Taken from a monthly newsletter published by Provident Investment Management
The U.S. economy got off to a poor start in 2015. Winter weather was difficult in some parts of the country, a strike in west coast ports hobbled commerce, and energy companies cut back activities faster than consumers took advantage of falling energy prices. The first two factors are no longer relevant, and consumers seem to believe that their energy expenses will remain low. Consumer spending rose 0.9% in May after a flat showing in April. Personal income growth has been fairly strong at 0.5% in both April and May.
The factory sector appears quite resilient according to the Purchasing Managers’ Index from the Institute for Supply Management. This broad gauge rose to 53.5 in June from 52.8 in May and 51.5 in both March and April. This is encouraging to see as the strong dollar is generally believed to make imports less expensive while hurting U.S. manufacturers’ ability to export.
Commodities prices are coming down once again, particularly industrial commodities such as iron ore, copper, and aluminum. This bodes well for U.S. inflation, which should remain quite tame. While we continue to expect the Federal Reserve Board to raise interest rates this year, potentially as soon as September, low rates of inflation run counter to its desired 2% inflation target.
The early view on corporate profits for the second quarter isn’t particularly encouraging and helps explain why the stock market has struggled to maintain momentum in 2015. Second quarter profits are expected to fall 4.5%, but would be up 2.2% excluding the weak energy sector. However, first quarter results topped expectations despite negative economic growth so perhaps second quarter projections will prove too cautious.
While the economy should continue to grow at moderate levels like in recent years, the low rate of corporate profit growth and high stock valuations may keep the market from producing stellar returns. Our stock selections target faster-growing companies at reasonable P/E ratios. We believe that they will continue to stand out in this slow-growth, high priced market just as they did in the first half of the year.