Jordan Wealth Management Group - ScotiaMcLeod Truro

Surprising US economic growth - is it sustainable? Stocks tumble, rebound and then tumble again.

The big picture

Surprising U.S. economic growth. Is it sustainable?

 The U.S. economy showed surprising growth in the third quarter, after more than a year of contraction. On Thursday, the Commerce Department reported that GDP expanded at an annual rate of 3.5%, a higher than expected surge after the economy had contracted 0.7% and 6.4% in the second and first quarters, respectively. Robust government spending, exports and consumer spending — lifted by auto purchases under the cash-for-clunkers program — pushed the measure into positive territory. The news came after bleak U.S. home sales and weakening commodity prices had cast doubt on the strength of an economic recovery for most of the week. U.S. consumer confidence is up for the first time since 2007, according to a survey by the Nielsen Company in October, although spending is still restrained because of the weak job market.

Canada’s GDP shrank 0.1% in August despite signs that the country is climbing out of recession. The Canadian dollar was volatile this week, hitting a 3-week low at 92 cents on Wednesday as the U.S. dollar strengthened as a result of investors seeking a safe haven. In international news, Norway became the first European nation to raise interest rates since the credit crunch began, lifting rates to 1.5% from 1.25%.

Markets

Stocks tumble, rebound and tumble again

 On Thursday, North American stock markets rebounded in response to U.S. economic growth data, after falling for four days on weak commodity prices and bleak U.S. home sales data. Oil prices fell below US$78 after data showed a surprise build in U.S. gasoline inventories and gold dipped closer to $1,000 as the U.S. dollar strengthened. The U.S. GDP report provided an important boost to investor confidence, lifting stock markets and commodity prices. Stocks gave it all back on Friday.

Maple Leaf reported a $22-million profit, compared with a loss of $12.9 million last year, as it rebounds from the contaminated meat crisis in August 2008. Vancouver-based athletic and casual wear retailer Lululemon raised its third-quarter outlook as robust sales exceeded expectations. Visa posted a strong quarterly profit that could signal a possible recovery in consumer spending. Audi will exceed its sales target in China this year, selling 118,000 cars, and expects China to be its largest single market by 2013. Google announced it will launch a free GPS service, allowing smartphones to double as navigational devices.

Our recommendation

Favour Americas and emerging markets

• Equities. Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group, says we remain constructive in our outlook toward equities through the end of the year and advocate maintaining full equity exposure through that period; as valuations move higher however, stock selection will become increasingly important.
• Fixed income. Chris Kennedy, Associate Director, Portfolio Advisory Group, highlights the following recommendations: Term Call – below benchmark duration. Sector Call – underweight Canadas, overweight Municipals and Provincials, neutral on Corporates. Currency Call – recent weakness in the Canadian dollar means little upside to foreign currency trades.  Alternative Strategies – overweight high yield, overweight Emerging Markets Debt, underweight inflation protected bonds. I continue to like floating rate preferreds.
• Portfolio strategy. Vincent Delisle, Scotia Capital’s Portfolio Strategist, writes, “On the equity side, our global bias remains unchanged: Overweight Americas and Emerging markets, underweight Europe and Japan. From a sector standpoint, U.S. Energy, Materials, Discretionary, Financials, and Technology are posting superior relative earnings momentum. Our Sector Strategy continues to be geared towards Cyclical sectors.”