Even with the headwinds of volatility, why is the U.S. economy doing reasonably well at this point?
One of the principal factors is continuing improvements in the labor markets in both employment and wages.
We’ve seen some of the best growth for job creation, especially when one adjusts for the slowdown in the workforce population. So, on a demographic-adjusted basis probably the best job creation we’ve seen in the last 10-15 years. This is starting to really help the outlook for the U.S. consumer. With wages going up somewhat and very low inflation with oil and gasoline prices falling, the purchasing power of the U.S. consumer, along with the strong dollar, is really improving, and that yields a relatively positive outlook for the U.S. economy for the remainder of this year.
One of the things we see on the horizon is that the Federal Reserve is probably going to move to start hiking rates sometime this year. That doesn’t mean that the Fed will raise rates right away. We expect that process to be incrementally gradual. We don’t think there’s going to be a dramatic spike in interest rates. That is, it appears the Fed will weigh whether to raise short-term interest rates on a meeting-by-meeting basis, beginning in June. Fed officials have reduced their outlooks for growth and inflation, implying a less aggressive path of interest rate hikes in the quarter ahead. One of the reasons is that we’ve seen bond yields fall across the world, not just in the United States, due to that slowing inflation and slower global economic growth.
When you put all of this together, we think it’s a pretty reasonable outlook in 2015 for the U.S. economy in terms of backdrop for stocks and bonds. We think earnings should be relatively steady and provide some foundational support to U.S. equity prices. However, we do expect more volatility ahead due to the risks that we’re seeing in the global economic environment as well as the prospect of monetary tightening on the horizon.
In spite of relatively soft U.S. GDP growth in 1Q15, growth is expected to rebound in the second quarter. Federal Reserve officials have signaled a return to business as usual. The strong U.S. dollar has had a negative impact on corporate earnings, but the incoming data suggests a strengthening economy at home.
In regard to the global economy, it’s expected that weaker local currencies and lower oil prices will eventually help the rest of the world improve although geopolitical tensions in Russia and Ukraine, political issues in Latin America, and the slowing growth rate of China could produce negative effects.
We continue to believe that diversification remains an investor’s best friend, with modest over-weights to equities and under-weights to fixed income depending upon an investor’s risk tolerance and time horizon.
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