Investment Commentary – 5/28/2015

Dow – 18,162.99 (5/27/15 close)
S&P 500 – 2,123.48 (5/27/15 close)
10-year Treasury – 2.13% (5/27/15 close)

  • As it becomes increasingly likely that the 2nd estimate of 1st Quarter 2015 GDP will be revised into negative territory this week, it is important to examine what may have been responsible for this contraction. The weakness observed in the 1st quarter was a function of a number of factors: lower than expected consumer spending due to very cold winter, subdued exports and a spike in imports due to the West Coast port strikes, and declining investment in structures resulting from the sharp decline in oil prices at the end of 2014 and into the beginning of 2015.
  • However, these factors all seem relatively transitory to analysts; 2 months into the 2nd quarter, the economy seems to be turning around. As shown in this week’s chart, the index of Leading Economic Indicators improved at its fastest pace in the past 9 months, with this improvement likely driven by stabilization in oil prices, consumers feeling better about their finances, and strength in the housing and labor markets. While it is important not to extrapolate a single data point into a broader trend, the turnaround analysts have begun to see in parts of the U.S. economy points to a bounce-back in 2nd quarter growth, and highlights that despite a hiccup in the 1st quarter, the story for the U.S. economy remains one of gradual expansion.
  • Mergers-and-acquisitions (M&A) activity continues to support the U.S. stock market.
  • Paradoxically, another factor boosting stocks has been mixed economic data, which has alleviated concerns over an aggressive Fed rate-hiking regime.
  • However, an autumn rate hike by the Fed and the resultant modestly higher rates are unlikely to be a catastrophe for markets.
  • Analysts think non-U.S. equities look attractive because of lower valuations and low interest rates and bond buying by global central banks.
  • Analysts like senior floating rates loans because of increasing incremental income and low duration risk.
  • Analysts believe U.S. equities can continue to climb and post further gains before the end of the year.

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.