In this latest installment of our quarterly report, my colleagues and I share some observations on the second quarter of 2015 and offer our outlook for the global economy and markets in light of recent events in Greece and China.
Click here to go to the full report on our website. Following are a few highlights:
- Stocks paused in the second quarter due to uncertainty about the global economy and U.S. Federal Reserve action along with meager corporate profits. Bonds and other income generating investments fell as investors parsed the Fed’s interest rate signals.
- Recent market and economic news from Greece and China and ongoing U.S. Fed deliberations pose threats to economic prosperity and rising markets. However, there are positive trends afoot that leave us still thinking that the U.S. stock market can show positive gains for the year.
- The U.S. economy continues to expand at a slow pace and is on track for GDP growth of about 2% for the full year. Consumer spending, supported by reduced energy prices and the ability of consumers to borrow at rock bottom interest rates, has been the primary factor helping GDP and has boosted sectors such as autos and housing.
- Following the rise of price/earnings multiples over the past few years to levels that are in line with historical averages, the U.S. stock market is dependent upon corporate earnings to support higher prices. Though second quarter earnings are expected to be on the weaker side, we anticipate better earnings later this year as the U.S. and foreign economies gain momentum.
- Current indicators point to the most likely scenario being a first Fed move either late this year or in 2016. We believe the Fed will most likely raise rates gradually as businesses hire more workers and the unemployment rate falls. We also believe a gradual rise in rates due to improved economic conditions could be a good sign for the stock market, which has performed well in past times of incremental rate hikes.
- However the Greek situation resolves, we believe there will be continued volatility in Europe over the coming months but limited long-term impact on the European economy or markets. The European economy is improving, banks are much healthier, and we do not foresee Greece’s problems spreading to other members of the EU.
- Having more than doubled over the past year due to government policies that encouraged investing, stocks in China reached unreasonably high valuations and may fall more than their recent plunge. Even if the government succeeds in stabilizing the stock market, we believe the lower expected growth rate of the Chinese economy poses a long-term challenge.
- We are optimistic about the markets due to what we see as improvement in the global economy and financial system, reasonable valuations that could be higher given current low interest rates and high profit margins, and our careful selection of what we believe to be undervalued securities for our portfolios.
Jordan Smyth and the Edgemoor Investment Advisors Team
This material is not financial advice or an offer to buy or sell any security product. The opinions expressed within this blog posting represent an assessment of the market environment at a specific point and time and they are not intended to be a forecast of future events or a guarantee of future results. This blog post does not constitute a general or personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. All the opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing.