Living in Saratoga, we’re in a bit of a time warp, where it never quite feels like summer has even started until opening day. Believe it or not, though, the days are getting shorter, and we’re already into the 3rd Quarter. This is a great time to assess what’s occurred so far this year, as well as our projections for what remains.
The year began, just as last year did, with weak GDP figures in the 1st Quarter. The weak results were largely attributable to the harsh winter, as well as a port strike which affected the entire west coast. We expect that figure to improve when 2nd-Quarter results are released. For the year, GDP figures should come in around 2.5%.
The broader indices are largely flat for the year, however we expect that, as Q2 GDP figures are released and corporate earnings season gets underway, these indices will rebound. A total return for 2015 of between 7% and 10% in the S&P is achievable and, we think, likely. By-and-large, we feel that US stocks are at or slightly below their fair value, and could see further appreciation as companies continue to report improved earnings and positive guidance. The strong US Dollar will continue to create some drag on US companies, but its effects should be mitigated as low energy prices result in lower overhead for US producers.
In spite of the outlook for the US being largely positive, there is a lot of noise in the media and from politicians, which may have you thinking otherwise. Remember that fear mongering is a great way to sell TV advertising, and boost voter turnout.
Let’s cut through some of that:
— Unemployment: Unemployment stands at roughly 5.5%, which some would have you believe is a terribly high figure, and a sure sign that the economy is not rebounding. The fact is, 5.5% is in the range of what’s considered “full employment.” That’s not to say that everyone has their dream job, or that there aren’t people whose skills have become obsolete in a rapidly changing economy, and need retraining. It does mean that things are better than you may be led to believe. Think about it this way: if you’ve been out recently and received really terrible service, consider that the employee who served you just may have a job because nobody better was available or willing to do the work. That’s a simple sign of full-employment.
— Greece: The past year has made me a bit grateful that my great-grandparents left Athens, bound for the US. For all the attention that Greece has gotten this year, remember this: the Greek economy is roughly as large as the economy of Detroit, even though it has a population roughly three-times as large. Put another way, it takes three Greek workers to produce the same economic output as one worker in Detroit. When Detroit went bankrupt a few years ago, your life probably didn’t change very much. What happens in Greece is just as unlikely to affect you.
— Fed Rate Hike: The Federal Reserve is going to raise interest rates; it has to. Expect the Fed to raise rates by .25%-.5% before the year is out. What will happen to stock markets when it does? Probably nothing significant and sustained. Yes, the news outlets will try to make a big deal of it, just as they did with “tapering” and the end of Quantitative Easing, and just as with those events, not much will happen. Remember, everyone already expects a rate increase, which means that it’s already priced into the market. The only way to shock the market is to do something out of left field. So, unless the Fed increases rates by 5% in one fell swoop, there is unlikely to be any long-term effect on stocks.
For the remainder of the year, here’s what we see elsewhere in the world:
— European growth continues to be hampered by systemic problems, with some countries, including Germany, showing more improvement than others, including Greece, Italy and France. A weak Euro means that exports become cheaper, which should help those European companies selling to customers overseas, since those goods priced in Euros will be relatively less expensive than comparable goods priced in US Dollars or British Pounds.
— Low energy prices should continue to help the more developed of the developing nations in Asia, including South Korea, India and China. China will continue to face systemic and demographic issues, which may pare growth potential. India is promising, as the newly elected government puts reforms in place.
— The Japanese still purchase more adult diapers than diapers for children, as a glaring demonstration of its own demographic problems. With an ageing and shrinking population, investments in increasing productivity through Information Technology are, perhaps, the nation’s best bet for boosting its economy, which we see growing at less than 1% in 2015, compared to a slight contraction in 2014 of -.1%.
— Much of Latin America will continue to wrestle with economic problems. Argentina is still recovering from its historic default in 2001. Venezuela is feeling the impact of increased isolation over its Socialist policies, made worse by its difficulty in finding buyers for its petroleum exports. On the other hand, Mexico, and other nations with closer ties to the US, should show relative improvement over regional cohorts. As an aside, it will be interesting to see how things play out with Cuba, given its improved standing with the US.
— Lower fuel prices should continue to benefit those nations which rely on energy inputs, very much at the expense of those nations, including Iran, Russia, and Venezuela, which rely almost exclusively on
the marketability of their energy reserves.
In summation, we see little deviation from our initial forecast for 2015. Signs point to continued growth of about 3% in the US, with the broader US stock indices providing returns between 7% and 10% for the year. Of course, these are forward-looking statements, which are based on information currently available. Any new information could dramatically alter our forecast, so be sure to work with your financial advisor, to help ensure your investment strategy continues to reflect your goals and any changes in the economic landscape.
Stephen Kyne is a Partner at Sterling Manor Financial, in Saratoga Springs and Rhinebeck.
Securities and investment advisory services offered solely through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. Sterling Manor Financial and Cadaret, Grant are separate entities.
