Despite all of the political, geo-political and social tumult in the news recently, U.S. economic data has remained surprisingly robust. Stronger economic data has been one of the components in the recent rally in U.S. equities.
First, U.S. assets are in demand from global investors. This can be seen from the strong demand for long U.S. Treasury bonds at the most recent auction. Global investors are looking for a safe haven from global uncertainty and the U.S. is the safest place to invest money.
Second, central bank policy is being accommodative. Any action by the Federal Reserve (Fed) is now most likely on hold, versus the at least one or two tightenings expected prior to year-end only two months ago. The Bank of England and European Central Bank will continue to be accommodative to deal with the aftershocks of the Brexit vote. The Bank of Japan is now openly talking about some form of helicopter money -- an action where central banks directly finance budget stimulus through programs -- in its next round of stimulus.
The third factor is better-than-expected U.S. economic data. The recent employment data and manufacturing reports continue to show that U.S. growth remains consistent in the 2.0-2.5% range.
In this environment, the path of least resistance is for equities to continue to grind higher over the coming months. Watch for any change in the above factors to halt the rally in equities.
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