One of the better stories supporting higher stock prices is the improvement in the economic outlook.  Stronger housing, employment and auto sales data in the U.S. have lead to higher consumer confidence and a subsequent improvement in the ISI Survey data that we track (shown below).  After bouncing sharply off the 2009 lows, the data from these corporate surveys has been range bound for most of the past two years.  The data has recently started to break out from this range suggesting higher levels of economic growth ahead.

Economic Strength Coming Back

While the U.S. has been the source of most of the world’s economic strength over the 2011/12 period, other regions are now starting to see better numbers as well.  Europe has clearly moved out of recession, even in countries such as Italy, Spain and Greece.  German economic numbers have actually been fairly robust as has the data from Great Britain.  While Japan is not booming, ‘Abenomics’ is clearly starting to work as growth has picked up for the first time since the Fukushima disaster in 2011.  Meanwhile, despite worries about a slowdown in China, their annual growth has stabilized at a rate of around 7.5%.  While this is below the 8-10% growth range of the past decade, it is still a large number and is also coming from a larger base for growth.  All of this improvement is being reflected in the Global PMI (Purchasing Managers Index) as shown in the chart below.  The index recently moved to a 32-month high and looks to increase further in 2014.  This data is supported by global trade numbers and suggests higher earnings growth ahead as well.   Global Manufacturing Recovering

The combination of higher economic growth, stronger profits, low interest rates and reasonable stock valuations all suggest continued gains in stock prices.  While the ‘stretched’ sentiment indicators could provide some volatility for stock markets in the short term, we would view any pullbacks as good opportunities to add to stock positions.

Our outlook for 2014 sees better gains for many of the economically sensitive sectors  that have lagged the overall market over the past few years.  While we continue to like the Financials and Technology sectors, we also expect some better performance from the beleaguered Basic Materials group, particularly the base metals group.  Energy stocks have also been somewhat of a laggard group, particularly in Canada.  With a slightly lower Canadian dollar, stable oil prices, higher natural gas prices and some tightening of the discount on Canadian heavy oil, valuations should get a further lift.  The tremendous value and opportunities in the Canadian energy space has already attracted the attention of some well-known international investors as shown by Warren Buffet’s investment in Suncor and Carl Icahn’s stake in Talisman Energy.

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