The most recent reading on the broad economy indicated that US gross domestic product (GDP) contracted by 0.2% for the first quarter of 2015, continuing the trend of below-average growth since the recession ended in 2009. The first quarter contraction was believed to be caused by transitory issues including harsh winter weather, west-coast port strikes, and a strong US dollar. Most economists project economic growth to resume, albeit at a moderate pace, for the balance of 2015. Manufacturing activity fell from levels seen at the beginning of the year, but remains in expansion territory with the ISM Manufacturing Index at 53.5. Offsetting the headwinds to GDP was strong consumer spending, which was likely aided by gains in income and lower gasoline prices. Furthermore, the housing market remains strong with pending home sales continuing to increase year-over-year coupled with a supportive pricing environment evidenced by the S&P/Case Shiller 20-city composite index reporting an annual home price increase of 5%. The overall employment picture remains solid with the unemployment rate standing at 5.5%, near its lowest level since the beginning of the 2008 recession. International economic data was mixed. The Eurozone continues to show hopeful signs of a gradual recovery from its current state of stagnant growth; however, the dire economic condition of Greece continues to dominate headlines in that region.
Major market averages rose modestly during the quarter, despite a June pullback. The exception was the Dow Jones Industrial Average which dropped -0.3% for the quarter. The negative performance of the Dow Jones Transportation Index (-7.1%) was worrisome to many investors as the transports are often viewed as leading indicators of the economy. On a more positive note, the NASDAQ Composite gained over 2% for the quarter and set an intraday high above its previous record set during the peak of the tech bubble in 2000. For the first six months of 2015, international and small-cap indices have outperformed the S&P 500, which is a reversal of the performance characteristics seen in the prior calendar year.
Investment-grade bond yields ended the quarter higher than where they started the year despite a lack of strong economic growth or readily apparent inflation concerns. The rise in bond yields pushed broad bond market indices into negative territory for the quarter, while shorter-term bond indices were little changed. The June FOMC meeting contained no significant surprises as the Federal Funds rate was left unchanged at a range of 0-0.25%. Nevertheless rate hikes are expected to begin as early as September. As of now, the primary debate among Fed-watchers centers around whether economic data will lead to one or two rate hikes in the second half of 2015.