The opportunities and trends to keep in mind when you invest in U.S. equities

There’s uncertainty across almost every asset class. Contributing to the precariousness of the moment are geopolitical events, changing demographics and higher-for-longer interest rates Read article The US Federal Reserve holds rates steady in September 20, 2023 statement.

Both the Global Purchasing Managers’ Index (PMI) and capital expenditures are slowing, there’s been inventory correction across some retail companies and a number of Covid-19 distractions and disruptions persist. And yet despite all of these challenges, opportunities for true wealth creation abound. Though timing the market is inherently difficult, history has repeatedly shown that the way to get through pretty much any macro event is through bottom-up security selection focused on long-term wealth creation Explore CIBC Asset Management’s Guide to Portfolio Construction..

U.S. employment is strong, and many employers may be labour hoarding. “Because so many companies have had such a difficult time hiring good employees over the last couple of years, they don’t want to let them go,” says Houston. “So, if there is a mild slowdown, many of these employers may do what they can to hold onto them, which would be great for the US consumer.” What’s more, there’s excess savings in the system as a result of Covid-19 stimulus cheques, a moratorium on student loan payments and changes in consumption patterns.

Given their strong housing and — up until recently — equity markets, middle and upper income U.S. consumers have been enjoying a bit of a wealth effect. For lower-end consumers, however, it’s been a different story. Because many of these consumers may be renters, not homeowners, they haven’t benefited from the strong housing market. In fact, they may have seen their rent go up quite a bit. And they tend to feel the impacts of inflation in a greater way because food and energy prices are a bigger part of their budgets.

Interest rates are still top of mind for many investors, but it’s impossible to predict where they’re going to go. So look beyond them.

“The economic indicators we see are noisy, they’re difficult or impossible to forecast,” says Houston. “For each real recession or severe bear market, we’ve probably seen 10 to 15 false positives — and most of those false positives actually represent really good buying opportunities.”

Understood in this light, higher interest rates are a lens that can be used to help determine if a company has a risk that may have been missed. While they do have an impact on margins, and impact cash flows and profitability, they also highlight the importance of investing in quality companies that will survive and thrive in whatever the economic environment.

“Volatility is an opportunity to take advantage of sentiment swings by investors who are overreacting,” says Farrell. “We’re really trying to identify the best companies out there to invest in the long term.”

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