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BMO Private Bank Report: U.S. Economy Reinvigorated Despite Fiscal Cliff Uncertainty

- Rise in housing prices hints that Americans are ready to start spending

CHICAGO, Nov. 26, 2012 /PRNewswire/ -- According to BMO Private Bank's December Outlook for Financial Markets Report, the U.S. economy is showing positive signs of continued recovery with a variety of sectors witnessing significant growth.

According to the report:

  • Corporate profits are at their highest levels since the early 1950s, with net profit margins at 10.7 percent 
  • Both 401(k) plans and home prices are rising, leading to a boost in consumer confidence
  • The S&P 500 has rallied more than 60 percent since the first quantitative easing announcement at the end of 2008
  • Mortgage rates cascaded to all-time lows in Q3, expanding home affordability by approximately 25 percent
  • Retail sales are up nearly five percent year-over-year

"Although Federal Reserve Chairman Bernanke's monetary plan has taken some time to unfold, we're beginning to see evidence that it is working," said Jack Ablin, Chief Investment Officer, BMO Private Bank. "If interest rates remain as low as they currently are, they will boost equity and housing values and embolden consumers. That, in turn, will boost corporate profits and employment."

The Fiscal Cliff

As the January 2013 amendment deadline looms, investors are feeling wary that the U.S. may lose its AAA credit Fitch Rating if the Fiscal Cliff is not properly addressed. The BMO Private Bank Report notes:

  • Treasury bonds have been on the rise with traders concerned that the government will be forced to step in to fill the fiscal void
  • With a full-percentage-point yield differential between two-year and 10-year notes, investors are concerned that another recession may be on the horizon if no progress is made on the Fiscal Cliff
  • Several state and local governments continue to struggle to address their own fiscal conditions

Equity Markets Show Volatility

Equity markets fell in the third quarter of 2012, with investors concerned about increased regulation and higher taxes.  The financial and energy sectors were affected the most.

  • Given legislative uncertainty and slowing growth, U.S. equity markets retreated about 5.5 percent
  • The S&P 500 fell 3.3 percent in the three sessions immediately following the U.S. election, and annual profits declined in Q3
  • Yield-oriented telecom companies dropped more than four percent in the days following the election.
  • Nearly half of Europe's Stoxx 600 companies failed to beat analysts' profit expectations.

China and America Share Challenges

According to the report, both the U.S. and China – the world's first and second largest economies – face income inequality; this, in turn, is affecting economic growth.

"Severe income inequality is not economically sustainable and consistent inequality impairs economic growth," said Mr. Ablin. "At home, after decades of productivity gains through global outsourcing investment in technology, the difference between America's wealthy and everyone else widened. China, in particular, also faces this challenge and could consider adopting a stronger social safety net to reduce inequality and promote consumption."

Mr. Ablin notes that, while globalization has gone a long way towards bringing two billion people out of poverty, income differentials within countries have widened in the international arena.

Outlook for 2013

Looking ahead to 2013, investors can expect a series of rules and regulations aimed at domestic banks and energy companies to take effect. Financial stocks are now trading at a 19 percent discount, making them fairly priced when taking into account the prospect of new regulations. Energy stocks are trading about one per cent above their historical norm, making them overpriced.

The full report can be found at: www4.harrisbank.com/Insights/Publications

SOURCE BMO Private Bank

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