April: The U.S. economy as firmly on track to accelerate this year

Highlights

• An improved earnings outlook has been a factor in the very good relative showing of the Canadian index in Q1. In contrast to the S&P 500, earnings growth expectations have been rising since August. At this writing, analysts see 12-month forward earnings growth of 12.9% for the Canadian market compared to only 9.4% for the United States. Data show that both foreign and domestic investors are showing a growing appetite for Canadian equities lately.

• Reports from the Chinese economy have continued to disappoint in recent weeks. Financial markets were particularly unnerved by the February trade report showing a collapse in exports. Unfortunately it will take a couple of months more to gauge the underlying strength of Chinese trade due to the volatility inherent in Chinese New Year celebrations. In the meantime, we take comfort in seeing that imports held up much better than exports in February. In our view, the uncompleted urbanization process as well as the available fiscal room of governments should be enough to offset the drag from deleveraging in the industrial sector.

• Weather-battered quarter notwithstanding, we see the U.S. economy as firmly on track to accelerate this year. The weekly leading economic indicator continues to trend up and labor market indicated solid gains in the private sector. The employment report for February was especially encouraging in its confirmation of a continuing shift from part-time to full-time employment. With the economy improving, a normalization of interest rates should come as no surprise. If inflation remains low, there will be no rush for the Fed to raise rates. Still, there are developments that we will be monitoring closely in the coming months such as the dramatic rebound of food prices in 2014.

• We are making a slight adjustment to our asset mix this month. Our cash position is reduced to 5% from 8% while our equity exposure is increased to 60% from 57% Despite turmoil in some emerging markets earlier this year and ongoing geopolitical tension in Ukraine, leading economic indicators and price action in commodities and corporate bonds remain consistent with an acceleration of economic growth in 2014. We continue to think that global stock markets are likely to advance further this year, justifying our slightly overweight stance in equities. We are raising our S&P/TSX target to 15,000 from 14,400. Our S&P 500 target is also raised, from 1,900 to 1,930. Our sector rotation is unchanged this month.