The following release was prepared by Jacob Johnson and Karen Rubel on behalf of the 2014 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.
In general the Henry Fund’s outlook for real GDP growth, CPI inflation, and interest rates has stayed constant through March. After 4Q13 GDP was revised downward to 2.6%, the fund still sees slight growth in the short term trending towards a long-term projection of 3% growth. This expectation is also reflected in unemployment and interest rate expectations. As part of a recovering economy, we see the unemployment rate gradually decreasing from 6.7% in the most recent quarter to a long-term value of 6.18% in two years. Coupled with the GDP growth, we expect interest rates on the 1-year Treasury bill, 10-year Treasury bond, and fed funds rate to increase from historic lows in recent quarters. We expect rates for all three to increase slightly in the short-term with greater growth in the long-term, with compression in the spreads bringing values back to more normalized figures.
Our outlook for future increases in oil prices has not changed; however, we have decreased the amount of increase. The overall increase in prices we believe is due to the continued hydraulic fracturing providing additional production. Driven by higher energy consumption, we believe the WTI oil price will increase to $106.32 in the next two years, after climbing to $103.93 in six months.
Our short-term outlook on the Euro has remained constant at 1.37 USD/EUR since January, even though actual FX has increased from 1.368 to 1.381 USD/EUR over the same period. However, our long-term outlook has been steadily declining and sits at 1.34 USD/EUR as of April. We expect Japan to continue its current monetary policy, keeping the Yen at a low FX rate, but our two year outlook has decreased slightly to 102.64 JPY/USD.
Overall, we believe the S&P 500 index return will grow significantly slower than 2013. Although the YTDreturn has already grown more than we predicted as of January, we believe it will level out after 1st quarter earnings releases and only return 6.41% (excluding dividends) over a two-year holding period. We do expect consumer confidence to increase, but not to the level to cause large S&P growth over the next two years.