Quarterly Investment Outlook: March 2015


  • A Fed rate hike is dependent upon inflation moving higher.  We are watching service prices, which may signal a change in trend.  A strong dollar is also depressing goods prices.  A September increase seems likely.
  • Meanwhile consumer spending may have finally started benefitting from lower energy prices and solid employment gains.  However, we are monitoring the four week moving average of unemployment claims (currently at 294,500), which has failed to make a new low for sixteen weeks.  This is becoming a troubling trend.
  • Core capital goods orders, less transportation and defense, rose 0.6% mom.  This is the first rise following four consecutive monthly declines, and it is only up 4.2% yoy.  Business spending appears sluggish.
  • Consensus operating earnings for the S&P 500 have been revised downward to 120.37, up only 2% from 2014.  Forecasts for 2016 (136 expected) appear too high.  At 16x our estimate of 128 for 2016, the S&P 500 should trade at 2050.  At a minimum, the market appears fully valued.  With interest rates at zero in the US and QE underway in Europe and Japan, liquidity is flowing freely.  An equity overshoot phase is possible!
  • Treasury yields have risen lately reflecting stronger growth in the US, while excess liquidity in Europe is depressing bund yields (30 basis points).  The wide spread between US/Germany is benefitting both the US dollar and US treasuries.  Any softening in domestic growth would cause treasury yields to test 1.5%.  Investment grade credits offer attractive yield pickup.

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