The U.S. economy got off to a sluggish start again in the first quarter under the weight of heavy snowfalls and disruptions at west coast ports with GDP contracting at a minus 0.2% rate. However, growth has revived in the second quarter as expansion in consumer spending has been led by growth in the housing sector. Housing starts and new and existing home sales have reached record levels since 2009. U.S. nonfarm employment has been steadily expanding with more than 12.4 million jobs having been created since the financial crisis and the unemployment rate has dropped from 10% to 5.3% over the last five years.
Despite the negative first quarter blip, the economy has been recovering and the growth looks sustainable at a rate of at least 2.5% over the next year. At the present time the risk of the economy falling into recession seems to be very low. The decline in oil prices has hurt the energy sector, impacting capital spending and jobs, but is a positive for the consumer sector and emerging markets. U.S. growth is accelerating and corporate profits are at the highest level since the 2008 recession.
The Greek financial crisis has been a media circus after dragging on for the last five years with numerous deadlines and serial defaults. Until last week the ECB has been providing funds to keep Greek banks liquid through its Emergency Liquidity Assistance program. Despite the resounding “No” vote on the July 5 referendum, Greece’s parliament has now approved the required conditions for the ELA to provide funds and reopen the banks.
Growth in the U.S. economy is not likely to be negatively impacted by the unraveling of the Greek crisis, events in the Middle East or Asia. Greece’s economy is less than 2% of Europe’s GDP.
China’s stock market bubble began in November when the PBOC cut interest rates to stimulate economic growth. This set off a speculative stock buying frenzy which led to a doubling of the CSI 300 Index of stocks on the Shanghai-Shenzhen stock exchanges by June of this year and a subsequent decline of 25% in stock prices.
Federal Reserve Chairwoman Janet Yellen has said that the central bank is ready to take the first step to start raising the Federal Funds rate this year. She has been concerned about wage growth but feels that wages are on the rise with a tightening of the labor market. We believe most investors have accepted that interest rate increases will be done gradually and that interest rates will remain lower for longer.
The S&P 500 is up just 2.4% since the end of 2014. Investors have had to deal with concerns about growth and valuations with weaker than expected economic reports, the ongoing Greek financial crisis, the collapsing of the Chinese stock market bubble and speculation about when the Fed will start raising interest rates.
Whitnell’s Perspective on Markets and Investing
Fixed Income: With current yields from fixed income investments at historic lows, the prospects for future returns are not attractive and are subject to duration price risk when longer-term interest rates rise.
Equities: While prices are extended in the 6-year bull market, large cap stocks appear fairly valued on an historic basis and are attractive on a long-term basis relative to other investments. We emphasize high quality stocks with sustainable earnings growth on a bottom-up, research-driven basis.
Other Investments: There also may be attractive opportunities in international developed and emerging market equities, real assets and alternative strategies if appropriate for some client portfolios.
Note: We have gathered the information contained in this report from sources we believe reliable; however, we do not guarantee the accuracy or completeness of such information. You should not assume that any discussion or information contained in this market commentary serves as the receipt of or as a substitute for personalized investment advice from Whitnell & Co. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission.