Reflections on the World of Investments, Finance, and Wealth Management.

Henry Fund Economic Outlook – February 2016

The following release was prepared by Nihar Patel and Josh Vander Plaats on behalf of the 2016 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.

Henry Fund Research

With real GDP growth for 3Q2015 at 2% coupled with a 0.7% growth rate in 4Q2015, the Henry Fund research team’s short-term forecast (6 month) for US Real GDP growth is 2.3%. Our long-term forecast (2 year) expects growth to increase to 2.8% by 2018. The current volatility in the market has not dulled consumer confidence, and consumer spending remains strong. An improving labor market and low inflation should also have a positive effect on GDP growth. A risk to the economy is the contraction in the energy market caused by the decline in oil prices. We expect this to dampen growth in the near-term, but our long-term outlook remains strong.

Oil continues to cause ripple effects through the global economy. It recently dipped below $30 per barrel for the first time since 2001, before recovering back above $30/barrel. We feel the weak GDP growth of the final quarter was driven by the dramatic decline in the price of oil. The team’s 6-month price estimate is at $33 as over production continues to keep a cap on prices. The uncertainty in the Middle East and unsustainability of current production levels lead the team to expect the price of oil to increase over the long term to $48 by 2018.

Inflation is expected to stay at current low levels for the near term with the 6-month rate forecasted to be 0.8%. The low price of gasoline, driven by the collapse of oil prices, and cheaper food is responsible for lowering change in CPI. The long-term 2-year outlook has CPI moving up 1.7%. The team expects that the price of oil will stabilize and rise some, because the oversupply will eventually lead to a cut in production. Demand for oil might also pick up, driven by emerging economies. With this weight lifted inflation will begin to rise. Core CPI, which excludes oil and food, has been on an upward trend. The Core CPI change reported in Dec 2015 was 2.1%. The Federal Reserve uses Core CPI as part of its overall outlook when deciding monetary policy including increases in the Fed Funds rate. Core CPI excludes volatile goods, but eventually the low cost of oil will filter down and keep a lid on Core CPI increases, even if CPI starts to rise.

The US unemployment rate has continued to decline with the Dec 2015 rate being reported at 5.0%. However, this must be balanced against the labor participation rate, which measures the part of the labor force that is employed or looking for work. This rate gives more context to the unemployment rate, and a fuller picture of the US labor market and the health of the economy. The labor participation rate is at its lowest level since the late 1970’s, and has been stable between 62% and 63% since 2014. As more working age people leave the workforce the unemployment rate will artificially decline, but a strong labor market might see people enter back into the active labor force. In this case, we should see the labor participation rate start to increase. Many economists also believe that full employment in the US is around the 5% unemployment mark. Considering all this, the team does not expect any significant moves in unemployment, with only a decline to 4.9% expected over the next two years.

The Federal Reserve has a stated inflation target of 2%, and it has a mandate to achieve maximum employment. The current 0.25%-0.5% rate range is the 6-month expectation. The long-term 2-year forecast sees the fed funds rate going to 1.25% once the recent weakness passes and the underlying strength of the economy requires balancing growth against inflation.

With the increase in the fed funds rate, the 1-yr T-Bill and the 10-yr T-Bond yields are expected to increase over the next 2 years. The team has projected the yields to be 0.8% for 1-yr T-Bills and 2.2% for the 10-yr T-Bond by mid-2016, which are modest increases over current levels. The 2-year projection calls for yields to increase to 1.6% for the 1-yr T-Bill and 3.2% for the 10-yr T-Bond.

Pressure on US exporters will continue as the dollar strengthens. There are a few drivers to the dollar. The increased US interest rates make it an attractive currency compared to others whose central banks have kept the interest rates low. There is also the flight to safety of the US dollar as the migrant crisis strains Europe, the slowdown in China, and the collapse of commodity prices. Over the next 6 months the EUR/USD is expected to be $1.08. Our 2-year long-term outlook sees the Euro weakening against the dollar to $1.03.

Market volatility has yet to hurt consumer confidence to this point, but we expect a decrease in consumer confidence in the short-term. The market volatility and international environment will make consumers wary. The collapse of oil prices is straining many states, the flood of migrants is straining the EU, and terrorism is still a big problem. With the effects from the fed funds rate hike uncertain, we expect caution and fear to drive down consumer confidence. These doldrums will pass quickly, and we expect that by 2018 we will see consumer confidence rebound to current levels.

