The U.S. economy is considered the cleanest shirt in the laundry basket. Its GDP grew by only 2.6% during the 4th quarter which was below estimates. Considering the low-cost of energy, most economists were predicting faster growth. Money is still flowing into the U.S. bond market. The yield of the 10 year bond is down to 1.66% from 1.8% which indicates the fear level is still increasing. The S&P 500, the Dow Jones and NASDAQ are all down for the month of January.
The Euro Zone is awash in red ink, debt levels in the southern regions are still hindering growth. The collapse in energy costs are deflationary which will hamper the effectiveness of Q.E. A possible Greek exit from the Euro, along with a Russian debt default could send shock waves throughout the financial markets.
U.S. multi-national corporations have to do battle in foreign markets and the results are weaken due to the strong U.S. dollar. The sales and profits that they make are reduce once they convert back to U.S. funds. The Fed is talking about raising interest rates sometime in 2015 which will put more pressure on profit margins. Raising interest rates could also affect the weak housing market making borrowing more expensive.
Can economic growth in America stop the Canadian economy from sinking further? Our economic growth was only 1.9% and was negative for the month of November. Is it in danger of plummeting along with our dollar? The United States is our biggest trading partner. When they get a cold, Canada gets a pneumonia. The Loonie has already dropped 9% for the month of January. There is speculation that the Bank of Canada may cut interest rates again which could drive the Canadian dollar down to the $0.70 level.
The defensive sectors of the U.S. economy has started to head lower. Consumer staples, health care and utilities are still demonstrating positive returns for 2015 but the above chart is a little disturbing.
It is still too early to jump into the oil sector. The positive news on Friday that the number of oil drilling rigs are coming down is only part of the story. A good friend of mine suggested that the new King of Saudi Arabia is more worried about Iran’s nuclear program than competition from U.S. production. Before he became King, he was the minister of defense. A long period of low oil prices may bring Iran’s economy to its knees causing social unrest. It could force the leadership to suspend its nuclear program in exchange for a cut in oil production by Saudi Arabia.
My defensive strategy for 2015 has been working well so far. Moving money out of Canada has boosted my investment returns by 9% so far. A possible rise in U.S interest rates and another cut by the Bank of Canada could even increase the value of my U.S. cash by another 10% if the Loonie falls to $0.70 by the end of 2015.