D ifferent 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.
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.
Bottom line: We recommend staying overweight luxury products and services equities, especially as valuations still appear very reasonable.
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