Macro Analysis

The great north is also showing positive growth for investors. The end of 2016 showed growth of 0.64% and it's GDP is currently sitting over $450B.The Bank of Canada has decided to maintain the nation’s current interest rate of 0.5% to monitor economic growth in order to determine whether or not a rate hike will be beneficial.​​

As of April 2017, unemployment in Canada is sitting at a rate of 6.5%, which is above the the Bank of Canada’s target rate of 5%. It is clear that unemployment in Canada is showing a downward trend, which can be attributed to Canada’s continued GDP growth.

On balance, the United States looks great for investors. Lets dig deeper into this economy.

  • Great environment for bullish investors, due to American companies overall increased GDP.

  • In regards to interest rates, we are currently seeing substantially lower levels.

  • Due to the 2008 financial crisis(low inflation and high unemployment), the Federal Reserve cut the real interest rate to less than 1%.

  • This was done to encourage investment and growth opportunities for corporations and consumers.

  • The Fed intends to implement monetary tightening (increase interest rates). This is based on historically higher interest rates coexisting with strong economic performance.

  • This policy should stabilize inflation and the current unemployment level 

  • As of May 2017, the real interest rate was sitting at 0.91%

  • An increase has been projected in June, possibly two more hikes near the end of the year.

After the financial crisis of 2008, the unemployment rate was at 10% in 2009,the highest it has been since the 1980s. The Fed was able to bring unemployment levels down through their interest rate cut, which has allowed the US to recover. As of April 2017, the unemployment rate was sitting at 4.40%.

  • US inflation has grown to 2.2% in April, slightly above the 2% target.

  • Increasing interest rates may stabilize the economy but may increase inflation and increase unemployment levels

  • An economy that can maintain a level of full employment and inflation that is not degrading consumer purchasing power is vital

The first factor that I looked at was the overall GDP in each country and its relation to its current real interest rate. Starting with the United States, their GDP is over $18.5 Trillion (and growing), representing 3% growth from 2016.

Benefits and Risks:

  • President Trump is fond of tax cuts and deregulation, two themes that I am currently interested in

  • A corporate tax cut from 35% to 15% will be beneficial for businesses to not only increase  earnings, but reinvest them into more growth

  • Trump also wants to deregulate the Dodds Frank Act, which could reduce restrictions on financial institutions, making them more profitable 

  • Controversy over Donald Trump's association with the Russians and their role in the previous election has also caused uncertainty in the financial markets. Impeachment may play a role in whether or not his policies will be implemented.

​Conclusion:

  • Overall, this bull market is attractive for investors given its increased expansion

  • I remain optimistic about this market, given the continued growth of America's GDP, which provide an environment where both businesses are thriving and consumers are spending - increasing stock performance

  • As interest rates increase, this will help stabilize inflation to a lower and more optimal level, allowing consumers to purchase more goods and services, thus increasing company earnings  

  •  Finally, unemployment in the US will increase in the short run due to the increase interest rates, but will still remain within target of full employment in the long run, allowing those in the economy to have income to spend

  • Inflation in Canada as of April 2017, was sitting at 1.6%, slightly below the 2% target.

  • This figure will not change, given the Bank of Canada's decision to leave the real interest rate unchanged until further notice.

Benefits and Risks:

Unfortunately, Canada is struggling from a weak dollar and low oil prices, but these present opportunities.

  • With a low currency, this will raise the demand for Canadian goods and services, increasing Net Exports, therefore increasing an already growing GDP

  • Furthermore, the approval of the Keystone pipeline and other energy projects will serve as a catalysts for economic stimulation in the energy sector

 

As for Canada's high unemployment, there are also positives and negatives to consider.

  • The low current price of crude serves as a negative catalyst, which has caused many layoffs,particularly in Alberta.

  • In Alberta alone, unemployment is approximately around 8%.

  • This is not the  sole driver of Canada’s unemployment, but it is a factor given it's reputation in the energy industry and it's economic significance. The approval of the keystone and other energy projects will mitigate this risk.

  • More people are also entering the workforce as well, which also adds to the unemployment rate, which is not necessarily detrimental to the economy.

​Conclusion:

  • ​Overall, the Canadian economy shows strong potential for investing 

  • Positive GDP growth indicates growing productivity of businesses and consumers, which will improve stock performance

  • With a lower dollar, we should see an increase in Canadian exports, further adding to more GDP growth

  • Lastly, the approval of various pipelines and energy investments will provide employment for Canadians and future economic growth

  • This will increase profitability and stock performance for companies in the energy sector and other sectors going forward