What Does US Growth Mean for Investors?

He did warn that investors in the US stock market would have to be more selective in the future however. Where in the past it was enough just to have exposure to the rising index, now investors will have to be more stock and sector specific to make gains. 

Mark Burgess, chief investment officer for Threadneedle said that manufacturing and employment in America were clearly on an improving trend.

"Unit labour costs are falling and have been for a while. The benefits to manufacturing of cheaper energy from shale gas are huge," he said.

"Added to that, relatively high inflation in Asia from rising labour costs in that region is creating a shift in US manufacturing and its global competitiveness. As a result, new capacity is opening in the US and companies are repatriating some of their operations back to America."

But it’s not just investors in the US who should be aware of goings on across the pond. The Fed tapering QE will have an impact not just those who held US assets - but European ones too, according to Stuart Thomson, chief market economist at Ignis Asset Management.

"Despite Mario Draghi’s commitment to ‘do whatever it takes to save the euro’, the catalyst for spread compression in Europe was not rhetoric by policymakers, but driven by the Federal Reserve’s previous policy of QE infinity," he said.

"With the Fed now discussing tapering, we believe the initiation of this policy will result in further spread widening in Europe."

Video transcript: 

Emma Wall: Hi. I’m Emma Wall and welcome to Morningstar TV. I’m here today with Kerry Craig to talk about what the news from the U.S. means for you.

Kerry Craig, Global Market Strategist for JPMorgan, hello. 

Kerry Craig: Thanks. Thanks for inviting me along.

Wall: So we’re here today to talk about what's going on in the U.S. The biggest news is, of course, that GDP figures have risen. People seem surprised, but I thought they were ready for a recovery. I thought we were having a recovery.

Craig: The figure came in much bigger than the consensus estimate. So consensus was about 1% rise quarter-on-quarter on an annualized basis, but it came much big at about 1.4%. I think the surprise there about why it was so much higher was the drag from the government. The fiscal spending cut was actually much less than people expected, and at the same time, the U.S. consumer has been very resilient. So that consumer portion of the total figure was much stronger. So, on balance, that led to kind of a higher figure.

Also a contributing factor was the fact that the inventories buildup was much stronger than people had expected. However, that’s kind of neither here nor there, so obviously inventories buildup in one quarter and then they get depleted in the next quarter. So kind of washes out over time. So the headline figure, 1.7, maybe think about it being a little bit lower.

Wall: Also this week we’ve had the minutes released from the Fed, confirming they’re going to do QE again this month. When can we expect to see QE end?

Craig: The QE as a whole, they are talking about the – there is two distinctions here really. They’re talking about their asset purchase program through the – that’s the QE, and they’re also talking about hiking rates. So when they talk about QE ending, it’s not really ending at all. They’re talking about just dialing back how much bonds they’re purchasing every months, and that’s what people are looking for now. So in September you have a press conference with the next Fed meeting. They do that every quarter and what you’ll see there is more about when actually tapering is going to start.

The markets are expecting that to start in September, and at the moment there was no real surprise in the minutes or the announcement from Ben Bernanke. He was perhaps a little more dovish on what was going to be said. He view on growth had sort of toned down to moderate from modest. So they are little bit worried about inflation as well and what’s happening in the housing market. But, overall, they’re still expecting the economy to grow over the next two quarters a bit faster than it has in the first half of the year.

Wall: So that’s two pieces of positive news. Can we do the triple with the unemployment figures tomorrow?

Craig: Hopefully. So yesterday we had the ADP figure, which is one measure of how many jobs are being added each month in the U.S. economy. That can contrast and can be slightly different to the official measure from the bank – sorry, from the Bureau of Labor Statistics tomorrow. Often they are in the same directional trend, but the magnitude of the numbers can vary slightly. But again, market’s looking very, very positive number there, sort of a round 200,000 jobs. That’s the average we’re seeing over the first six months this year, about 200,000 jobs.

The interesting fact there is that, although we’re having this quite strong job creating in the U.S., it’s not really reflective of actually how much growth we’re getting in there as well. So with 200,000 jobs being added, you typically think of growth being around 3%. Obviously, year-on-year about 1.4, so much lower, and people are sort of thinking how can that job creation maintain that pace without the sort of economic growth to support it. But overall, I think if it was a bad number, it would have to be very bad for markets to react negatively or for the Fed to change its current stance. We’re mostly likely to see tapering or announcement of tapering in September with beginning later in the year, but the data would have to be a big difference than what it is now. There’s been some softness in the data, but probably not enough to actually upset the Fed’s current plan.

Wall: So all that looks to be creating quite a positive environment for investors then?

Craig: Certainly. U.S. equity markets have been quite strong this year. We had a new peak last month, but we still think there is room to grow in U.S. equities. I mentioned earlier, we’re seeing a strong amount of consumer demand and it was a big supporting figure in the GDP number, and that’s because over time during the recession there was pent-up demand. People deferred the spending they would normally have had. They stopped buying cars; they stopped buying those big ticket items. Now, as they are actually feeling better and consumer confidence is rising, in fact, it’s now at a six-year high, consumers are feeling much better about themselves. Housing market is improving. So they’ll likely start spending again. We think that will really drive the economy going forward and that will support equity markets as well.

Wall: So can we expect yet more all-time highs from the S&P 500?

Craig: We should continue to see it going up. The earnings season was fairly decent. The investor has to be more selective about how they’re approaching the market. For example, in this very sort of low interest rate environment we’ve had, investor has obviously moved away from bonds into sort of higher dividend yielding stocks to generate income. So now those sectors of the market are actually looking a bit expensive relative to, say, some of the lower yielding stocks, say, the cyclical sectors are perhaps going to benefit as the economy actually turns upwards. So there investors have to be a bit more sort of proactive, a bit more discerning about how they’re actually investing in equities in the U.S. But still we think there is room to run on the market.

Wall: Kerry, thank you very much.

Craig: Thanks very much, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.