Primed for a Christmas Rally

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The American economy is moving right on track as far as Profit Watch is concerned.

That means we’re on track for a strong 2019 when it comes to US stocks…which might be just what we need to pull the Aussie market out of its current rut.

Regardless, the latest news from Middle America means you can throw aside the doomster warnings for now.

There’s US$5.8 trillion in tappable wealth that’s beginning to move.

You can’t see it if you look at the headline stock indices.

But it’s clear once you start digging a little deeper.

And that’s exactly what we’ll do today…

Did I just say US$5.8 trillion?

Where’s that going to come from?

Why, home equity in America, of course!

Back in the July issue of my monthly Small Cap Alpha report I made the case that the American economy was a lot stronger than most people believed.

Part of the reason was US property values.

CNBC reported at the time that home equity was at the highest point in history.

I didn’t see anyone else point out this basic fact when it came out — or since, now that I think about it.

Point being: Existing real estate owners could tap this at any time and driver consumer spending forward.

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Now, the Wall Street Journal confirms it’s beginning to show up through refinancing…

More than 80% of borrowers who refinanced in the third quarter chose the “cash out” option, withdrawing $14.6 billion in equity out of their homes, according to government-sponsored mortgage corporation Freddie Mac. That is the highest share of cash-out refis since 2007

“Home equity is the big pot of gold,” said Sam Khater, the chief economist at Freddie Mac.

Indeed, Sam.

We hear a lot about US stock markets all the time. They dominate the news. However, this obscures the basic reality for most Americans.

The top 10% own most US stocks. Middle class American wealth is centred around property.

Australia is no different.

And parts of the US have seen prodigious rises in property values since the entire market bottomed out in 2011.

Certainly, any properties near where the big tech companies are headquartered — California, Seattle, Denver — have soared.

In San Francisco, rents are 36% higher in real terms than they were in 2005, according to this week’s Economist.

Now we should see this wealth show up in healthy consumer spending.

Our analysis appears on track based off the latest Black Friday figures…

Consumers go shopping!

Online sales were 28% higher this year on Thanksgiving Day.

The American National Retail Federation expects Christmas shopping over November and December to increase 4.8% over 2017.

In fact, the S&P consumer discretionary sector of US stocks is now the second-best performing over the last year.

Of course, this isn’t all to do with home equity. There are plenty of other healthy signs across the US.

The national unemployment rate is 3.7%. But there are cities across the US where it’s even lower than this. And wages are rising.

America is a pretty happy place right now.

Don’t forget, too, that the recent drop in oil prices is now going to give the US — and Aussie — consumer another helping hand for as long as it lasts.

Oil was getting a little uncomfortable there for a while.

Now, we just need a catalyst to send the markets higher again.

The fundamentals are sound.

My money is on the upcoming G20 meeting…

The case for a massive relief rally

Donald Trump spent a lot of 2018 saying that US sanctions would hit Iranian oil and there would be no exceptions.

The oil market priced this in — hence part of the rise into October this year.

Except the times that the Trump administration allowed multiple exemptions.

His rhetoric was totally divorced from the reality.

That’s part of the dramatic fall in the oil price lately — and Trump scores a win with the average US punter.

We could see something like this play out at the G20 meeting.

All year, Trump has hammered China. The market is wary that this ‘trade war’ will drag down growth.

If there’s a positive resolution to the China-US spat at the G20, the markets could soar in a massive relief rally.

The S&P 500 trades on a modest 16 times forward earnings.

The historical average is 20.

There’s plenty of room for the market to move up here.

Now, we can’t know this is how things will play out. But the potential is latent.

Indeed, the US consumer is looking so healthy right now, stocks could be on the Christmas shopping list — alongside the turkey and ham, and prawns for us Aussies.

Regards,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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