July 2015


As global growth has slowed, many countries have sought to accelerate their growth by lowering interest rates. Australia, China, India, South Korea and Sweden central banks are just a few to take such measures.

The United States (US) Federal Reserve has maintained zero percent (so-called emergency level) overnight interest rates for over six years. Many expect overnight US rates to finally rise to at least ¼% before year end. As the first rate increase in nearly ten years this would make news; however, the nominal effect should be modest.

In Europe and Japan, negative short-term interest rates and excessive money printing resulted in weaker currencies and greater loan growth. In turn, economic growth returned to Japan and most of Europe. Japan’s unemployment rate (3.3%) is at an 18-year low and economic growth is accelerating (3.9% in the first quarter). Outside of Greece, European tourism should benefit from an attractive exchange rate.

Greek tourism may suffer from protests and cruise companies changing ports. Greece represents less than 2% of the European economy. Other than the EU stabilization fund (EFSF), the European Central Bank (ECB) and the International Monetary Fund (IMF), very little Greek debt is held outside of Greece today. So any default, renegotiation of debt, or EU exit should have little economic effect on the rest of Europe, despite media coverage.

On the other hand, emerging markets currently embracing economic reform and less bureaucracy (like China, India, Indonesia, Mexico and South Korea) may experience stronger economic growth in future years.


2015 had a slow start due to West Coast port strikes, snow, a stronger US dollar (leading to weaker export volume), and lower energy prices (resulting in less energy infrastructure spending). Since then, the US dollar and energy prices have stabilized, weather has improved, and the ports have reopened. The savings from lower energy prices could lead to higher consumer spending on other items in the future.

The overall US unemployment rate has fallen to 5.3%, while the unemployment rate for those with a college degree (or greater) is only 2.5%. The domestic skilled labor force is near full employment and wage pressures should be felt in the years ahead. Less educated workers should also benefit from a stronger economy due to labor demand for trade workers.

Workers voluntarily leaving jobs is at a seven year high, meaning employers may need to do more to retain good workers. Numerous large US employers have recently instituted starting wages above minimum wage in order to attract and retain competent employees. A few cities and states have also recently raised their minimum wages. Wage pressure will negatively affect some corporate profit margins, and stock prices of those companies may remain under pressure.

Other signs of accelerating domestic growth include rising bank lending, consumer confidence, household net worth and new home sales.


Negative events garner headlines. As such, any turmoil in Greece will attract significant press despite its negligible effects on the rest of the world. Also, a 30% one-month decline in Chinese stock market indices received many headlines, while the preceding 12-month 150% stock market increase in China received less attention.

Overall government and central bank easing in China, the EU and Japan should lead to future economic growth for most of the world despite short-term volatility and some nations remaining in turmoil. Many economies and governments will benefit from these central bank moves.

As the EU and Japanese economic growth accelerates and benefits from weak currencies and strong exports, many companies in these countries (and subsidiaries of US companies located in the EU and Japan) should report double-digit earnings growth.


Investors looking for signs of stock market overvaluation or recession should study historical bond market comparisons. Before most US recessions, 30-year US Treasury bonds yield less than ten-year bonds. Today, 30-year bonds yield over ¾% more than ten-year bonds. The US stock market tends to have headwinds when ten-year bond yields are over 5% and rising. Currently, the ten-year US Treasury bond yield is only 2.4%.

Flows into domestic mutual funds tend to be frothy before a market peak. From 2006 to present, the cumulative flow into domestic stock funds has been negative $700 billion. The year-to-date figure is also negative, inferring the average American is not overly exuberant about the domestic stock market.

Since 2006, $1.245 trillion has flowed into bond mutual funds, including deposits this year. As interest rates finally rise, some bonds and bond funds may lose market value and generate negative returns. While three short-term stock market corrections of 5% or more per year are normal, there could be more near-term risk in the bond market. In this regard, it appears wise to limit excessive bond market exposure at this time.

Where bond positions are maintained, investors should consider up to a ten-year bond ladder of investment grade corporate securities. In taxable portfolios, investment grade municipals exempt from state, federal and alternative minimum taxes appear more attractive than Treasuries.