Looking Up for Small- and Mid-Caps
12/17/2012 9:15 am EST
The US economy may actually be making its way out of the doldrums, even in the face of global weakness and a looming cliff says Richard Moroney of Upside.
Despite the looming fiscal cliff and slowdowns overseas, things are looking up for the US economy.
While likely to remain sluggish relative to past recoveries, consensus forecasts predict US growth will rank near the top among advanced economies in 2013—and recent US indicators have been exceeding consensus expectations. Reports on the labor market, housing, and consumer confidence have positively surprised in recent months, underlying two key themes for the year ahead:
- Americans are feeling increasingly upbeat. The University of Michigan consumer sentiment index improved to 82.7 in November, up from 63.7 a year earlier and the highest level since September 2007. For the first time in four years, half of all households expect their income to rise in the year ahead. Higher incomes generally mean higher consumer spending, which drives roughly 70% of the US economy.
- Record-low mortgage rates are helping fuel demand for homes. The National Association of Home Builders said sales of previously owned homes were higher than expected in October, and the full-year total is likely to be the highest since 2007.
Property values and selling prices are climbing, while inventories of previously owned homes have dropped to ten-year lows. Meanwhile, confidence among homebuilders is at a six-year high.
To be sure, if we jump off the fiscal cliff—and more than $600 billion in automatic spending cuts and tax increases take effect in January—today’s good tidings could dissipate quickly. But both President Obama and congressional leaders have strong incentives to avoid a worst-case scenario, and a credible fiscal deal that actually provides clarity for investors and companies would be a huge positive.
Small- and mid-cap stocks offer some of the most targeted ways to bet on improvement in the US economy.