The bull market still has legs
Eugene Yashin

US Economics

The economy strongly advanced in the second quarter, following stretches of mediocre growth. Thus, after years in which gross domestic product growth had averaged an unremarkable 1.5% to 2.5%, the April-to-June period saw GDP surge north of 4%. Lower taxes, steady job gains, and higher disposable income boosted consumer spending. Gains in exports and federal government spending also contributed to strong results.  The question is how sustainable such growth can be. Judging by the recently revised consumer saving rate, we believe the recent growth has firm legs to stand on.  

Global Economy

As the global economy moves through the third quarter, signs are that GDP growth will post an eighth consecutive reading above 3% annualized, according to JP Morgan. This is the message from activity indicators tracking gains in manufacturing output and in retail spending this quarter and from the stability in the August global PMI. Even if global GDP grows below a forecasted 3.4% this quarter, there is little doubt that the global expansion is still delivering solid growth, a point reinforced by the continued drift down in global unemployment rates.

Portfolio Rebalancing

In the middle of August, we conducted our regular quarterly equity portfolio rebalancing. Reviewing our Macro Forecasting Models, we couldn’t help but notice that a recent upward revision of Personal Saving Rate provided by the Bureau of Economic Analysis lifted our views on Consumer Discretionary and Technology sectors. Now we observe an interesting barbell situation.  We believe cyclical sectors (Discretionary and Technology) and defensive areas (Staples, Healthcare and Telecom) look attractive going forward. Judging by history, when consumers start saving more, that is a good sign for sustainability of the economy. By not overspending when times are good the consumers prepare themselves for a soft patch down the road. That should make things evolve much smoother when the economy slows down.

As for positions in our portfolios, we have made very little changes. The well-rounded companies we have in our strategies still look more attractive than alternatives. We prefer reasonably priced, free cash flow producing, profitable and growing entities. If history is any indication, those companies tend to behave well for the most part of an economic cycle.  We believe in such evidence when it comes to a successful portfolio composition for long-term results. 

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