Recap & Macro Outlook: The North American Economy Continues to Expand
We started the year writing about our investment process. Our investment process governs our daily work and focuses us on investing in businesses rather than being concerned with the headlines of the financial and political press. This week, we revert back to economic and market commentary. Since the beginning of the year, financial asset volatility has increased. The price of a long-term US government bond is down more than 7%. In equities, North American and some oversea markets have fallen 10% from their peak in January. Concerns are rooted in geopolitics and interest rates; specifically, potential trade wars and the fact that interest rates have risen. On the other hand, overall economic data continues to be robust.
In the US, general economic activity has remained strong, inflation is tolerable and the Federal Open Market Committee (FOMC) continues to project a steady increase in administered interest rates as a means to ultimately normalize the term structure. Gross Domestic Product (GDP) and employment continues to be secularly strong both in terms of absolute job growth and real wages. In addition to low unemployment rates and low weekly jobless claims (we would have to go back to the summer of 1973 to see numbers as low as they are now), the strength of the American worker can be seen over statistics such as quit ratios and wage levels. Both have increased as people are quitting work for higher paying jobs elsewhere. Recent tax changes have also benefited US businesses. We are currently in the middle of Q1 earnings season and have seen strong financial results as our companies report. All of the above ultimately translates into higher interest rates: the yield on a US 10-year government bond pushed though 3% this week which caused some consternation in equity markets.
“This means that” As we noted above, the US economy continues to expand and there are no indications of a recession in the short-term. Our investment team debated the consequence of a “booming” US economy: Is it positive for the obvious growth? Or is it negative because higher interest rates will adversely impact asset valuations? An argument can be made for both. Generally, we are pleased with the growth and not concerned with the absolute level of interest rates today but are cognizant that much higher interest rates from here could negatively impact financial asset prices. Regardless, current stock market volatility should provide the investment team more opportunities to put capital to work into the companies that we follow, at better prices. All of our mandates have cash, which we view as a valuable option.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).
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