The GDP Surge And Investment Implications

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Includes: CMG, LMT, SPY, VHT, WMT
by: Disruptive Investor

Summary

Robust US GDP growth has been driven by consumption expenditure and I remain bullish on consumption based themes for the festive season.

Defense spending has accelerated in the third quarter of 2014 and I believe that the sector is attractive considering the current level of global geo-political tensions.

US healthcare spending remains consistently high and I expect that the sector will continue to deliver stable growth.

Remain bullish on US equities for 2015 and I expect the real test for the US economy after the festive season is over.

For the third quarter of 2014, US GDP growth was reported at 5%, up from 4.6% in the second quarter of 2014 and up from 4.5% in the third quarter of 2013. This article discusses the factors that have contributed to GDP growth and the investment implications.

For the third quarter of 2014, the personal consumption expenditure increased (percentage change from preceding period) by 3.2% as compared to 2% in the third quarter of 2013. The PCE contributed to 44% of the GDP growth with goods contributing to 21% and services contributing to 23% of the GDP growth.

I believe that the PCE will remain robust for the fourth quarter of 2014 and for the first quarter of 2015. Therefore, consumption based themes will be attractive from an investment perspective in the festive season. Wal-Mart (NYSE:WMT) has been trending higher and I expect the stock to outperform the markets in the next 3-6 months. In the services industry, I like Chipotle Mexican Grill (NYSE:CMG). The company's same store sales have been growing at a healthy pace with a relatively healthier food offering and I believe that sales growth will remain robust for the company in the festive season.

For the third quarter of 2014, the gross private domestic investment increased by 7.2% as compared to 19.1% in 2Q14 and 16.8% in 3Q13. In the overall positive GDP report, this is one of the negative factors. It is important for domestic investments to sustain as it provides near-term as well as long-term support to the GDP. The impact of lower oil prices on the investment cycle might also be evident in the coming quarter. However, the factor still contributed to 24% of the overall GDP growth.

A big change in was also evident in the government consumption expenditure and gross investments for 3Q14. For the quarter, the above factor increased by 4.4% as compared to 1.7% in 2Q14 and 0.2% in 3Q13. The big spending growth has come in the national defense sub-component, which increased by 16% in 3Q14 as compared to a 0.4% growth in 3Q13. Government spending contributed to 16% of the GDP growth with a bulk of the growth coming from defense spending.

Considering the current geo-political scenario globally, I believe that the defense sector spending will remain robust in the coming quarters and I believe that companies like Lockheed Martin (NYSE:LMT) will be attractive investments. The company offers a robust dividend payout of $6 per share, which is sustainable considering the current defense spending environment and the company's cash flow.

Overall, the GDP growth components indicate robust consumer spending. I must also mention that among the sub-components of spending, healthcare constituted 10.4% of the GDP growth and investors can consider exposure to healthcare themes for the long-term. I believe this is a long-term investment theme considering the demographic factors. The Vanguard Healthcare ETF (NYSEARCA:VHT) can be considered for broad exposure to the healthcare sector.

In conclusion, the US GDP trend remains very positive amidst a global economic slowdown and I expect that strong growth will continue in the fourth quarter of the year. The key point to watch will be the trend in fixed investments and consumer spending. While I expect consumer spending to remains robust in the festive season, the real test will be after the month of January 2015.

Even with some points of caution, I remain bullish on the US economy and the US equities (NYSEARCA:SPY) for 2015. The economy has shown strong resilience even after the QE and if this trend sustains for 3-4 quarters, US can be on the path to sustainable growth than volatile growth.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.