Following the sell-off that started off 2016, the team expects short-term volatility in the markets and the price of the S&P 500 staying close to current levels. In the long-term, we expect equities to experience strong gains and a simple return of 14.69% from the S&P 500 level of 1890 over the next two years to 2168. Once the shock of the first rate increase in almost a decade passes the index should recover.

Introducing the 2016 Henry Fund Research Team

Congratulations to the newest members of the Henry Fund research team! The following 11 analysts will take over management of the $5.0 million Henry Fund portfolio at the start of the spring 2016 semester.

  • Qian Wang (Financial Services)
  • Sam Atari (Financial Services)
  • Josh Vander Plaats (Consumer Staples)
  • Gaurav Ghantkar (Technology)
  • Ajay Kaushik (Technology)
  • Casey Spoden (Health Care)
  • Charles Schaller (Health Care)
  • Cole Lambert (Energy & Utilities)
  • Nihar Patel (Telecom & Consumer Discretionary)
  • Benjamin Martin (Consumer Discretionary & Materials)
  • Wallace King (Industrials)

This group represents the 23rd team to manage the fund since the program’s inception in January 1994.

Henry Fund Economic Outlook – November 2015

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.

Henry Fund 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.

 

Henry Fund Economic Outlook – October 2015

The following release was prepared by Stuart Hemesath and Jonathan Kerr 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.

Henry Fund Research

The Henry Fund research team’s outlook for the US economy has improved since September with 6-month GDP growth estimates improving to 2.7% after the official GDP data rose to a 3.9% annual pace over Q2 2015. This had minimal impact on our 2-year outlook which remains just under 3%. With a volatile summer, we do not foresee this strength continuing over the fourth quarter.

The CPI inflation rate remains sluggish falling an additional 0.2% in September for all items, led largely by energy prices as they continue to impact the greater economy. We see this rising to 1.2% 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%.

Unemployment continues its decline ending September at 5.1%. Our outlook remains stable at this rate over the next 6 months and rises to 5.3% over the following 2 years. Energy has been a burden on this measure but stability comes through the improvements in GDP and an increasing consumer confidence level.

Despite the stability in unemployment, expectations that the Fed will enact an increase in the Fed Funds rate by year end continue to diminish. After the rate remained unchanged following the September Fed meeting, fears of increased global volatility now loom over the decision, echoed by IMF heads. The 10 year T-Bond yield remains steady at 2.1% and our expectations see marginal increases to 2.5% over the next 6 months and 3.3% over the next 2 years. The market continues to anxiously await the anticipated 25 basis point increase and guidance toward future expectations.

The price of oil has bounced back from the summer’s low of near $38 per barrel.  Our 6-month outlook of $49/barrel is in line with currently trading levels.  Our short-term outlook has improved, but only slightly from our September outlook of $43 as there is still a worldwide oversupply of about 2 million barrels per day.  Our 2-year outlook remains unchanged from September at $61 as Saudi Arabia and other Middle Eastern countries will begin to suffer financially as a result of decreased oil prices.

Consumer confidence is up as consumers view current economic conditions more favorably despite recent market volatility. 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 weaken slightly from our September outlook.  However, US consumers will continue to benefit from a strong US dollar as global investors continue a flight to quality moving funds to the US due to continued uncertainty in the global economy.  We expect the US dollar to trade at $1.13 per Euro and the Yen to trade at ¥121.50 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 exchange rate to remain unchanged.

The US equities market is recovering from a large drop at the end of August.  However, we expect the markets to decrease slightly in the next six months due to rising interest rates.  We expect a 2% decline in the S&P 500 in the short-term.  However, in the long-term we expect a 5% increase in the S&P 500 as the US economy continues to strengthen.  We feel the most value will come from large and mid-cap companies within the consumer staples, financials, and information technology sectors while being underweight in the utilities, telecomm, and healthcare sectors.

Finance Boot Camp Speaker Series

Todd Nelson, CFA, CPA

Vice President, Investment Banking, Capital Markets

Goldman Sachs (New York)

“How Corporations Enhance Equity Returns – The Anatomy of Corporate Leverage and a Bond Offering”

Wednesday, September 30, 2015

12:30-1:45 p.m., W401 PBB

The Finance Boot Camp speaker series brings finance and investment professionals to campus with the goal of extending traditional classroom education. Speakers focus on specific topics related to his or her role in the investment management or corporate finance process, with a strong emphasis on practical applications and real-world examples. The sessions are open to all students, who are encouraged to engage and actively participate during each sessions’ question and answer period.

