Also known as “Supply-side Economics” applies more directly to fiscal policy, but its principles still apply to our current state of monetary policy.  On the bright side, I made you look .

Corporate profits over the last several years have soared, however personal income and subsequent spending have stayed fairly muted.  Supply-side economics asserts that as corporations are more profitable (through the reduction of taxes, but in this case monetary easing) they will then make capital investments in the way of employment and new equipment.  That equipment, in turn creates even more jobs for the production of inventories. The state of full employment and elevated salaries will then foster more spending, resulting in strong GDP.  So what is missing; why has capital investment by corporations stalled?

In a recent article I discuss “The recipe for corporate growth”, however something is missing.  Unfortunately it appears to be the appetite for risk.  Corporations would have to take on short term reductions in corporate earnings in order to invest in the future expansion of business.  As the Federal Reserve is still supplementing the economy (through quantitative easing, QE) it appears that corporations will be content to enjoy the impact that QE is having on the consumer before translating their profits to capital investment.  I believe we will see this capital investment begin later this year, but I also feel it will be at a muted rate until QE is all but gone.

Elsewhere in the economy US real estate took a step backward last week as the S&P/Case Schiller HPI composite – 20 showed prices for homes increased 13.2% year over year in January[1]; however pending sales of both new and existing homes fell.  There is a recurring theme across many reports relating the current weakness in the housing market to harsh weather.  The encouraging note is that perhaps the continued escalation in prices reflects that weather is truly the issue and that the spring will bring pent up demand to the buyers table.

The other concern would be elevated mortgage rates… yes I said elevated.  It is ridiculous that a 30 year fixed mortgage at 4.56% (as of 3/28/14) [2] is viewed as elevated.  In fact that rate is down from year end and has been at this level in excess of 9 months now.  This factor should be mitigated going forward as this is becoming more of a normal rate.

Internationally, China has continued to show reports of economic slowing as many believe that China will have to implement stimulus to regain ground on its 2014 GDP projection of 7.5%.  The slowdown in China is expected, but is moving faster than anticipated.  This is causing concerns as China is the second largest world economy.  If Chinese GDP were to fall by 1% it would represent a .35% fall in global GDP[3].

The Eurozone has continued to show strength as French Manufacturing PMI came in at 51.9[4] (Above 50 indicates expansionary), the first reading above 50 in months.

If you would like an in-depth analysis of your current positions and allocation, please feel free to call Jason Roque at 719-313-7536 to schedule an appointment.

Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services.  Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment.  Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.