February 2015

In 2014, the United States Economy, as measured by GDP, grew by 2.4%. This was on the heels of a 2.2% increase in 2013. Since the Great Recession, GDP growth has lagged the 3% average growth rate of previous post – WWII recoveries by about 25%.

Inflation remained tame last year, averaging just under 2%, similar to the rate over the past five years. Internationally, inflation is close to non-existent, at least by traditional measures. A fear of deflation looms as Europe deals with stagnant GDP growth.

Based on its August, 2014 Baseline Budget Forecast, the CBO is forecasting a 2015 Federal Budget Deficit of under $500 Billion. This deficit is under 3% of GDP, which is more in line with post- WWII deficits, and has resulted from increasing tax revenues and a slowing of Government expenditures. It is hoped that continued progress on the deficit front will stop the acceleration of accumulated Federal Debt levels experienced since 2008.

Over the past two months, the US stock market has rallied and then pulled back around 4% to 5% on several occasions. This volatility of “angst” and uncertainty somewhat reflects the fully valued nature of this market. The S&P 500 Index stands at 16 times forward price earnings.

Interest rates, as measured by the US 10-year Treasury Note, moved lower last year. This was a major surprise to most economists, market analysts and investors. Declining yields helped push large US stocks higher by about 13% in 2014. Small-cap, Mid-cap, Developed International and Emerging Market returns were between -4% and +6%.

The big question this year is what will be the effect of lower oil prices on the consumer and the economy. Output may not be materially affected until mid-year due to drilling and fracking projects already in the works when oil began to dip last fall. The consumer is seeing $60 per month on average of savings at the pump. It is believed that consumers are using there savings partly to reduce debt, add to savings and increase spending. As measured by XLY, the Consumer Discretionary Select Sector ETF, we saw a blip up in consumer spending over the past two months. It’s still too soon to determine the net overall effect on economic growth in 2015 resulting from reduced energy related capital expenditures and possible job losses in the oil patch versus the offsetting increases in consumer spending and savings. We’ll have to wait and see what happens.

Over the past six months, the Federal Reserve has been signaling an interest rate increase may occur around mid-year. Over the past year, the economy has added over 200,000 new jobs per month. The unemployment rate has dipped below 6% and is trending lower. The Federal Reserve has cited these developments along with other factors to support its intent to allow interest to rise to manage inflation expectations going forward while hopefully not interfering with what appears to be our ongoing recovery. We will have more to report in May.



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