Register by Sept. 29: https://uiowa.qualtrics.com/SE/?SID=SV_9sQgvO1FQ1xK7WJ

 

Henry Fund Economic Outlook – September 2015

The following release was prepared by Christina Erbe and Liana Tamakloe 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.

Henry Fund Research

The Henry Fund research team’s September outlook for the US economy shows a decline in our projected 6-month GDP growth to 2.3% down from our April consensus of 2.7%. Though the team remains bullish on the domestic economy, events in the global markets, such as the extreme financial market volatility in China, falling commodity price effects on emerging markets, and geopolitical tensions in the Middle East are expected to hamper global growth potential. In the long run, our forecast for real GDP growth over the next two years remains relatively unchanged at 2.9%. With limited growth in projected GDP, our outlook for unemployment remains unchanged at 5.3% over the next 6 months and a slight uptick to 5.4% over the 2-year forecast period.

Our outlook for inflation remains low at 0.6% in the next 6 months, then increasing to 1.4% in the long run. This reflects our view that oil prices will continue to drag down overall prices in the economy and that the current trough in the oil price cycle will persist in the coming year or longer. Flowing from this, our forecast for the Federal Funds rate remains low at 0.35% in the next 6 months and 0.75% by 2017, as we are of the opinion that a low inflationary environment will not provide enough impetus for the Federal Reserve to increase rates this year. Additionally, as the financial markets self-correct, a rate hike to prevent an equity bubble will no longer be required. Our assessment is that any rate increases will most likely be in the 1st quarter of 2016. We anticipate the 10-year Treasury bond yield to remain steady at 2.4% and 3.1% over the next 6 months and 2 years respectively as we expect a low interest rate environment to persist.

Oil prices are currently trading in the $45 range and have fallen as low as $39.86 recently. We believe that the current price environment will persist as there are no signs of a cut back on oil production, and global demand for oil appears to be falling. Also, finalization of the nuclear deal with Iran is expected to increase global oil output even further. Our outlook over the next 6 months for oil prices remains low at $43, and $61 in the 2-year forecast period, a downgrade from our April estimate of $51 and $71 respectively.

Consumer confidence is expected to remain unchanged, being neutral both in the near term and long run, with low oil prices and reductions in unemployment being offset by uncertainty related to interest rate hikes and recent volatility in the financial markets.

In the currency markets, we project the dollar to strengthen against both the Euro and the Yen, trading at $1.10 in the short against the Euro, and ¥120 per dollar against the Yen. We foresee limited growth in global economies, as stimulus interventions by central governments in Europe, Japan, Australia, etc, have still not yielded the desired results, and depressed commodity prices, partly fueled by slow growth in China, has negatively affected growth in several other commodity dependent emerging economies. We therefore predict a flight to quality as funds move to the US, having better prospects for future growth.

With the recent volatility in the financial markets, we believe equities have become better valued and therefore forecast growth for US stocks in the S&P 500 to be 3.4% in the next 6 months and 12.7% over the next two years. We see opportunities in value stocks, and prefer to go with large and mid-cap stocks as a defensive play. As a fund, we are positive on financials, healthcare, consumer discretionary and technology sectors, and see growth opportunities in integrated energy industries, healthcare (biotech) companies and consumer-focused firms such as manufacturers of household and personal care products.

CFA Scholarship Opportunities for UI Students

The CFA Institute, administrator of the Chartered Financial Analyst (CFA) designation, offers a scholarship program to subsidize the enrollment fees for full-time students sitting for all levels of the CFA examination.  As a CFA Program Partner with 4 charterholders on staff, the Department of Finance at the University of Iowa is eligible to award up to fifteen (15) scholarships to full-time graduate or undergraduate students.

The Department of Finance is now accepting applications from graduate or undergraduate students who plan to sit for either the December 2015 or June 2016 CFA examinations.  Students selected for these scholarships will be eligible to enroll for the December 2015 or June 2016 CFA exam at a reduced rate of $350.  (Normal enrollment fees range from $1,100-$1,750 depending upon the sign-up period.)  Scholarship recipients who have already registered for the exam will receive a refund of the fee differential from the CFA Institute once the scholarship forms are processed.

