Bullish Outlook for US?

In the current doom and gloom over the global financial markets and US stock indices, who would bet there is a bullish outlook for US stocks?

The following post is a direct extract from an article posted by iCapital that i think serves an interesting global view for further market digestion.

As opposed to the doomsday scenario, iCapital thinks the US economy is not falling off the cliff.
We all know that the US housing industry is in dire straits. And based on what is being reported, it would seem that there is no end in sight yet.

On the other hand, when the US housing industry was expanding robustly, there were few who worried there would be a nasty end until the end actually occurred.

Whatever the asset class may be, the behaviour of investors is the same; they are often one-track.

This means that when there is an expansion or contraction, they expect that trend to persist until the trend eventually changes. The same applies to the current housing contraction.

For now, most see the current contraction and the accompanying woes as having no end. Such thinking, of course, does not make sense. Why?

One, the contractions in both sales and starts have been very prolonged.

Two, the contractions in both starts and sales have been steep.

Three, interest rates have dropped, even at the longer end.

Four, as opposed to the doomsday scenario, i Capital thinks that the US economy is not falling off the cliff.

As house prices get lower, the houses become more affordable, which means that eventually housing sales would pick up again. Finally, the population of the US is growing relatively fast.

The chart shows the US population, in total and percentage change, from 1950 to 2007.

During this period, the US population doubled or increased by almost 150 million. In that same period, Japan’s population increased 53% or 44 million.

From 1990 to 2007, the US had an increase of 52 million people or a jump of almost 21%.

In this 18-year period, Japan’s population increased only 4.16 million or 3.4%. Japan’s population peaked in 2004 and is now declining.

From 2004 to 2007, the US added 8 million people.

i Capital strongly believes that the population growth is an important factor.

Besides helping one to understand that the US economy in the coming years will not be like the Japanese economy, post-1990, the sustained and rapid population growth of the US means that the current drop in demand for housing is only temporary.

When the recovery comes, there will be quite a fair bit of pent-up demand to fulfil.

If the current housing contraction ends in 2008, the contraction would have lasted three years and, in that time, there would be eight million to nine million more people in the US.

Taking all the above factors into consideration, one should not be like the lemmings and expect the housing woes and contraction to go on forever.

While it is easy to be caught up with the pessimism, it is time to look beyond the housing valley.

The implication of this for the US economy is simple.

Over the next 12 months or so, instead of being a negative drag on the US economy, i Capital opines that the US housing industry would become a positive contributor to US gross domestic product growth.

Since the subprime problem broke out in August 2007, i Capital has remained steadfastly optimistic over the New York Stock Exchange (NYSE).

If there were one single factor that can prevent a rally or bull market from breaking out on the NYSE, it would not be a prolonged, weak US economy.

As advised previously, the factor would be an overheating US economy and an inflation rate that is too high to bear.

Many economists, investors, strategists, etc have been very pessimistic over the US economy. i Capital does not share this doomsday view.


In fact, i Capital is concerned that all the recent prognosis, worries and fears have resulted in the US politicians, policymakers and central bankers taking too many stimulus actions at the same time and that the end result would be a too-strong US economy.

Such an outcome, which has a reasonable chance of unfolding, would be a major dampener on the NYSE.

Assuming that this overheating, inflationary scenario does not materialise, i Capital’s bullish outlook for the NYSE remains unchanged.

iCapital is a close-end fund listed in Malaysia's KL Stock Exchange. iCapital is owned by Capital Dynamics, the first independent investment adviser in Malaysia. It has been described as "one of the country's most iconoclastic and critical research outfits".