Where’s the growth? This is a question we continue to ask as the market remains obsessed with the timing of the Fed’s decision to raise interest rates. One of the main indicators the Fed is closely monitoring to trigger the rate increase is employment data. The outlook sustained a black eye when the recently reported job creation figure fell well short of expectations. As the market digests the recent surprise, a mystery persists as to why GDP isn’t improving based on the additional purchasing power of consumers benefiting from lower fuel prices. One explanation circulating at this time is that consumers have been focusing on paying off debt resulting in a delay of positive effects from consumer spending.
We did see the negative impact of a stronger dollar on U.S corporate earnings during the 4th quarter of 2014 and anticipate the effects to continue. As the 1st quarter earnings season starts, we are curious as to the extent of such currency effects moving forward. The stronger dollar also adds downward pressure to oil prices but the main reason oil prices remain at lower levels is due to persistent growth in inventory relative to demand. We may see some short-term fluctuation in the value of the dollar and its impact on oil prices due to the interest rate guessing game, but a sustainable trend in oil prices should be driven by the supply/demand scenario. The duration of lower oil prices is being monitored closely for its impact on high yield bonds and the possibility of layoffs due to cutbacks in the oil & gas industry.
There are many reasons as to why U.S. equity markets remain at higher levels but as we analyze the data we believe the support level for the DJIA is now approximately 16,000 based on fundamentals, down from our previous figure of 16,400. This revision is based on negative earnings adjustment trends and represents a 13% drop from recent highs. Even though we continue to feel that domestic equity markets are trading at a premium, we are not sounding emotional alarms to sell. As a firm, we avoid sensationalizing our feedback on capital markets. Our goal is to provide objective guidelines driven by fundamentals to assist in our portfolio management decisions.
We are content with slow economic growth patterns in the U.S., which appears to be the case, while other professionals are seeking higher levels of growth. These lofty expectations often form the basis as to how capital markets react should economic indicators fall short. We move forward cautiously knowing that decision makers around the world are committed to providing a friendly monetary environment to stimulate global economic growth.
We look forward to seeing everyone who will be attending our next event on April 23rd. The topics that emerge from our Round Table Discussion events are always insightful due to the feedback from all attendees. So if you have any questions and would enjoy participating, please contact Leslie Tritschler at 484-320-6300 to reserve a spot for the event if you haven’t already done so.
Lastly, we would like to extend a big welcome to Derek Lemke who recently joined our firm. I have known and worked with Derek for 8+ years and am extremely excited that he has accepted our offer to be part of our team. His extensive financial planning background, knowledge of investments and integrity will make him a valuable part of Ellis’ commitment to our clients.