Quarterly Investment Outlook: June 2016


• The treasury yield curve has flattened from 140 basis points (2/10 year spread) at year end 2015 to 96 basis presently.  Historically, a flat yield curve has been positively correlated with slower GDP growth. 
• Despite the fact that short rates are rising faster than long-term rates, causing the U.S. dollar to rise 3.8% from its May low, the Fed minutes released on 5/18 gave a strong indication that a June Fed funds rate hike is probable.  
• In December of last year, despite evidence the U.S. economy was slowing, the Fed hiked rates by 25 basis points.  The result was a 13% decline in stock prices into mid-February.  In our opinion, another risk off trade would take a June hike off the table.  
• Global growth appears to be converging.  U.S. growth is slowing, evidenced by employment trends which have averaged 192K during the first four months of 2016, down from an average of 248K in the final four months 2015.  Meanwhile, growth in Japan and Europe have shown positive trends in the first quarter.  The growth outlook in China is set to improve, with their economy benefiting from a weak RMB, tax cuts, a recovery in their property markets and increasing infrastructure spending.  
• Having risen roughly fourteen percent from the February low, the S&P 500 has been trending sideways since early April.  On a positive note, the market's 20-week exponential moving average has risen above its 50-week moving average.  In addition, the percentage of stocks on the NYSE trading above their 200-day moving average has been above 60%.  These positive technical trends were confirmed by a recent new high in the NYSE advance/decline line.    
• The latest Conference Board Leading Economic Indicators (LEI) for April increased 0.6 to 123.9.  The latest six months witnessed an increase in the LEI at the annual rate of 1.1%, down from 1.3% annual rate in the preceding six month period.  Of the 10 indicators, only consumer expectations declined.  Noteworthy, the series is approaching its all time high of 129 in 2007.  Our conclusion is more of the same for the U.S. economy i.e. slow growth but low probability of recession. 

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