Since the election of Donald Trump in November, U.S. stocks have surged to all-time highs, and the S&P/TSX Composite index isn’t far off. The US Federal Reserve raised their base rate 0.25% as expected and indicated the potential for some additional increases to come in 2017. Their cautious, yet generally positive, economic statement follows a slew of improving data. This includes better-than-expected manufacturing growth, growing consumer confidence and solid payroll gains. Plus, with their unemployment rate now at 4.7%, when it has hovered around 5% for the past year, it is at a level many economists consider to be full employment.
In its statement, the Fed noted that inflation is “moving close to their 2 percent longer-run objective,” but that “excluding food and energy prices, inflation was little changed and continued to run somewhat below 2 percent.”
Inflation has started to show signs of increasing after running below the Fed’s 2% target for years. The personal consumption expenditures price index, the Fed’s preferred measure of price inflation, increased 1.9% in January from the year before. Another measure of inflation, the Consumer Price Index, rose 2.7% year-over-year in February. They also reiterated that based on their balance of risks statement, “Near-term risks to the economic outlook appear roughly balanced”. This means that they expect the economy going forward will be more to the upside than the downside.
So what does this mean for investors? There is a general consensus among fund managers that there is greater upside growth potential to US and global stocks, as well as here in Canada and in to a lesser extent in Europe. Market participants have no idea whether the Brexit will be hard, soft or somewhere in between. There are always correction concerns around things such as the upcoming US debt ceiling increase, current high stock valuations, other global unknowns, etc. etc.
There is a lot of noise out there that now is a good time to rebalance, especially into US (the equity market performance, postelection, really reflects an optimism about growth), as well as global equities, as there doesn’t seem to be any significant global recessionary indicators on the horizon. The US consumer rather than exports seem to be driving US growth as housing starts are trending up – driving the expanded manufacturing growth.
Here in Canada, banks and consumer staples are doing very well, plus growth in farm receipts and industries other than energy are helping boost our economy. In Asia 20% growth in manufacturing receipts is driving their economies, especially in Korea.
Bond markets have priced in two rate increases all ready, with a third one possible and rising equity valuations hurt bond yields. Our dollar will be less a petro dollar and have greater linkage to the US dollar and the Fed interest rate. Oil will bounce around $45 to $55 for the foreseeable future due to a continuing surplus globally, plus with fracking, the US can very quickly increase their supply if prices rise above these levels.
Investing is never cut and dry. There are so many variables to consider such as your risk tolerance, how many years until retirement and the diversity of your portfolio. So, as with all things related to investments, seek out a trusted financial professional for advice and do some research, as it is always good to understand your options.
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