Why the best investment in the US could be from outside the US
The first relates to US interest rates. BlackRock research shows that Canadian stocks have outperformed US stocks in most instances when the Federal Reserve has raised interest rates.
This is because the central bank tends to only lift rates when financial markets are doing OK, the US economy is expanding, and prices are rising. And all of this is good news for Canada, as the largest trading partner to the US.
So though Canadian stocks have already rallied this year on the back of resurgent energy and materials prices, the market may strengthen further as interest rates rise.
The S&P/TSX Composite Index, a broad measure of the Canadian stock market, has significantly outpaced the S&P 500 in the year through November 10. Even after the post-election rally in US stocks, the indexes are up 13% and 6% respectively.
The second leg to the Canadian rally
As Canadian stocks look to leverage US growth, its government is rolling out a significant fiscal stimulus to reboot the economy at home.
Prime Minister Justin Trudeau has opened the government checkbook to fund $91 billion in infrastructure spending over the next 10 years. The stimulus plan will also extend to pensions and tax reform, among other things.
It's a bold approach to use low interest rates and government borrowing power to boost growth and productivity in the economy. And many countries around the world are closely watching how it unfolds.
The anticipated boost to materials and industrial companies from this government spending, and also from any major infrastructure developments in the US, would help Canadian stocks.
And while there are risks, particularly in the country's hot housing market and the potential impact of higher long term interest rates on this market, the case for a rising stocks remains.
So for investors, the combination of a short term tightening of US interest rates and increased government stimulus could warrant a closer look at the Canadian market.
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