This Week in Review | US GDP, Canada Economic Update, Utilities Sector

Transcript

Stephanie Kuehne:

Hello and welcome to This Week in Review. This weekly segment is designed to highlight a few important developments you may have missed this week, what they may mean for markets, and most importantly, the potential impact for investors.

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Now, let's review what happened during this holiday-shortened week.

First, US third-quarter GDP.

The US Bureau of Economic Analysis released its initial estimate for third-quarter gross domestic product, or GDP, on Tuesday. The report was originally set to be released in October, but was delayed because of the US government shutdown. So, what did the long-awaited data show? The US economy expanded 4.3% annualized in the third quarter, well above analyst expectations, and accelerating from 3.8% growth in the second quarter.

While many headlines are touting the fastest US GDP growth in years, we believe it's important to look under the hood as the details often reveal more nuances. In the third quarter, strong personal consumption and net exports boosted growth, but business investment slowed. Additionally, part of the net exports' contribution to headline GDP came from falling imports, which isn't an economic positive to us, but a quirk of how GDP is calculated since it only focuses on domestic production.

Beyond the details of this particular GDP report, it's always important to remember GDP data are backwards looking. Future GDP growth is what's most important and relevant to stocks today, not what happened in the past. And this fact is compounded by the multi-month reporting delay for this Q3 GDP data.

We can also look to more timely data than Q3 GDP for a pulse check on how the economy is doing. For example, monthly composite Purchasing Manager indexes, or PMIs for short, have signaled expansion across major economies during Q4. These PMIs, among other indicators, suggest the global economy has been chugging along quite nicely as we reach the end of the year.

Next, let's turn to Canada.

This week, Canada also provided an economic update. On Tuesday, Canada released final GDP figures for October, along with a preliminary estimate for November. For October, month-over-month GDP contracted -0.3%. But GDP rebounded some in November, expanding by 0.1%, led by gains in services. The combined weakness across October and November likely raises some eyebrows, giving Canada's shaky GDP data earlier this year.

In Q2, Canadian GDP contracted by -1.8% annualized and many expected economic output to fall once again in Q3. However, Q3 GDP positively surprised at plus 2.6% annualized— avoiding two consecutive quarterly declines, which is one definition of a recession. But we believe those third quarter numbers were less impressive than they seemed, since falling imports boosted the headline growth artificially— likely an after effect of companies front-running tariffs earlier this year.

But looking at the bigger picture, all of the anticipation of a recession means Canada doesn't need to deliver super economic results to positively surprise. And we think Canada's economy likely proves more resilient than feared, considering a big majority of Canada's exports are exempted from new US tariffs via the US-Mexico-Canada trade pact.

Finally, a closer look at the Utilities sector.

The Utilities sector, a traditionally defensive corner of the market, has been a hot topic amongst investors in recent years. As we approach year end, let's take a brief look at the sector and whether artificial intelligence hype and the data center energy demand could indicate more strong performance ahead or not.

Utilities is one of the smallest sectors in the global MSCI World Index, and it includes companies providing essential services like electricity, natural gas, water and sewage. Because these are vital services, demand—and correspondingly revenue—tends to remain steady. This makes Utilities a go-to for cushioning losses during market downturns. But it also means the sector often lags in strong bull markets.

This year, however, Utilities has been in the spotlight. The MSCI Utilities Index, which tracks Utilities firms in developed markets, has outperformed the broader MSCI World Index year-to-date. This outperformance has been fueled by strong earnings, its defensive appeal during market volatility and expectations of increased electricity demand driven by AI.

But should investors expect Utilities to be both a safe haven and a growth engine moving forward? Probably not. While the sector's defensive traits will likely continue to support it during downturns—thanks to stable profits and high dividends— those same traits could lead to underperformance as the bull market matures.

Additionally, Utilities firms often face high fixed costs and heavy regulation, which can slow growth and weigh on earnings. For these reasons, we caution against piling into Utilities stocks or any single hot-performing sector. Instead, we think long-term investors should seek to maintain a well-diversified portfolio across both sector and regional categories, which can help balancing the risk versus return in your overall investments.

And that's it for this week.

Thanks for tuning in to This Week in Review. If you're looking for more insights, then don't miss our other series, 3 Things You Need to Know This Week, released every Monday. You can also visit FisherInvestments.com any time for our latest thoughts on markets. Thanks again for joining us and don't forget to hit like and subscribe!