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It's a Small World

Stock Market News

October 2014

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It's a Small World

It’s an ill wind that blows no good, as the saying goes. And it appears that the ongoing economic woes of Eurozone nations are having a positive effect on economic prospects in the United States. The modest but steady U.S. growth rate looks stellar by comparison to the European nations that continue to struggle with high public debt and lowered government spending. When it comes to investments, the world outlook is as important to the health of the U.S. markets as other key factors. Here’s a look at some of the major trends and their impact on U.S. investors.

In September, the surprise move by the European Central Bank (ECB) to announce further stimulus measures gave a boost to U.S. stock markets. The ECB can be compared to the Federal Reserve. Coming just three months after the ECB’s earlier stimulus package, the move to lower Eurozone benchmark interest rates from 0.15 percent to 0.05 percent and to buy bundles of bank loans served to make the recovery in the United States look even better.

The weakened economies in Europe and other parts of the world are causing energy and interest rates to drop in the United States. Gas prices have declined in the United States by some 24 cents a gallon since June 2014 because oil supplies worldwide have increased. U.S treasury notes declined on the news from Europe, down from yielding 3.03 percent at the beginning of the year to 2.54 percent.

The ripple effect from the recent ECB initiatives creates a boost for the current policies of the U.S. Federal Reserve. ECB policy in Europe is expected to help hold down inflation rates in the United States, and lower yields from Treasury notes are expected to help reduce U.S. unemployment rates. Economists note that the situation in the Eurozone creates a less risky environment for the Federal Reserve to begin gradually raising interest rates in the United States.

Cheaper gasoline and low interest rates have helped increase the demand for cars and trucks in the United States. Sales of vehicles in August reached a peak not seen since January 2006. Consumer borrowing and retail spending have both increased due to improving consumer confidence as well as low interest rates.

The outlook in Europe remains less rosy. European policymakers have suggested that the various Eurozone nations need more help than the ECB alone can provide, and that “radical reforms” are needed by individual governments. The ECB is urging some of Europe’s wealthier nations – including France and Germany – to bite the bullet on needed changes.

Of course, the boost the United States has received could sour if the Eurozone situation deteriorates drastically. If this occurs, we could see some setback in the stock market and some decline in spending and hiring. China is also the wild card in the global forecast. Economic growth in China – the biggest consumer of oil supplies – has stalled.

Currently, the U.S. economic position looks good overall in a global context. Significant economic declines worldwide could hurt U.S. exports in the future, but currently in-flows of foreign capital and lower energy prices are keeping our economy buoyant.

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These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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