RECENT MARKET NEWS continued to be dominated by continued positive- earnings surprises as well as ongoing discussions about the ongoing slide of the US dollar. Although most of the news was positive, stocks sagged slightly for the week ended Oct 23, with the Dow Jones Industrial Average falling 0.2% to 9,972, the Standard & Poor’s 500 Index declining 0.7% to 1,080 and the Nasdaq Composite Index dropping 0.1% to 2,154.

 

At present, we are about halfway through the 3Q earnings season, and more than 60% of US companies that have reported have posted better-thanexpected results. Profits are up partly because of cost-cutting measures, but also as a reflection of better economic conditions. Capital-spending levels have been holding up, non-US economies are improving and the weaker US dollar has been a boon to US exports. Over the past several months, US businesses have been able to maintain strong ba lance sheets. In addition, corporate profits in the US have increased by a 20% annualised rate for the past three quarters — a record by a wide margin in a recessionary environment.

 

In terms of the broader US economy, we have seen the Index of Leading Economic Indicators increase for six months in a row, lending credence to our belief that the economy has moved out of a recession. We would also point to inventory levels as a key driver of economic growth. Inventories, which had been drawn down sharply earlier in the year, have recently seen strong reinvestment, suggesting that they will likely act as an important engine of growth. High levels of US consumer debt remain a problem and unemployment continues to climb but, on balance, we remain convinced that the global economic recovery has taken hold and is spreading. We expect US employment levels to start increasing around the turn of the year. Likewise, we expect consumer spending to gradually increase over the coming months.

 

Looking at currencies, the declining US dollar has been helpful for US MNCs, but there are growing concerns that the weakening currency could present some problems. Given the current interest rate differentials between the US and other countries (with US rates being lower), the probability that the US Federal Reserve will be among the last central banks to raise rates, and the ongoing exodus from safe-haven assets such as the greenback, we expect the US dollar will continue to fall, which is a subject that needs to be closely monitored.

 

For the markets, the backdrop remains supportive of better performance from higher-risk assets. Non-inflationary economic growth, positive corporate earnings and ample liquidity are all important tailwinds. In addition, investors continue to move funds out of cash and into higherrisk assets and, while the bulk of these moves has been from cash to bonds, we expect to see increased flows to equities in the months ahead. Of course, risks remain for equities, such as potential inflation down the road and uncertainty about the US dollar. While these crosscurrents should keep volatility levels relatively elevated, we continue to believe that the major trend for equities should be to the upside.