The U.S. Economic Expansion looks real and what that means for Canadian Investors

Today we received further confirmation of our belief in the U.S Economic Expansion. November’s reported U.S. job gains were incredibly high. 321,000 jobs were created verses the consensus expectation of only 230,000. This extremely encouraging development is the largest gain in employment since 2012.  Moreover, the unemployment rate has now held for half a year at a 6-year low of 5.8%.  But these new results far exceeded even the most optimistic expectations. The American economy seems to be on a positive trajectory and making real progress.  As Barack Obama, the U.S. President recently stated, in the last few years, the U.S. has created more jobs than Europe, Japan and all other industrial nations combined.  Along with several other meaningful economic indicators, including improved pricing in the crucial U.S. housing market, this high level of job and wage growth strongly bolsters our thesis that the U.S. may have already moved from recovery into expansion (See our last Blog).  As we expect the next few months to continue to show improvement in U.S. economic activity, we can be more confident that the U.S. economy is heading toward a healthy, self-sustaining level of GDP growth.

Could corporate and consumer spending now finally pick up?

First, more meaningful Corporate business spending or CAPEX ( Capital Expenditures) may finally be coming!  For years, due to persistent slack in the labour market, corporations have not had to deal with any real wage pressure costs.  Wages are a very large component of costs for corporations.  Since corporations benefited from these low labour costs they did not have to invest as much in equipment and technology to increase productivity. Consequently corporations stockpiled excess cash and bought back shares.  Now more money on corporate balance sheets may eventually be deployed into technology and equipment to support future growth which will further contribute to GDP growth.

Second, the U.S. Consumer will undoubtedly benefit from the increase in the U.S. dollar and related decline in commodity prices (reference the nearly 40% decline in the price of oil). Naturally, such a large decrease in oil prices is extremely stimulating to the economy due to lower costs to the consumer at the pumps.  Notably, the U.S. consumer represents 70% of GDP!New consumer spending adds strength to both the U.S.economy and U.S. Corporate profits. Moreover, U.S. consumers have, in general, decreased their debt levels over the last few years and are likely poised to spend their increasing wages on lower priced products.

Therefore, given the strength of the U.S. economy, where both the Consumer and Corporations may spend more, the U.S. economy should do well and the U.S. dollar should continue to maintain its upward trend against other currencies putting continuing pressure on commodities since they are priced in U.S. dollars.

The strength in the U.S. economy and dollar contrasted with economic weakness in virtually every other major economy and falling commodity prices seem to have produced some apparent investment values in both foreign markets and certain sectors such as resources. However, while oversold conditions in cheaper investments may trigger price rebounds from time to time we recommend caution and prudence.  One should note that U.S. bond yields are also higher than in Europe and could attract an additional flow of funds looking for safety.  Due diligence should be exercised when considering investing in these potential “value trap” situations and we strongly advise that if one chooses to invest outside the U.S. or Canada that any such investment should be currency hedged so as not to be exposed to weak foreign currencies.

Our Portfolios remain focused on investing in quality shares of larger, well-capitalized, Blue Chip companies that are dominant in sectors that can potentially benefit from (or at least should better absorb the shock of) the strong U.S. dollar.  We remain positioned for a strong U.S. economy set against the rest of the world, the subsequent effect on commodity prices, and the potential for higher interest rates eventually arriving in the U.S..

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