in the housing sector. Much has been written about it; however, the growth still appears to be in the beginning of the “embryonic stage.” It will not be a straight linear line, but so long as the net new households created is rising substantially relative to lack of new homes being built and an improving unemployment picture, housing has a substantial tail wind that we like nearly as much as we did in 2009.
For a better picture on what might occur, consider the comparison of the current total of new homes for sale in the United States and when it was last near these levels.
The last time we were at this level in low points of U.S. new homes for sale, the 10-year and 20-year average gain in the Household Real Estate Assets rose 10.4% annually over each period, according to the Flow of Funds report. The long-term measure stands at 6.7%. This estimates that in 10 years at 10% average gain, household real estate assets could rise to $56 trillion from the current $21.996 trillion.
Housing, construction, rising demand of materials and subsequent stability in consumption based off of higher housing levels continues to be a pivot to the argument that the economy still has better days ahead of it than it has behind it.
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information atwww.aamlive.com/blog/about/disclosures.