With nothing meaningful for investors to evaluate regarding Greece until after this Sunday’s referendum on austerity, this week’s commentary will focus on North American economic data and capital markets.
This week has been a tumultuous one for our equity markets, with both the TSX and Dow Industrials seeing modest year to date gains erased in a single day on Monday to now sit slightly negative for the year. While we do not foresee this developing into a market correction, we are expecting to see a very sideways market within which we will be able to take advantage of attractive opportunities, both in Canada and abroad.
The year began with the U.S. economy shrinking in the first quarter, largely due to transitory factors such as a very harsh winter and port delays. However, despite the soft first quarter, the fundamentals underlying household spending appear favourable, and consumer sentiment remains solid. We saw evidence of this last week as the U.S. Labour Department reported that job growth accelerated sharply in May along with wages increasing by a median 3.3% over the past 12 months. Further confirmed this week by the Commerce Department releasing figures reflecting broad-based consumer spending increases of 1.2%, that ranged from car dealers to clothing outlets and department stores.
On top of growing household consumption what really helped lift GDP growth in the second quarter was large gains in factory production and business inventory figures along with home building. With new home sales rising and residential construction increasing at a 6.5% annualized rate there is building confidence that the U.S. economy will continue to expand. While a strengthening U.S. economy has been evident for a while, the combination of rising wages alongside of an expanding GDP is a new and important factor.
With many states having raised (or proposing to raise) their minimum wage against a backdrop of firming demand and a better composition of jobs being created, the economic data is clearly supporting the U.S. Federal Reserve’s desire to raise key interest rates. Though we expect these increases to be gradual.
As we focus on adding to our U.S. assets amid a very flat capital markets, employing an active management style will be key for investors in order to take advantage. Funds pointed towards a stronger consumer, such as Fidelity Small Cap America, that hold companies that range in size from 3 to 10 $Billion such as Hanes Brands and Snap-on Tools; or Dynamic’s Strategic Yield larger company holdings such as Walt Disney, Wells Fargo and Verizon should be expected to perform well.
We mention the importance of active management, because despite management fees and a broad market that has returned zero to the passive Index ETF holder, these two managers have delivered year to date net returns of 15.3 and 3.5% respectively to investors. While historical returns are never an indication of future returns, we do expect these managers to continue to provide strong benefits for investors.
This weekend marks Independence Day south of the border, so for those of our readers travelling across the border please give yourselves some extra travel time.
Sunday will also be the FIFA Women’s Cup Final at B.C. Place Stadium. While our Canadian team will unfortunately not be playing, Japan versus the United States should be a fun contest to watch.
For those of you who are baseball fans, Nat Bailey Stadium is a great place to spend an afternoon as long as you remember the sunscreen.
We never forget that working for our clients is an expression of your trust, and we promise to always uphold that trust. Thank you.
As always, we welcome your feedback.
Have a great weekend.
The Dekker Hewett Group