Excerpted from the May newsletter from Provident Investment Management
The first quarter may show very little growth in Gross Domestic Product (GDP). The dollar is likely a significant factor, but difficult winter weather across much of the country likely had an impact, as it did last year when first quarter GDP fell 2.1%. The economy rebounded as the weather improved last year. Lower energy prices should eventually translate into stronger consumer activity, which generates about 70% of U.S. GDP. It looks like another year of moderate growth, just like the last few years.
If there is any silver lining, the subdued rate of growth allows the Federal Reserve more flexibility in deciding when to raise interest rates. The prospect for higher rates has been a source of much of the volatility in stock prices over the past two years.
Understanding the vulnerability of companies to overseas competition and the translation effect of weaker currencies into the stronger dollar has become significant in recent months. It is also important to note the impact of falling oil and gas prices on the businesses of companies whose primary business may not be oil and gas.
After a couple years when a rising tide seemed to lift all boats, investors have become more focused in 2015. The best results have come from companies exhibiting continued growth despite the numerous headwinds, and from companies subject to takeovers. The S&P was up only 1%, including dividends, in the first quarter. We continue to expect the market to show a positive return for the year despite continued volatility.
If our assurances aren’t strong enough, consider a little “voodoo economics.” The stock market hasn’t shown a negative return in the third year of a presidential election cycle, which this year is, in over 70 years. The concept is that the party in power wants to stay in power, and gives the economy a little boost to keep Americans in a good mood heading into an election year. Or maybe it’s just a random pattern seeking an explanation.