Posted by  Ronald E. Canakaris

June 30, 2015

While the economy has rebounded from a disappointing start to the year, real Gross Domestic Product (GDP) growth is likely to be lower in 2015 than it was in 2014. As compared to real GDP growth of 2.4% in 2014, we now expect growth of close to 2% in 2015. The industrial sector of the economy is being held back by a challenging export environment due to the past strength of the dollar and by elevated inventories that still seem to be at unsustainable levels and that need to be worked down. Capital spending is also weaker than expected due to the hit that the energy sector has taken from lower oil prices and the generally reduced factory utilization rates that U.S. manufacturers are experiencing.

The recent improvements in consumer spending and housing activity are encouraging trends and hopefully will be sustained so that at least 2% growth can be achieved for the year. The Federal Reserve has recently lowered their real GDP forecast for the year to a range of 1.8-2.0% from their March projection of 2.3-2.7% and 2.6-3.0% last December. We continue to expect inflation, as measured by the Consumer Price Index, to increase less than 1% in 2015.

STOCK MARKET OUTLOOK

The ongoing global economic expansion and very accommodative central bank monetary policies throughout the developed world should continue to support share prices in 2015. With stock market valuations stretched and investors generally complacent, the near term outlook remains less certain due to weaker than expected economic and earnings growth, the uncertainty as to when the Federal Reserve will raise interest rates, and what impact, if any, an increase in interest rates will have on the economy. Higher interest rates could contribute to further dollar strength which would weaken exports and also lead to higher mortgage rates that would dampen housing activity. Even so, after several years of a zero interest rate policy and rounds of Quantitative Easing, it appears that the Federal Reserve would like to begin raising interest rates before the end of the year so that they are in a position to lower rates when the next recession is on the horizon. Because economic growth is still very moderate and earnings growth has slowed, the market, which is at nearly record high price and valuation levels, is likely to be choppy as investors evaluate the Fed’s likely course of action and until it becomes clearer that a tightening of Federal Reserve policy will not harm the economy. Of course, if the economy does not improve as generally expected from its weak start to the year, the Federal Reserve may not be able to raise interest rates at all in 2015. This would not necessarily be viewed favorably by investors as extended stock market valuations will not have been confirmed by supportive economic and earnings fundamentals.

Because the high quality growth stocks in our clients’ portfolios are reasonably valued, are financially strong and have sound earnings prospects, we believe they are well positioned for what could be a more choppy and volatile environment in the period ahead. With the corporate earnings cycle maturing, these companies are particularly well positioned as their earnings growth is more assured due to their global diversification and financial strength.