The economy and the financial markets came through the 16 day US federal government shutdown without any significant damage.
While we wait for the next round of government shenanigans on the budget deficit and debt ceiling (deadlines of Jan 15, 2014 and Feb 7, 2014 respectively), I thought I would look at the economic cycle and where I see things right now. Below is an excellent chart (courtesy of ACG Advisors) that depicts the major phases of the economic cycle. From my perspective, the US economy is somewhere between the early upswing and late upswing phase. The US is experiencing growth, especially in housing and manufacturing, but at a below-trend level. The FED remains accommodative, so interest rates should remain low. Employment growth is too low but job losses are declining.
Internationally, developed markets (e.g., UK, Germany, France, Japan, Australia) are in the recovery phase and heading into the early upswing phase. Confidence, among both consumers and businesses is rising. Central bankers are holding interest rates down. Eurozone manufacturing continues to expand with October PMI (purchasing manager index) rising to 51.3 (reading over 50 means growth) with all countries rising except France and Greece (source: Fidelity Research). In Australia, retail sales growth accelerated to the highest level since February 2013 and housing prices increased the most since mid-2010 (source: Fidelity Research).
Emerging market economies saw slowdowns, especially in China, India and Brazil, during the summer months. Some of this was due to policy (China trying to shift from government spending to consumer spending) while some was due to reduction in monetary stimulus to support the local currency. It is important to note that while emerging market growth has slowed, EM economies are still growing twice as fast as developed market economies (source: Natixis Asset Management). I would put emerging markets in the late upswing phase.
In my opinion, all of this continues to support favoring risk assets (stocks, commodities, real estate) over more conservative assets (fixed income, especially government bonds) over the short to intermediate term (next 24 months). I continue to favor US equities but believe international equities may offer potential due to favorable valuations. However, I do expect volatility to increase especially (1) in early 2014 when the government must again deal with budget/debt ceiling issue and (2) later in 2014 when I estimate the FED starting to reduce monetary stimulus.
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Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful. Past performance is no assurance of future results.