OUR OUTLOOK FOR THE ECONOMY FAVORS EQUITIES
Despite the oil crisis and threat of interest rate increases in the U.S., sagging economies in Europe, the Far East and emerging countries, and increasing market volatility this month, I believe that economic growth will improve in 2015 for the following reasons:
1. The U.S. economy is growing, with a boost from the drop in oil prices. Our gross domestic product (GDP) growth is approaching 4%, in the opinion of JP Morgan Asset Management.
2. The federal budget deficit and trade deficit are both declining (source: U.S. Treasury Department and the Bureau of Economic analysis); this trend should help support U.S. equities and the dollar.
3. The U.S. dollar is arguably the strongest world currency. Of course, this helps our purchasing power for imports but may create a drag on exports for our larger multinational companies. Small stocks, with lower foreign sales, may benefit.
4. Inflation is very low and now, with the oil price decline of over 45%, below 2%. Low inflation is generally good for financial assets.
5. Economic weakness in China and Europe are creating an environment for continued low interest rates and helping our consumer and business economy.
a. Most forecasters believe that domestic interest rates will increase this year in line with the Federal Reserve’s stated intent to increase the Federal Funds rate starting this summer. I disagree because the oil price decline already lowered inflationary pressures. There is little reason to slow our economy and risk causing a recession. A reasonable forecast is to be cautious this year or defer interest rate hikes to 2016.
6. Estimates for fourth quarter earnings growth in the U.S. are as high as11%, but for a negative1% for foreign companies. (Source: RBC Capital Markets)
7. Dividend yields for S&P 500 stocks are higher than that of the 10-year Treasury bond. The opportunity to benefit from a higher dividend, favorable tax treatment, plus the potential for capital appreciation is very compelling. This disparity occurred four times in the last 50 years with large equity gains over the following twelve months in the other three cases. (Source: Bespoke Investment Group)
If the trend in January continues, our belief in diversification may be rewarded. Unlike last year, domestic small cap stocks, foreign large cap stocks, and emerging market equities appear to be leading the S&P 500. It is still early to project that this trend will continue. Volatility has been extraordinary. On balance, we are optimistic that this will be a good year and that it will continue in 2016, a presidential election year, where neither party wants to rock the boat with new legislation.
Marv Kaye, J.D., CFP® | Kaye Capital Management