Several factors have contributed to the slower than average growth in GDP in this recovery from the recession. Aside from the high rate of unemployment and the bursting of the housing bubble, individuals and companies are focused on improving their balance sheets.
As the below chart details, individuals continue to reduce their leverage. The slight up tick in leverage, based on the latest print, could be supportive of the recent improvement in consumer sentiment that I reported yesterday. This is equally impressive given the contraction in the value of home prices that would contribute to a higher leverage ratio.
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| From The Blog of HORAN Capital Advisors |
Coinciding with this improvement in individual leverage is the fact individuals have stepped up their level of savings.
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| From The Blog of HORAN Capital Advisors |
Lastly, nonfinancial companies continue to increase the level of liquid assets. Assuming there is more clarity on policy coming out of Washington, this cash may be put to use in higher dividend distributions, stock buybacks and even increased acquisition activity.
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| From The Blog of HORAN Capital Advisors |
All of this would be supportive of higher stock prices. The risk at the moment is the market has been on an essentially uninterrupted uptrend since the end of August.
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| From The Blog of HORAN Capital Advisors |
Last week the market (S&P 500 Index) broke through a double top. If the market can successfully test this level and turn this former resistance into support, further market advances are likely.
Source:
The Balance Sheet Recovery
Economic Trends
Federal Reserve Bank of Cleveland
By: Tim Bianco and Filippo Occhino
December 12, 2010
http://www.clevelandfed.org/research/trends/2010/1210/01gropro.cfm
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