Different asset prices do not respond in the same way to quantitative easing. Unfortunately, in the aftermath of structural housing busts, central bank action simply cannot generate a strong rebound in house prices. But it can trigger big rallies in stock prices.
247Bull.com Editor: Not only can QE trigger big rallies in stock prices, it can also create GDP growth. However the one thing it can’t do is create true lasting economic prosperity.
For example, U.S. households’ real estate assets are still languishing at $16 trillion, down sharply from $23 trillion in 2007 – however, the Fed’s quantitative easing programs have helped households’ stock market wealth bounce back to $21 trillion, close to an all-time high.
Importantly, the movement in stock prices relative to house prices is an excellent gauge of wealth polarization, and hence the relative strength of top-end versus mainstream consumer spending. Recent policy decisions from five of the world’s major central banks will continue to support the top-end spender more than the average spender.
The bottom line
We recommend staying overweight luxury products and services equities, especially as valuations still appear very reasonable.
Article courtesy of BCA Research.