The global capital markets have started this month on a volatile note, primarily due to the tensions in the Ukraine. While the conflict within that country is concerning and garnering a significant amount of news coverage, and rightfully so, it is not something that we feel will have long term effects for investors. There is definite concern about the Russia-Ukraine conflict rolling back into the capital markets as military conflict always provides uncertainty for the capital markets. However, we expect to see this subside in the relative near term.
We have seen positive markets, despite the very weak January and current geopolitical front, as the economy is continuing to gradually improve. The data we saw this week of strengthening employment figures suggests the economy remains on an upward track. This report is very supportive as it indicates that more people are entering the labour force looking for work, a key indication of a strengthening positive outlook.
Labour market improvements are one of the main reasons why policy makers at the U.S. Federal Reserve have tapered their bond buying. Even as the new Chair of the Federal Reserve, Janet Yellen, has reiterated the 6.5% unemployment threshold for raising interest rates, the central bank still faces challenges in communicating its intentions to investors. Today’s report showed a nice gain in payrolls, however we would expect the labour participation rate to begin to increase, thus keeping any reductions to the unemployment rate as modest, and for the unemployment rate to remain above the threshold of 6.5%.
In addition to the improving employment data we also saw manufacturing expand at a stronger pace than was previously forecast in February, while consumer spending also rose in January at a better than expected rate. Consumer spending is the primary economic data point that drives capital markets as consumer spending determines approximately 70% of all Gross Domestic Product. As we continue to see jobs added to the economy and signs of organic employment growth through increased manufacturing and industrial production, our expectation would be for a continuation of the positive market trends we have seen thus far in 2014.
We continue to moderately increase our US investments for clients according to their governing risk profiles; however, our favoured diversified holdings have been the iShares Russell 2000 Index ETF, S&P 500 Index ETF and the Fidelity US Monthly Income. While we have also incorporated individual US companies (such as JP Morgan or Qualcomm) into client portfolios, those are always specific recommendations based on individual client risk. A diversified ETF or Fund is an excellent and cost effective way to initiate a diversified ownership of the US economy.
In Europe we have seen strengthening industrial output, especially within Germany where there has been a very clear uptrend for the past three months, helping drive a faster-than-forecast expansion of euro area GDP. With construction, manufacturing and industrial production continuing to move upward since the beginning of the year we see an increasing benefit to owning diverse international assets. Currently our preferred international ETF is the iShares MSCI EAFE Index, providing clients with a very broad ownership of Europe in conjunction with Australia and the Far East.
Just a kind reminder - Daylight Saving time in North America begins on Sunday March 9, 2014. Don't forget to change your clocks - move them forward one hour!
Please note: Daylight Saving Time in the UK and most of Europe begins on Sunday March 30, 2014, and in Australia clocks will move back one hour on Sunday April 6, 2014. There is no Daylight Saving Time in China and in Hong Kong.
Given that we lose one hour of sleep this weekend, remember that extra cup of coffee on Monday morning!
Have a great weekend.
Thank you for your trust.
As always, we welcome any feedback.
The Dekker Hewett Group