Lower for Longer

By: Carl Choy, CKW Financial Group-

The statement “Lower for Longer” made by the Head of the Federal Reserve Bank is good for the United States of America Consumer.

What is Lower for longer?  How low?  How long?  Is it Interest rates, the rate of inflation, the price of oil, and non US Dollars exchange rates?

Older Consumers (over 55) see all 4 as low compared to 1980, which is favorable for consumer spending. Younger Consumers (25-40) could perceive the relative rise as a headwind for the future.

The perception of the Consumer determines where they will spend their dollars and their confidence determines how much.  Why does this matter? The US Consumer now has more real dollars to spend because interest rates, inflation, oil, and non US dollars are lower.  The predictions of how low and how long consume the financial news and Macro world news.  But the longer these rates stay lower, the longer the Consumer will have More Money to spend.

Second if the Consumer accounts for two thirds of the economy and the Consumer has more money to consume then Consumer perception and confidence is important.  US households and non profit organizations have more than $19 trillion more than they had in Q2 of 2007, over 11 trillion in cash like assets and over 20% less debt as a percent of household income.

No one can tell where and when asset flows return to the equity markets.  Historical returns more than 60 years show an average S&P 500 Total Return growth over the following year at 13.13% when P/E ratios were 15.3 to 17.23 times.  2016 consensus P/E is 16.1 times.

With expected earnings per share of 129 and the S&P index at a level of 1920, on average this equals an expected earnings yield, E/P of 6.7% plus a current dividend yield of 2.2%.  An expected 8.9% return is a reality if investors continue to pay the same P/E and earnings grow to 129. Relative to other investment choices we find this a compelling reason to buy stocks.  With near zero return fixed asset return offerings today we believe the S&P 500 can move dramatically higher when investor confidence rises.

* “Lower for Longer” by Janet Yellen, Chairwomen of the U.S. Federal Reserve Bank, http://www.bloomberg.com/news/articles/2013-04-16/yellen-backs-lower-for-longer-rate-policy-while-seeing-risks