Fund Investing

Mounting evidence of next growth cycle spells opportunity for investors.
By Gail Bebee | 06/05/10

I've just returned from a road trip to the Southern United States. In these days of vacations to exotic destinations accessible only by air, a road trip seems rather old-fashioned. But, it has its merits: I did not get stranded in an airport for five days waiting for volcanic ash to subside, and I did get the opportunity to see a lot of country in my travels through some 12 American states.

About the Author
Gail Bebee is an independent personal finance speaker, teacher and the author of No Hype--The Straight Goods on Investing Your Money. She can be reached at gbebee@gailbebee.com; her website is www.gailbebee.com.

Even though the trip was a vacation, my investor persona kept popping up. I found myself making first-hand observations on the condition of the world's biggest economy after having suffered the worst recession since the Great Depression, and what it all means to Canadian investors.

Signs of hardship still abound, but there's cause for optimism too. My conclusion, based both on my up-close-and-personal perspective and on the latest economic entrails, is that the worst is over and that the U.S. economy has entered the expansion phase of the business cycle. That spells opportunity.

Based on outward appearances, this bullish scenario might seem far-fetched. You can't help but notice the many abandoned factories dotting the U.S. landscape in urban areas, both small and large. The number of empty stores along the main street of many towns is sobering. Little Rock, always somewhat of an economic backwater even though it's the capital of Arkansas, has been particularly hard hit. Every downtown commercial block included one or more boarded-up businesses.

In an outlet mall south of Dallas, about half the stores were vacant. By contrast, renowned tourist destinations such as Taos, New Mexico and the larger urban centres show fewer visible signs of economic decline. Along Chicago's famed Magnificent Mile shopping area, for instance, the retail space is essentially fully occupied.

The U.S. housing market is still struggling. In my travels, I saw dozens of for-sale signs beckoning prospective buyers, but not one sign sported a sold sticker. In a real-estate flyer for central Arkansas, one company advertised "Buy or list with us and receive a 5-day/4-night cruise."

The National Association of Realtors recently reported that sales of existing homes in March were up 16.1% over March 2009. However, such stellar numbers are unrealistic as house sales are currently being powered by home-buyer tax credits of up to US$8,000, which expired at the end of April.

From what I observed on the ground, and from the latest jobless data, the U.S. economy suffered a major hit from which it has yet to recover. In March, the unemployment rate was 9.7%, up sharply from 8.6% in March 2009. With so many citizens not earning a pay cheque, achieving growth in a consumer-driven economy is challenging.

Yet there are anecdotal signs of an economic recovery:

  • At an inn in Santa Fe, New Mexico, a fellow diner reported that the Denver housing market has hit bottom and speculators have already bought in.


  • In Pecos, Texas, a dusty shell of a town straight out of the movie, The Last Picture Show, a woman walking her dog along the almost shuttered main street told me she was in the midst of turning downtown retail space into a yoga studio.


  • I endured endless stretches of road construction and bridge rehabilitation, courtesy of the American Recovery and Reinvestment Act, the government program to kick-start the economy.

According to U.S. Commerce Department figures, the U.S. gross domestic product grew at a very robust annual rate of 5.6% in the fourth quarter of 2009. This pace proved to be unsustainable, fuelled as it was by all the government stimulus money that is working its way through the economy. Even so, according to the latest Commerce Department data released on April 30, the first quarter produced a healthy annualized growth rate of 3.2%.

 
Source: U.S. Commerce Department

Clearly, the American economy is in expansion mode. To take advantage of growing corporate profits associated with this economic recovery, Canadian investors should include stocks of quality American companies in their portfolios, if they have not already done so.

I personally favour dividend-paying stocks of large, established. U.S. multinational companies in the industrial and consumer products sectors, since there are few Canadian company equivalents.

Companies such as these can be held directly or through a reasonably priced mutual fund or an exchange-traded fund. They should be able to deliver a combination of ongoing dividends and stock-price appreciation over time.

In addition (with the exception of currency-hedged funds and ETFs), there is potential for foreign-exchange profits. If the currently high-flying Canadian dollar falls against the U.S. dollar, your investment will become more valuable in Canadian-dollar terms. Of course, the opposite holds if the Canadian dollar continues to gain against the greenback.

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