The autumn months will be important for investors. There are three key events to keep an eye on:
(1) The US Federal Reserve policy meeting in September- central bankers are expected to announce a tapering of the $85 billion being injected into the economy every month. This comes on the back of an improving US recovery but could lead to panic selling, especially in emerging markets, which have benefited from increased US investment during the Quantitative Easing programme.
(2) German elections- the usual debates over Eurozone integration and bail-outs have been side-lined in the run-up to the German elections in September, with politicians wanting to avoid falling on the wrong side of the electorate. Doubtless these issues will emerge as soon as elections results are in, meaning a period of uncertainty in Europe could be on the way.
(3) The ‘third arrow’ of abenomics in Japan- after PM Shinzo Abe’s monetary stimulus the markets are eagerly awaiting structural reforms to the economy in order to sustain growth. It will be interesting to see what these changes may be and how they are received.
Investors’ recent flight from risky emerging markets to the US reflects the uncertainty surrounding these events. The US is currently the most stable of the world’s economies, with a large domestic market and solid growth figures. Although cutting back on quantitative easing in the US will impact all markets (including the US) negatively in the short term, it will be symptomatic of a strong underlying economy. This is why investors are turning to the US market- the outlook is far less certain elsewhere.
The housing market is perhaps the best barometer for the economy. A healthy housing market means the creation of construction jobs, a rise in the consumption of household goods and looser credit conditions for borrowers. The effects of a housing collapse, like that seen in 2007, can bring an economy to its knees, with low demand reflecting tight credit conditions and low consumer spending.
For this reason the US housing recovery is particularly good news. House sales in July were up 6.5% from June- 5.39 million compared to 5.08million. However, there is far more ground to make up. Sales are still low by pre-crisis standards as inventory needs to increase to meet the rise in demand. Until then house prices will continue to rise. The graph below illustrates the low level of existing stock in the US market (showing volume in millions):
The continued strength of the US housing market is also supported by high levels of affordability. The graph below compares the house price to income ratio from 1976 to the current date. A high ratio indicates that property is less affordable: