The following release was prepared by Alec Davis and Bernardo Daza 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 March outlook for the US economy remains positive, with a projected 6 month growth of 3.1% compared to a 2.2% growth for Q4 2014. We expect GDP expansion to remain stable over the 2 year forecast period at an average of 3.0% by Q2 2016. Recent growth has been slowed by a sluggish global economy and currency devaluations in Europe and Asia which has put strains on US multinational corporations.
The CPI inflation currently stands at -0.1% over the trailing 12-month period as the recent plunge in the price of oil works its way through the economy. We expect this number to move positive to 1.1% for the 6 month outlook and 1.8% for the 2 year windows, still below the Fed’s target rate of 2.0%.
Our outlook for US unemployment is stable, as we expect the current 5.5% rate to remain over the next 6 months while continuing to move downward to 5.35% over the 2 year forecast period. Despite loses in the energy sector, we expect the strong US economy and GDP growth to make up for this in the other sectors such as technology and consumer discretionary.
The recent strong gains in unemployment have accelerated sentiments that the Fed will begin its shift in monetary policy towards raising rates in the latter half of 2015. We project the yield on the 1-yr T-Bill will move to 0.32% by Q3 2015 and the 10-yr yield at 2.42%. Any increase in the Fed Funds rate will be gradual, signaling a move towards a higher rate environment but with consideration that US inflation remains low. Our outlook for 2017 interest rates are 0.90% and 3.36% yields for the 1-yr and 10-yr notes respectively.
The price of oil remains suppressed following its fall in Q4 2014, and continues to have a major impact on the global economy. Our 6 month outlook at $51/barrel is in line with current trading levels as OPEC and other major oil producing nations have yet to signal any significant cutback in production. At these prices we believe ultimately production will be unsustainable for higher cost producers such as the American shale oil industry and that prices will eventually rebound slightly to $71/barrel by 2017. Global energy stability could be threatened by the fact that several major oil producing nations such as Russia and Venezuela have federal budgets based on oil priced at $100/barrel, and continued trading below these levels would continue to destabilize their economies.
In the US falling oil prices have helped pushed consumer confidence up as consumers are able to put savings on energy and gas towards other household purchases. Lower energy prices should continue to provide tailwinds for the US economy as these pricing effects work their way through the various sectors. Due to low oil prices, low unemployment, and forecasted strong GDP growth, our outlook for consumer confidence is positive for both the 6 month and 2 year time frame.
US consumers will also benefit from the strongest US dollar in over 5 years as major economies such as the EU and Japan have implemented economic stimulus measures that have devalued their currencies. Our outlook for the 6 month Euro exchange rate at $1.07 is close to current trading levels, and we expect this to rebound slightly to $1.14 by 2017. We expect the dollar to the yen exchange rate to behave similarly.
The US equities market continues its strong bull run, and we expect this trend to continue although at a reduced rate for 2015. Despite high valuations, the strength of the US economy and dollar relative to the rest of the world has continued to drive capital to US markets, which combined with low interest rate environments means record valuations should continue. We expect a 2.8% growth for the S&P 500 over the next 6 months and a 6.7% growth rate for the 2 year outlook.