Greeks voted to reject the latest bailout in a referendum held on July 6, 2015. This event has triggered increased uncertainty about how the European Union and IMF will deal with Greece and its woeful economic situation, driving volatility in most global equity and bond markets.
We view this volatility as a buying opportunity for our U.S. investment strategy.
- Real GDP growth, while lower on average than the previous 25 years, is still resilient, especially in the face of global economic and political challenges post great recession.
- 5.3% unemployment rate is very close to pre-2008 levels.
- Inflation remains well within U.S. Federal Reserve policy range and is expected to remain that way for the next couple of years.
- Even as economic conditions are nearing “normalcy” The U.S. Federal Reserve remains cautious on when and how fast they will raise interest rates.
Research & Analysis
1) Economic Growth
U.S. economic growth in the 7 years post the great recession has had about the same level of volatility (ups and downs) as the previous 25 years but the actual growth rate, on average, has been a bit lower. Even when compared to the most recent 5 year period (the early 2000s).
This is in spite of a number of major global economic and political challenges the economy is up against:
- A Eurozone that is in and out of recession during the past 5 years
- Increasing net imports stemming from a strong U.S. dollar (net imports = imports - exports; a drain on the economy)
- An aggressive Iranian nuclear program
- Russian invasion of Ukraine
3 elements of the employment condition in the U.S. factor into our thinking:
- The unemployment rate has steadily fallen since it’s peak in 2009 and is nearing pre great recession lows.
- Weekly jobless claims are back to historical levels not seen since the 1970s.
- The labour market participation rate continues to decrease. If the trend is based on demographics (more people retiring) then even though they won’t be drawing an income they will still be spending savings. If the trend is due to disgruntled workers who are not able to find work, the low unemployment rate will likely bring these people back to the work force eventually. In either case we are not too concerned that the impact will be enough to significantly hinder future economic growth.
We analyze what the U.S. Federal Reserve analyzes and notice that inflation is well within policy limits. In addition, deflation, which can be just as concerning as too much inflation, isn’t likely as well.
The U.S. Federal Reserve’s inflation forecast for the next years suggests that inflation/deflation will be kept under control.
4) Monetary Policy
The U.S. Federal Reserve believes it is on the right track in fostering a monetary environment conducive to meeting its dual mandate of full employment and controlled inflation. Here are the latest minutes of the FMOC (the policy committee) indicating as much.
In addition, he U.S. Federal Reserve will watch to see how the situation in the EU plays out to make sure there are limited impacts in the U.S. This will be another reason to push out interest rate hikes to late 2015 or 2016.
Medium-term Investment Strategy
- BUY U.S. based companies with the majority of revenue derived from the United States
Triggers for Strategy Change
- Weakening U.S. dollar (could make companies with more international business attractive)
- Reversals of current positive employment trends.
- Changes in U.S. monetary policy due to inflationary or deflationary pressures.
Type: Investment Strategy Thesis
Sector: Consumer Discretionary, Consumer Staples
Area(s) of Analysis: GDP, unemployment rate, participation rate, jobless claims, inflation rate, U.S. Federal Reserve Projections