Is non-residential investment a bull market trend?
Non-residential investment growth back to bull market levels
The below graph reflects an interesting trend that may bode well for economic recovery and the continuation of the equity bull market. Note that prior business cycles were characterized by investment swings in which residential investment accelerated much more quickly than non-residential investment. In the current cycle, residential investment is just a little over non-residential in terms of growth rate, and may be standing close to historical norms—not very exciting. What is exciting is the fact that non-residential investment (the blue line) is actually at very respectable growth levels. This article considers the strength of the non-residential investment recovery and the macroeconomic outlook for equity investors.
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Is this a redo of the Clinton recovery?
Note the investment recovery post-1992, when Clinton took office. While residential investment was languishing around historical norms, non-residential investment rose to historical high growth rates and stayed there until the Dot Com meltdown—that was a super run for postwar investment data. Currently, the non-residential growth data seems to be accelerating to above-average growth rates after a 13-year decline. If these growth rates in non-residential investment can continue at this rate or accelerate further, it may seem more probable that the current recovery will pick up steam. With ultra-low interest rates and ultra-high levels of cash in banks and on corporate balance sheets, it would seem that a major investment growth phase may very likely be forthcoming. This would be great news for equity investors and investors in riskier bonds.
To see how business inventories are growing in sync with the investment recovery, please see the next article in this series.
To see how high yield fixed-income securities are performing in current economic conditions, please see Key strategy: Will deflation contain the bear market in bonds?
Equity outlook: Constructive
Despite problems in Ukraine and China, and despite the modest consumption data in the USA, U.S. labor markets appear to be well into recovery—with the exception of the long-term unemployed. From this perspective, it would appear that the U.S. is probably the most attractive major investment market at the moment. While the fixed investment environment of the U.S. is still quite poor, corporate profits and household net worth have hit record levels. Hopefully, all this wealth and liquidity can find their way into a new wave of profitable investment opportunities and significantly augment improvements in the current economic recovery. For investors who see a virtuous cycle of employment, consumption, and investment in the works, the continued outperformance of growth stocks over value stocks could remain the prevailing trend, favoring the iShares Russell 1000 Growth Index (IWF), and growth-oriented companies such as Google (GOOG) or Apple (AAPL).
Equity outlook: Cautious
Given the China- and Russia-related uncertainties, investors may wish to consider limiting excessive exposure to broad equity markets, as reflected in the iShares Russell 2000 Index (IWM), State Street Global Advisors S&P 500 SPDR (SPY), Dow Jones SPDR (DIA), and iShares S&P 500 (IVV). Accordingly, investors may wish to consider shifting equity exposure to more defensive consumer staples–related shares, as reflected in the iShares Russell 1000 Value Index (IWD).