According to Richardson GMP the U.S. economy "appears to have shaken off the polar vortex chills” as third quarter of 2014 begins.
The big brains at Richardson sum it up: Markets have achieved new highs. Corporate profitability remains robust. Most importantly, the gradual tapering of quantitative easing by the U.S. Fed appears to be a non-event for markets. Even as the Fed has begun to wind down the unique stimulus measures, bond yields have remained stable and low.
"Sure the market is not cheap, but maybe it shouldn't be any more as we progress along the second half of the recovery. Not to rain on the parade, we have become more concerned over the amount of leverage in the market and complacency that has increased the risk of a market pull back,” say the authors.
One key theme in the report: Complacency abounds. "Volatility has reached historical lows and financial leverage at cycle highs creating a cautionary combination. We believe the risk of a near term pull back is elevated."
That said, the outlook is positive over the long term. “This cycle still has legs,” say the authors. Monetary policy remains accommodative. The economy is gaining strength. Corporations remain very profitable and healthy. "The vast majority of our models continue to point to a continuation of the current bull market phase of the cycle.” America is on the cusp of solid growth. The U.S. economy is gaining momentum. This is good, everyone likes growth. But this is also bad if bond yields rise. “Given the markets current leverage and complacency...The Canadian economy will benefit from U.S. growth -- However high Canadian household debt and an economic cycle that appears further advanced has us a bit more cautionary."
Richardson GMPs recommendations:
1. “It has been a great run, don't feel bad about taking a little off the table nor getting a bit more defensive to take advantage of a pullback should it materialize.”
2. “Mergers and acquisitions came roaring back this year, we believe corporate spending is next. We have a positive view on Industrials and Technology.”
3. “The C$ rebounded from oversold levels, we don't think this bounce will last. We are still welcoming U.S. dollar exposure.”