The following release was prepared by Amit Shah on behalf of the 2015 Henry Fund research team. The team updates its economic outlook several times throughout each semester. This analysis forms the basis for class discussions, company selection, and investment research.
The Henry Fund research team’s outlook for the US economy has been stable since October. Our 6-month GDP growth estimates declined marginally to 2.6% after the official GDP growth rate slowed to a 1.5% annual pace over Q3 2015 as companies cut back production to prevent a buildup in inventories. However, Henry Fund analysts believe that US GDP growth will rebound on the back of steady consumer spending. Our 2-year GDP growth forecast remains steady at the 3.0% level.
The CPI inflation rate fell 0.2% in October led largely by declining energy and commodity prices. Over the prior 12 months, the US inflation rate has held at 0.0%. We see this rising to 0.7% over the next 6 months, an improvement unseen year-to-date including food and energy, and 1.6% over our 2-year horizon. Both measures, however, are still below the Fed target rate of 2.0%.
Unemployment continued its decline ending October at 5.0%. Over the past 12 months, the unemployment rate is down 0.7%. Our outlook remains stable at this rate over the next 6 months and rises to 5.3% over the following 2 years. The energy and mining industries have been a burden on employment as companies continue to cut labor force but other industries including retail, healthcare, food services and construction have increase the workforce with improvements in GDP and steady consumer spending.
Despite the stability in unemployment, expectations that the Fed will enact an increase in the Fed Funds rate by year end continue to rise. Altough the Fed Funds rate remained unchanged following the September Fed meeting, the 1-year and 10-year T-Bond yield increased to 0.51% and 2.32% respectively in ancipation of rate increase announcement in near term. We expect the 10-year rate to rise further to 2.7% over next 6 months and 3.4% over next 2 years. The market continues to anxiously await the first anticipated 25 basis point increase and FOMC guidance toward future expectations.
The price of oil has again declined to $40 after a bounce back in September to $48 per barrel. The build up of crude oil inventory is weighing heavily on oil prices. We expect oil prices will rebound to $49 over next 6 months. Our 2-year outlook has slighly increased to from September at $63 as we expect continued decline in US shale oil production, thereby mitigating the global demand-supply mismatch.
Consumer confidence has declined over September from 103 to 97.6 level despite strong growth in employment rate. Despite the decline, consumers still rate current conditions favorably. We expect both the short-term and 2-year outlook to increase as consumers continue to benefit from low oil prices, low unemployment and moderate GDP growth.
We expect the dollar to strengthen slightly from our October outlook in the short term following the recent rally in the dollar. However we estimate dollar to depreciate slighly over next 2 years as global economy stabilizes. We expect the US dollar to trade at $1.10 per Euro and the Yen to trade at ¥124.6 per dollar in the short term. In the 2-year horizon we expect the US dollar to trade at $1.12 per Euro and the Yen to trade at ¥123.8.
The US equities market continues to recover from from a large drop at the end of August. However, we expect the markets to remain at current levels over the next six months due to rising interest rates and concerns on valuations. However, in the long-term we expect a modest increase for equity markets in the 5-8% range as the US economy continues to strengthen. We feel the most value will come from large and mid-cap companies within the consumer discretionary, financials, energy and information technology sectors while being underweight in the utilities, telecomm, material and healthcare sectors.