Application Deadlines:

  • December 2015 Exam: Wednesday, August 26, 2015, 12:00 p.m.
  • June 2016 Exam: Monday, December 7, 2015, 4:00 p.m.

Application Requirements:  To apply for the scholarship, students must submit the following information to the Department of Finance, S252 PBB, by the deadlines noted above:

  • One-page cover letter discussing your career goals and the role of the CFA designation.
  • Resume with email address and current contact information.
  • A copy of your University of Iowa grades (does not need to be an official transcript).
  • A completed CFA Scholarship Form:
  • If you are currently registered for the exam, please include proof of CFA exam registration, such as a copy of your confirmation letter or email from the CFA Institute with your candidate registration number.  (Pre-registration for the exam is not a requirement to apply for one of the scholarships.)
  • All students selected to receive one of the 15 University of Iowa sponsored scholarships will be required to sign a waiver authorizing the release of examination scores to the UI CFA program faculty committee, so that we may monitor student performance across areas of the CFA curriculum.
  • Students who plan to sit for the June 2016 exam are strongly encouraged to simultaneously apply for one of the CFA Institute’s Access Scholarships. These need-based scholarships lower the enrollment fee to only $250. The application deadline for 2015 is Sept. 15, 2015. (http://cfainstitute.org/programs/cfaprogram/scholarships/Pages/index.aspx)

Student Eligibility Requirements:

  • Applicants must be current full-time undergraduate or graduate students at the UI.
  • Applicants must have a valid passport (CFA exam registration requirements).
  • All applicants must fulfill CFA candidate requirements.  CFA Institute guidelines require all applicants to hold a bachelor’s degree or equivalent by no later than December 31, 2016.  Thus, undergraduate candidates may only enroll in the Level I exam during their final year of studies.  For more information on the CFA examination or candidate requirements, visit the CFA Institute website (www.cfainstitute.org).
  • Applicants must choose whether to apply either for the December 2015 or June 2016 exam scholarship, but not both.
  • Students enrolled in the MBA-PM program may apply for the scholarships as long as their current employer does not provide any type of reimbursement or compensation either before or after the exam.

Scholarship Selection Details:  In prior years, the selection process was extremely competitive for the limited number of scholarships.  Scholarships will be assigned in proportion to the total number of undergraduate and graduate student applicants.  Selection criteria may include the following:

  • Academic performance as a student at the University of Iowa
  • Academic performance in courses that are part of the CFA curriculum.
  • Work, internship, and professional experiences.
  • While these scholarships are available for all levels of the CFA exam, the selection committee will give priority to new Level I examination candidates for the December 2015 or June 2016 exams, followed by level II candidates, level III candidates, and finally those repeating levels I, II, or III.
  • Priority may be given to students currently enrolled or applying for the MBA FIN:9250 Applied Securities Management (Henry Fund) course or the undergraduate FIN:4250 Applied Equity Valuation (Krause Fund) course.
  • Priority may also be given to students who have already enrolled to sit the CFA examination.
  • Scholarship recipients for the December 2015 exam will be contacted by Friday, August 28.  Scholarship recipients for the June 2016 will be notified by mid-December.
  • Please note that alternative scholarships, including for exam levels II and III, are also offered through local CFA societies (http://www.cfainstitute.org/society/societies.html), such as the CFA Society of Iowa.  Many of society scholarships go unclaimed due to a small number of applicants.
  • Depending on the number of applications, we anticipate that approximately five (5) scholarships will be available for the December 2015 exam, and the remaining ten (10) scholarships will be reserved for the June 2016 exam.

 

Henry Fund Economic Outlook – April 2015

The following release was prepared by Krishnakumar Bakthisaran and Royce Walton 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.

Henry Fund Research

The Henry Fund Research Team’s April outlook for the US economy is reflective of the current economic deceleration with a projected 6 month growth of 2.7% down from our March consensus of 3.1%. We predict long-term real GDP growth of 2.9% by 2017, down from our earlier consensus of 3.1%. A strong dollar has made US exports more expensive for foreign customers, while plunging oil prices have reduced domestic oil investment, thereby slowing the manufacturing sector and to some extent the US economy. Our forecasts also take into account the fact that March saw the smallest additions to the domestic work force in over a year, as hiring slowed down across most sectors.

