By Andrew Trimble
Bullish economic data
It’s been a big week filled with bullish data from around the globe starting with the world’s largest economy. In the U.S., GDP expanded at a robust 3.2% in Q3, the strongest growth in 2 years. Expectations had been set at 3.0% with higher consumer spending responsible for the outperformance. In terms of U.S. corporate earnings, the story was also good as after-tax profits rose 3.5% from Q2 according to the Commerce Department. YoY after-tax profits rose 5.2% – the strongest growth since Q4 2012. U.S. home prices were another source of optimism as they have now surpassed the record reached more than 10 years ago closing the book on the worst period for the housing market since the Great Depression. Another bright spot on the week was news of an agreement among OPEC and other major oil producers to reduce oil production.
The cartel has committed to a 1.2 million barrels a day cut while producers outside OPEC have signed on for a 600,000 barrels a day reduction. The moves, designed to lift sagging oil prices, come with a caveat as OPEC and others have a checkered past when it comes to complying with their own agreements. Meantime, Canadian GDP climbed at a better-than-expected 3.5% in Q3 which comes on the heels of a 1.3% decline in the previous three months. In China, an official factory gauge climbed to 51.7 in November matching the highest level since 2012 while the non-manufacturing PMI rose to 54.7 (reads above 50 signal expansion). Turning to Europe, unemployment dropped to 9.8%, the lowest level since July 2009. Looking ahead, the U.S. releases jobs numbers Friday (Canada does as well) with this being the last time the Fed gets a look at the employment picture before its mid-December rate-setting meeting.
Stocks jump in November
Major North American stock benchmarks closed November sharply higher in what was an eventful month for asset repricing. For the one-month period, the Dow was up 6.48%, the S&P 500 4.81%, the Nasdaq 4.27% and the TSX 2%. For the four days covered in this report, the Dow added 39 pts. to close at 19,191, the S&P 500 fell 22 pts. to settle at 2,191 and the Nasdaq shed 147 pts. to finish at 5,251. The TSX lost 48 pts. to end Thursday’s session at 15,027.
Positioning for Mass Rotation into Values and Cyclicals
Equities: As we have been explaining for many months, we believe the 7+ year bull market is well-intact despite subdued equity investor enthusiasm. Many of the drivers for positive risk markets (resilient labour markets coupled with stabilizing corporate earnings, emerging markets and commodities) were in place before the November U.S. election outcome and the pro-growth agenda of the new administration has only increased the longevity of the current business cycle.
Our pre-election style outlook also remains intact as we advise investors to position for a mass rotation into Value and Cyclicals from the over-owned and expensive Defensive areas. If economic growth disappoints (and/or if the USD/interest rates rise too quickly) in 1H17, then we will move towards a Cyclical Growth stance; but for now we remain neutral.
Regionally we prefer North America over Rest-of-World and sector-wise we remain overweight Energy, Materials, Financials, and Industrials and underweight Telco’s, Utilities, Staples, REITs, and Gold. We are neutral on Technology, Discretionary and Health Care. In addition to sectors, we continue to advocate an overweight to US small caps predicated on receding global recession risks despite having made the call six months ago and more than doubling the returns of US large caps.
This material does not include or constitute an investment recommendation, and is not intended to take into account the particular investment objectives, financial conditions, or needs of individual clients. Before acting on this material, you should consider whether it is suitable for your particular circumstances and talk to your investment advisor.
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