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OECD Forecasts More Growth—How Is Your Portfolio Positioned?

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December 14, 2016
Arrow of Crowds: OECD Projecting Acceleration in Growth
Mike Kiev/Getty Images

After years of below-trend economic growth, the global economy may finally be picking up steam. The composite leading indicators (CLIs), compiled by the Organization for Economic Cooperation and Development,  designed to offer a glimpse of economic turning points, revealed last week that growth momentum was accelerating in several advanced economies including the United States, Canada, Germany and France.

According to the report, investors may finally be able to say goodbye to worries about so-called secular stagnation. There are signs a number of global economies are finally gaining some traction after years of sluggish growth in the wake of the 2008 global financial crisis.

The OECD said that more active use of fiscal policy will raise growth modestly for the global economy, which has been stuck in a low-growth trap. The organization bumped up its projection for 2017 global GDP growth to 3.3%, up 0.1% from September. 2017 Growth forecasts were also raised for the United States, the Euro area, Germany, Italy, Japan, the UK and China. 

20-year GDP for five advanced economies

FIGURE 1: 20-YEAR GDP, U.S., U.K. FRANCE, GERMANY AND ITALY.

The US has had the greatest percent growth over the last 20 years, with the major European countries ranging from up 44% down to 9% growth. Data source: FRED database. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. To view within the thinkorswim platform, log in to your account and click Charts > GDP:FRED >Time Frame = 20 Y : Mo.

Stocks Are Cheering

The stock market, which some traders view as a leading economic indicator, may already be pricing in expectations of future economic growth, with last week's rally to new all-time highs in the S&P 500. "You've seen it across all the major indices since the election and are seeing it in the European indices as well," says JJ Kinahan, chief market strategist at TD Ameritrade.

Portfolio Considerations

With the push to all-time highs in stocks, investors may want to "be careful of being over-allocated," says Kinahan. "With stocks near all-time highs, it is the same message we've said before—don't jump in fully to a position, jump in somewhat," he says, suggesting investors may wish to scale into a position over time. Keep in mind that scaling into a position will involve more transaction costs. 

Here is a look at 3 niche sectors that could potentially benefit from a pick-up in overall economic growth.

  • Retailers: "For the first time some of the stocks that have had trouble growing in recent years, like retailers, could have an opportunity," Kinahan says. He warns that investors may not have the full picture until after the conclusion of the holiday season, but for now there may be reasons to explore the retailing front.
  • Travel industry: The strength in the U.S. dollar "continues to be a positive for the travel industry—both airlines and hotels. After being on the back burner for a long time, the strong dollar may have put European trips back on the plate," Kinahan says.

      
  • International stocks: After weak performance, are these markets vulnerable to a reversion-to the-mean trade? Sam Stovall, chief investment strategist at CFRA, pointing to the MSCI EAFE (“Europe, Australasia and Far East”) Index, warns about that possibility. The EAFE index, shown in figure 2 below, measures equity market performance of developed countries outside the Americas.
MSCI-EAFE Rolling 10-year CAGR

FIGURE 1: MSCI-EAFE: A MEAN REVERSION PLAY?

Data source: CFRA, MSCI. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

The market tends to go through cycles. If something is out of favor for a while it could be vulnerable to a reversion-to-the-mean type of move, Stovall says. "The OECD is saying in terms of world economic growth there is an improvement and this chart basically says you don't want to unolad," Stovall says.

"On a 10-year rolling basis, the growth rate for the MSCI-EAFE is at its second lowest period in history, with only the February 2009 being worse," Stovall says. "If you are an investor contemplating unloading international holdings you might want to stay that thought," Stovall says.

While there have been concerns about how a strengthening dollar could impact international investments, if other countries are also growing – in addition to the U.S. – this will neutralize appreication in the dollar, Stovall says. 

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