The S&P 500 hit 2,000 for the first time in history shortly before the Bureau of Economic Analysis revised upwards their estimates for GDP growth in the second quarter of 2014. While stocks have reversed course from their weekly high, U.S. equities remain attractive to investors as more investors bet on equities thanks to improving economic conditions and the possibility of a quantitative easing program by the European Central Bank.
European Monetary Policy
While U.S. stocks hit a milestone this week, European stocks also saw broad strength relative to earlier underperformance in the year. On August 22nd, Mario Draghi hinted that declining inflation and negative growth in the center of the European Union could push the ECB to make unprecedented changes to its monetary policy, including an expansion of the eurozone monetary base.
The ECB has made several efforts to spur investment and growth in the EU in recent months, including a negative deposit rate and benchmark interest rate cuts. The ECB benchmark rate has fallen to 0.15%, which has caused bond yields throughout the eurozone to fall. While short-term and mid-term bond yields in Germany turned negative, yields on peripheral nation bond issuances have also fallen. Italy’s 10-year yield saw record lows below 2.5%, falling to match levels of U.S. Treasuries.
With moribund demand in central European nations, analysts have predicted that a round of quantitative easing is likely the ECB’s next step, and a bond buying program may materialize as early as September, after the ECB’s Governing Council meets on September 4th.
U.S. Unemployment, Housing
In the U.S., jobless claims fell to their lowest level since 2006 and have reached far below highest levels after the 2008 global financial crisis. According to the Department of Labor’s figures released on Thursday, weekly unemployment claims on a 4-week moving average fell below 300,000. That figure has been steadily falling throughout 2014, and many analysts expect it to continue to decline as remaining slack in the U.S. labor market is taken up by increased job openings, which have also risen in recent weeks.
With falling unemployment, consumer spending growth has remained steady and was a positive contributor to GDP growth, which was revised upwards by the BEA to 4.2% annualized according to a release on Thursday. The BEA pointed to a 1.6% rise in personal consumption expenditures, while disposable personal income rose by 6.6% in the second quarter on a current-dollar basis. The largest contributor to GDP growth was nonresidential fixed investment, which increased by 8.4% in the second quarter.
GDP growth acceleration has occurred while new home prices stumbled. The Department of Commerce reported this week that new home sales fell to their lowest pace since winter, with new home supply remaining at 6 months at current sales rates. In a separate study by the S&P, home prices rose by 9% on a year-over-year basis in July, a slower pace than the over 10% year-over-year price growth seen in late 2013 and early 2014. The median sales price of new houses sold in July 2014 reached 5x median U.S. household income, far above the 2.6x ratio that has been the historic norm.
Rising GDP growth and falling unemployment have coincided with an accelerating decline in Federal deficit spending, which analysts believe indicates that private sector demand is spurring the GDP growth that America has seen in recent months.
According to the CBO, the Federal deficit has fallen to $506 billion annualized in 2014, a decline of 25% from the previous year. The CBO also expects the Federal deficit to continue to fall until 2019.