SPECIAL MARKET COMMENTARY

August 24, 2015

Is Correction Our Direction?

Not even a week ago I started to write an article for our clients that I was going to title, “Is Flat The New Up?”  I was basing this article on the fact that as of last Tuesday (August 19^th) the S&P 500 stock market index was up slightly over 1% for 2015.  A puny return when compared to the returns of previous markets for the same time frame.  The 500 hit its highest mark on May 21, 2015 when it peaked at +3.4%.   My original thought was, “Is this what it’s going to be like for the rest of the year?”  So is flat the new up?  We have been sharing with clients since last fall of our belief that the U.S. stock market might be considered fully valued.  That means that on a price to earnings valuation some believe it would be perhaps more difficult for stocks to grow at the same pace as the prior three years.  After all we are six and a half years into this bull market which is the third longest in stock market history.  But when considering the reasonable growth rate of the U.S. economy why wouldn’t stocks be able to continue to grow modestly in 2015?  So our statement to clients has been that we believed that the 500 in 2015 potentially could grow at a pace between 6% to 8%.  We also stated that most of this year’s growth potential would occur in the second half of 2015, not the first.   The reason?  Because our last two winters (2013/2014) have been so severe that business that would typically consummate in the first quarter would be pushed into the second quarter GDP numbers and then continue to improve and stabilize through the end of the year.  But just as I was about to wrap up our thoughts on “Is Flat The New Up?” stock markets around the globe fell at the end of last week in rather dramatic fashion in terms of the amount and speed of the decline.  Hence the retitling of our paper to “Is Correction Our Direction?” Continue reading →

Click image to enlarge

Entering into the 3^rd quarter of 2015, the US is now 6 years removed from the trough of the 2007-09 recession. The chart above shows the progress of the subsequent recovery over those 6 years, and compares it relative to past recoveries dating back until 1980. The most recent GDP report showed the current economic recovery continues to move in the right direction. The 2^nd quarter annual rate of growth came in at 2.3%, and a previous 1^st quarter contraction of 0.2% was revised to a 0.6% expansion. However, this puts the first half of 2015 at a pace slower than the already meager 2% average annual rate of growth we have been experiencing since 2012. This sluggish growth has led to the weakest economic recovery in postwar history.

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