May 2015

First quarter results for the US Economy were tepid at best. Following a common, winter chill theme, GDP grew at just 0.2%. Bad weather, cheaper oil and its impact on the energy sector and a stronger dollar were the likely causes.

Lower oil prices have not fueled an increase in consumer spending or at least not yet. As the chart below shows, consumers realized $112 Billion of expense reductions from lower gas prices which contributed to an overall increase of savings of  $120 billion. Whether these expense reductions lead to future spending remains to be seen.

In response to the GDP slowdown and still tepid job growth, the Fed is extending its timeline for raising interest rates, possibly out to December. Improvement in job growth and the unemployment rate will be key to the timing of any rate increases.

First quarter equity markets showed us a switch from last year. The S&P 500 eked out a 1% increase, while International stocks performed better. This trend continued in April, where the S&P was flat, while International Developed stocks rose close to 4% and Emerging Market stocks rose nearly 8%.

Valuations of US companies are relatively more expensive than those of International Developed and Emerging Market companies. At the same time, earnings for US companies are at peak levels, while the profits of International Developed companies are still below their historical peaks.

The rapidly strengthening dollar is a key driver here. The stronger dollar causes a reduction in US company earnings when international sales are translated into dollars and causes US products to be more expensive overseas, hurting exports.

The Fed is rolling back its timing to raise interest rates. US consumers are choosing to hold on to what they’ve got for now. Several factors including European Capital Bank accommodative monetary policy hint at the possibility of the continued relative strength of the International Developed markets. Where does this leave us?

According to the Barrons recent Big Money poll, 50% of the participants are neutral on the U.S. market over the next six months. Ask them what’s going to happen in 12 months, however, and you find that 82% are bullish on the US and 83% are bullish on Europe. Caution mixed with longer term optimism – a healthy viewpoint during a time of transition.


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