June 2016 Monthly Outlook
Anemic first-quarter growth has been the rule for five of the past six years, suggesting the slow economic starts may be due to the change of seasons. In all, first quarter growth has averaged less than 1% during this multi-year span, with the economy stepping up in the second quarter most years, then turning mixed for the remainder of the year. The big issue so far in 2016 has been the material weakness in business investment. This sector struggled mightily in the opening months due to another sharp drop in energy-sector capital spending. This should rebound in the current quarter, with sentiment expected to improve following the increase in oil prices since February. Growth could move up to the 2.0-2.5% range in Q2, helped by solid consumer activity (retail sales were up 1.3% in April), gains in employment and average hourly wages, further strength in housing, and recoveries in industrial production and factory usage.
The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.6% in April to 123.9. “The U.S. LEI picked up sharply in April, with all components except consumer expectations contributing to the rebound from an essentially flat first quarter,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Despite a slow start in 2016, labor market and financial indicators, and housing permits all point to a moderate growth trend continuing in 2016.”
Indicators point to the US economy growing slowly (~2% annually) and being in the late stages of a long business up-cycle without major excesses that brought down some prior economic upturns.
Stock and Bond Market Commentary:
The bull market is now more than seven years old, having begun during the waning days of the last recession, and is the second longest ever. It has been historic, with the Dow Jones Industrial Average tripling from trough to peak. Recently, the bull has started to look a little tired, which was not surprising given the length of the advance. There have been a series of brief and thus far shallow reversals this year. However, the best days of the multi-year advance may well be in the past. That said, just as many great baseball players who have past their prime often remain productive in the twilight of their careers so, too, may the stock market have good days and months ahead of it. Of course, this assumes that the key economic, profit and monetary fundamentals remain welcoming on our shores and that the troubles overseas do not worsen materially.
Technical research strongly suggests we are in the early stages of a full-scale bear market, therefore it would be prudent to stay defensive with higher allocations to bonds and the consumer staples sector.