The market remained largely range-bound in the quarter and for the year. The S&P 500 index ended the quarter basically flat, gaining +0.28%, bringing year-to-date total return for the first half of 2015 to +1.23%. Investors remain in somewhat of a holding pattern as they continue to monitor signals from the Federal Reserve in anticipation of the end of the prolonged period of easy domestic monetary policy. Market consensus has shifted expectations for the first rate hike forward into September, albeit with a fair amount of uncertainty due to conflicting economic data signals.
The recent macro backdrop has been challenging for companies who have been facing a unique and diverse set of challenges in the form of muted global growth, currency headwinds due to the strengthening US dollar, anticipation of higher interest rates (thereby increasing borrowing costs), along with volatile commodity movements. This confluence of factors has increased the complexity of navigating and predicting the investment landscape in the short term as these dynamic forces work their way through company earnings.
Final readings for GDP in the first quarter reflected a (0.7%) contraction in the U.S. economy, down from initial estimates for a muted 0.2% expansion. The downward revision was greatly influenced by a change in the trade balance as higher than estimated imports coupled with lower than expected exports served to detract (1.9%) from overall growth. A slowdown at West Coast ports driven by labor disputes likely contributed to this, along with the pressure that a stronger dollar places on the affordability of US goods to overseas buyers, a headwind to domestic manufacturers and exporters.
While the weakness in GDP has largely been attributed to the impact of harsh weather conditions and the port slowdown, it remains unclear when a more robust growth picture may emerge. During the quarter, economists began revising down their expectations of GDP growth for the second quarter as a string of mixed economic data have somewhat obscured the growth outlook. As we look toward the second half of the year, we expect consumer spending to continue to accelerate buoyed by lower energy costs and a continued improvement in employment. This trend is beginning to be reflected in the data. Most recently the Atlanta Fed’s GDP forecast model for Q2 was increased to 1.9% from 1.1% in early June due to higher expectations for consumer spending growth.
Investor focus remains keenly attuned to the timing of when the Federal Reserve will raise interest rates. The contraction in GDP in the first quarter, while largely attributed to influences deemed to be transient in nature, contributed enough uncertainty to essentially take a June rate hike off the table, shifting expectations for the first rate increase since 2006 to September at the earliest, and possibly not until later in the year. Core inflation readings remain below target, and are likely to remain muted given the lag effect of when energy price declines, already captured in headline readings, begin to work their way into the core metric. Global growth concerns exacerbated by the potential of a Greek shock are also likely serving to elevate caution at the Fed, potentially influencing timing to some degree as they look to embark on the first rate hike cycle in 9 years. Bright spots in data releases have come from employment and housing figures. These countervailing forces continue to perpetuate a level of uncertainty in the market that rates will rise this September." To review the entire report, please download below.
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