Key Takeaways
- Second-quarter GDP revised higher
- Switzerland stands pat on rates
- Markets may shrug off shutdown
On this week’s edition of Market Week in Review, Senior Investment Strategist and Head of Canadian Strategy, BeiChen Lin, assessed the health of the U.S. economy. He also explained why the Swiss National Bank held the line on monetary policy and discussed the potential market impacts of a U.S. government shutdown.
Doubling Up
Lin began by noting the U.S. economy expanded at a faster pace last quarter than previously estimated. GDP (gross domestic product) growth in the April-to-June period was revised from 3.3% to 3.8%, he said, driven by a sharp rise in consumer spending.
“To put this into perspective, most economists believe the trend—or long-term—growth rate is around 2%. For GDP to increase at nearly double this pace really underscores the resilience of the American economy,” Lin stated. He added that other measures of economic health, including initial jobless claims, also remain at relatively low levels.
Still, Lin expects the U.S. economy to cool off over the next 12 months, although he sees a recession as unlikely. The story is different to the north, however, with the Canadian economy already struggling. “Economic growth in Canada actually shrank during the second quarter, and may do so again this quarter,” Lin explained.
However, he stressed that stock valuations outside the U.S.—even in places like Canada—still look more compelling than those in the U.S. This is despite the recent outperformance of non-U.S. stocks compared to U.S. stocks, Lin noted.
Zero Negativity
Switching to monetary policy, Lin said the Swiss National Bank (SNB) decided to leave interest rates unchanged at 0% this week. While Switzerland is facing some economic headwinds—particularly due to the 39% tariff on exports to the U.S.—bank officials have stressed the bar for lowering rates into negative territory is high.
“Clearly, the SNB doesn’t believe this threshold has been met yet. I do expect the central bank to remain data-dependent, however, which means rates may be adjusted if the Swiss economy sours further,” Lin said.
Funding Fumble
Pivoting back to the U.S., Lin discussed the possibility of a government shutdown next week. He noted betting markets see a 75% chance of this happening on Oct. 1 due to a lapse in funding.
Fortunately, U.S. government closures are usually short-lived, with the longest one lasting 35 days, Lin said. Because of this, they’re typically not a big deal for investors, he remarked.
“Historically, markets tend to look through shutdowns, although with today’s stock valuations so high, a pickup in volatility is possible if one occurs. Even then, however, I think investors would be better served by focusing on the long term instead of short-term market movements,” Lin concluded.