Why the private investment recovery supports the bull market



Private investment recovery: The long march continues

The below graph reflects an important transition in the U.S. economic recovery. As a percentage of the U.S. economy, consumption appears to have peaked out, and has remained fairly constant since 2007, at around 68% of gross domestic product, or GDP. What has been creating the problem for the U.S. economy has been the uncharacteristically weak post-crisis investment data—the yellow, green, and gray lines. With consumption flat and investment low, the post-2008 crisis has been terribly slow and out of step with typical recoveries. However, as the below graph suggests, things appear to be changing, and this is great news for investors. This series examines the current U.S. macroeconomic data pertaining to domestic investment and considers the implications for both equity and fixed income investors.

US GDP Components

For a detailed analysis of the U.S. macroeconomic environment supporting this series, please see Must-know 2014 US macro outlook: The crack in the debt ceiling.

Capitalists invest

Despite the housing investment excess and subsequent investment hangover (the gray line), private investment (the yellow line) is nearly back to historical norms. This has been a very positive development for maintaining GDP growth, and it will likely support the recovery in the future.

For a more historical view of the role of investment as a percent of gross domestic product, please see the next article in this series.

Equity outlook: Constructive

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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).


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