Q2 2015 Commentary

The puzzling economic data for the first quarter weighed on the market. Almost six years after the beginning of the economic recovery following the last recession, real GDP declined. This pattern of growth is unusual, and called into question the viability of the current economic recovery. Economic growth is expected to resume in the second quarter, and fall in a range of 2% to 3%, but confidence in the accuracy of this forecast is not as high now as it was six months ago.

The preliminary data for the second quarter does seem to be consistent with positive economic growth in the US. Job growth has been steady but not robust. The unemployment rate has declined in fits and starts. Auto sales were strong and consumer confidence has risen substantially on a year-over-year basis.

The outlook for growth in corporate profits is cloudy. Events outside of the US have tended to lower expectations for increases in corporate profits. Economic dislocations in China and the Eurozone have been met with economic policies, which seem almost certain to produce more instability and dislocations. The typical forecast for economic activity in Europe and China calls for real growth well below the average for each area. In many cases, US companies expect to see declining real demand for their goods and services in these two areas. Additionally, if the dollar’s value continues to drift upward in the face of the confusing economic policies implemented by our trading partners, US dollar denominated profits may fall short of expectations.

In the US, investors are waiting for the Fed to give some clear indication of when it will try and raise interest rates. The rise in rates is thought to be just over the horizon, but the horizon is receding. Short term weaknesses in US GDP data, economic travails in the rest of the world and a rising dollar, have tended to push the horizon back. Moreover, it is not clear the Fed can manage rates if capital flows reflect changes in terms of trade rather than short term preferences for cash balances.

It is unusual for the market to discount the same event twice, but the Greek economic debacle has stirred the market with each new headline. This phenomenon will probably end before the Greek drama reaches its inevitable conclusion. At some point investors will focus on more important matters, such as positive real GDP growth in the US, and increasing corporate profits. The stock market will advance as a consequence of these positive trends in the US when they materialize.