Mid-Year Report 2015: Where We’ve Been

In our first video of the series, Michael discusses where we’ve been so far in 2015, covering financial market performance, Fed policy shifts, the Greek debt crisis, and other topics.


Michael Conway: Hello everyone. My name is Michael Conway, CEO of the Conway Wealth Group at Summit Financial Resources. For our 2015 mid-year report, we’ve created a series of three short videos to take a look at the recent past, the present, and the future of the economy. We hope you will find them informative and insightful. Let’s begin our video series with where we’ve been, and take a look at the first half of the year.

In the financial markets, the S&P 500, representing domestic equities, was up 1.2% for the first six months of the year. The MSCI All Country World Index, excluding US, representing international equities, was up 4.6%. The Barclays US Aggregate Bond Index, representing domestic bonds, was down .1%. The Barclays Global Aggregate Ex. US Bond Index, representing international bonds, was down 5.4%. Commodities were down 1.6%. It’s little wonder that stock markets have not moved much this year, and that many commodities, oil included, have tumbled of late.

Labor markets have improved, and US consumer confidence is back to pre-crisis levels, with retail sales recovering after a weather-related decline early this year. However, the strength of the US dollar, and the uncertainty surrounding Federal Reserve policy normalization remains headwinds for equities. Also, in anticipation of the Feds potential rate increase in September, bond yields increased, prices declined, and domestic bonds held up better than their international counterparts.

Considering widely held expectations for faster growth this year, results in the first quarter were disappointing. US economic output declined at a seasonally adjusted annualized rate of .2%. Later, it was revised up to positive .6%. First quarter weakness has been a reoccurring US theme in recent years, and 2015 was no different. West coast port disruptions, and harsh winter weather likely account for much of the weakness.

China, Germany, France, Russia, the US, and the UK recently announced an historic accord with Iran, promptly turning market attention to Iran’s oil supply. With the fourth largest proven reserves, Iran has potential to significantly increase the world’s supply of oil. However, Iranian oil will be slow to come to the market, minimizing its impact on global oil markets in the near term. Even if all of the sanctions on oil sales are removed, the oil supply is expected to increase by about 500,000 barrels per day, which is just half a percent of global oil production. Meanwhile, the dynamics of further economic relationships in the region remain uncertain.

For years, market participants have accepted the fact that Greece has excessive debt. We’ve known that the last five years of bailouts, debt restructurings, emergency loans, and austerity measures were unlikely to get Greece back on its feet. Rather, a more appropriate goal was to balance the nation’s budget, excluding its debt payments, and to make structural adjustments so that the debt was largely out of the hands of private investors. Having accomplished both, the next leg of the saga begins. Will Greece leave the Eurozone? How large are the debt losses? What is the end game? No one knows. Is there the potential for policy error and unintended consequences? Absolutely.

Following weather-related weakness, the labor market bounced back in the second quarter. The unemployment rate has fallen to 5.3%, just a tenth of a percent from what the Fed considers full employment. In addition, payroll growth accelerated, weekly initial jobless claims hit a new 15 year low, and the ratio of job seekers to positions available is back to pre-crisis levels. However, vestiges of the financial crisis remain. Underemployment, although improving, continues to be unusually high in relation to historic norms. Likewise, the portion of the population participating in the labor force, now down to a 37 year low, impedes economic growth. Wage growth, or lack thereof, is equally a point of consternation among economists, policy makers, and of course, employed workers.

The housing market seems to have escaped its mid-2014 slowdown, with help from lower mortgage rates, weak energy prices, and higher levels of employment. Building and sales activity have moved higher. Inventories are low, and sequential monthly price declines have given way to widespread gains across all 20 major real estate markets. In May, 32% of all real estate transactions were for new home purchasers, up from 27% the prior year. If wage growth picks up steam, we believe demand could edge higher as well. Meanwhile, leniency in lending could increase as defaults decline and standards loosen. As a result, millennials, an important category for future home purchases, might lessen their hesitancy in making down payments, especially as they continue to play catch up and improve their financial standing amid the economic recovery. For now, let’s hope for an uptick in wage growth to jumpstart this process.

The US consumer is also showing considerable strength in the automobile sector. Light vehicle sales had an outstanding month in June, reaching seasonally adjusted annual rate of over 17 million autos sold. Strong demand for high ticket items is typically a very good sign for the health of the US economy, which is driven mostly by consumer expenditures.

This slide shows that economists have continued their predictions of a Federal Reserve rate hike later in the year. The Fed has indicated that they may raise rates in the second half of 2015, if economic developments are favorable. The Fed continues to pursue its statutory mandate of maximum employment, stable prices, and moderate long-term interest rates. Current metrics in the committee’s forecast for inflation suggest the Fed will start to raise rates in the second half of 2015. However, economic progress remains somewhat unclear, and the Fed has repeatedly adjusted their rate hike timeline in the past. In addition, the magnitude of rate raises will be gradual and based on meaningful wage growth, as the price of oil and the strength of the US dollar are forecasted to be transitory.

This concludes our first video. In episode two, we’ll take a look at the current state of the economy.