While the market’s rise in the second quarter was not robust, it did reflect underlying optimism on the part of US investors. The preliminary data pertaining to real GDP growth in the recent quarter suggest the growth rate was about 2.5%. The 2.5% represents an increase from the less than 1% real growth in the first quarter of the year. The outlook for corporate profits for all of 2016 includes a small positive increase for the year as a whole. These data are consistent with the market’s long held expectations for economic growth and corporate profits. The challenge to investor confidence came from shocks generated overseas for the most part.
Late in the quarter, the British voted to leave the EU. This vote generated alarming statements by commentators who could not know what they claimed to know; the impact of the British withdrawal from the EU. Initially, the US stock market fell sharply as the alarmist held sway. Eventually, the market regained lost ground as more reasonable points of view held sway. The process of withdrawing from the EU is likely to take place over time; if at all. As the process unfolds, investors will be able to make an informed judgement with respect to the consequences.
The Chinese economy has become part of a continuing melodrama. The opaque nature of Chinese economic policy contributes to the drama. As is the case with centrally planned economies, there is little margin for error and the probability of putting in place destabilizing economic policies is high. The confused outlook for growth in China has produced fluctuations in commodity prices, and exchange rates, as well as a hazy outlook for the profits of US companies with substantial exposure to the Chinese market.
In the US, markets are roiled from time to time, by events in the political arena. Every four years the buffeting is ramped up as the Presidential election unfolds. In this case, as in the case with the British vote to leave the EU, many are holding forth claiming to know what they cannot know; who will win and what policies will unfold. A prudent stance for investors is to watch and listen. We will all be much smarter in a few months.
For the remainder of 2016, economic growth should fall in a range of 2% to 3%, and profits should climb modestly. The Fed has stated it will postpone an increase in short-term rates in light of the turmoil overseas and its potential negative impact on US markets and the US economy. In this environment, stocks should drift upward.