Our outlook for US employment is also stagnant as we predict unemployment to remain near the current 5.5% level over the next 6 months. Our 2 year outlook on unemployment also reflects a slight uptick in unemployment up at 5.6% partly due to more predicted losses in the energy sector.

Over the prior twelve months, the consumer price index (CPI) was unchanged with a 0.0% change, from its -0.10% reading in March in part due to a small recovery in oil prices. We expect the low inflationary environment to continue, with price changes of 0.8% over the next 6 months and to 1.7% over the next 2 years.

Henry Fund consensus estimates for interest rates remain largely unchanged when compared to our March projections. We expect the Federal Reserve to begin gradually increasing rates in August or September of 2015, but we do not anticipate a large boost to market rates in the near term. We expect the 10-year Treasury bonds will rise to a 2.35% yield by September.

Oil, currently trading just over $52, is expected to remain flat in the $50 range over the next six months. This is also unchanged from our March projections. We do not expect any major changes in supply or demand for the next six months. Concerns about a boost in supply from Iran have quelled as the International Energy Agency released statements saying that they did not expect increases Iranian production for at least three years. We expect a recovery for oil by 2017 to just over $70 based on recovering economies in Europe and Asia.

Weak job numbers and concerns regarding increasing interest rates caused us to downgrade consumer confidence expectations. We expect consumer confidence to be neutral over the next six months and through 2017, which is a downgrade from our more optimistic projections in March.

We also expect currency headwinds to continue for American companies as the dollar continues its surge relative to the euro. Exchange rates are projected at $1.06 per euro in six months due to the continue struggles in Europe. By 2017, however, we expect the a slight European recovery to increase the rate to $1.12 per euro.

Finally, global trends, rising interest rates, and slow GDP growth all filter down to our projections for the S&P 500. We expect US equities to trade relatively flat over the next six months with only a 1.0% growth through September, and we are becoming increasingly concerned about current valuation levels in the market. The team has found it difficult to identify new investment opportunities across most economic sectors given high P/E levels and sluggish near-term prospects for economic growth. However, going forward we like targeted investments in health care, information technology, regional banking, and the consumer discretionary sectors.

Tippie to Host Investment Speaker

“2015 and beyond: Investing after the Global Financial Crisis”
Dan Morris, CFA
Managing Director & Global Investment Strategist
TIAA-CREF
Tuesday, April 7th from 10:30-12:00
W401 PBB

Dan will share his views on the opportunities and potential pitfalls he sees in 2015. The U.S. economy is finally recovering from the Global Financial Crisis, but the rest of the world is trailing behind.

  • Can the U.S. economy continue to expand or will it be dragged down by stagnation in Europe or a slowdown in China?
  • Markets have become more volatile of late. Why is this and will it persist?
  • How should investors protect their portfolios but also find the returns they need as interest rise, but remain low compared to historical norms?

More About Dan:

Dan Morris is a managing director and Global Investment Strategist for TIAA-CREF. Prior to joining TIAA-CREF in 2013, Mr. Morris worked in London as a Global Market Strategist at J.P. Morgan Asset Management, and before that as the Senior Equity Strategist for Lombard Street Research. Previously, he was part of the In Institutional Investor-ranked portfolio strategy team at Banc of America Securities in New York. Mr. Morris began his career covering Latin American equity markets at BT Alex Brown and Dresdner Kleinwort Benson.

Dan holds an MBA from the Wharton School and a Master’s in International Relations from the Johns Hopkins School of Advanced International Studies (SAIS). His undergraduate degree is in Mathematics from Pomona College, and he is a CFA charter holder. Dan is a frequent guest on CNBC, Bloomberg and other financial networks, and is widely quoted in the press.

Henry Fund Economic Outlook – March 2015

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.

Henry Fund 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.

Death Valley

Todd Houge

Todd Houge is the Curt and Carol Lane Faculty Fellow in the Tippie College of Business. He teaches applied equity valuation, applied portfolio management, and wealth management courses to undergraduate and MBA students. Todd also supervises the department’s award-winning Henry Fund and Krause Fund programs, which provide a real-world, money-management opportunity for UI students.

Todd received a Ph.D. in Finance and an MBA from the University of Iowa. He also earned his Bachelor of Arts degree from Wartburg College and holds the Chartered Financial Analyst (CFA) designation from the CFA Institute.