The U.S. economy picked up steam in the second quarter after a weak first quarter in which harsh winter weather, west-coast port strikes and a strong dollar negatively affected output. Real GDP growth was revised up from 3.7% to 3.9% as U.S. consumer spending posted one of its best performances of this recovery. Personal spending increased 0.4% in August from a month earlier and follows similarly strong readings in June and July. Fears of a Chinese-lead worldwide growth slowdown were at least temporarily abated by the upwardly revised second-quarter GDP report along with Federal Reserve comments suggesting that the U.S. economy remains on firm ground. Nevertheless, the strength of the Chinese economy and its effect on the rest of the world will remain on the forefront of investor’s minds throughout the remainder of 2015. On a positive note, the Eurozone continues to show hopeful signs of a gradual recovery from its current state of stagnant growth as accommodative European Central Bank monetary policy takes hold. Third quarter economic growth looks promising given the continuing strength of the housing sector and the robustness of recent retail and automobile sales reports. Manufacturing activity is likely to remain a headwind as the energy and materials sectors cut spending in the face of declining commodity prices. After factoring in a weak first quarter and a stronger second quarter, most economists expect Real GDP growth in the range of 2.0% to 2.5% for the year.
Markets fell across the board in the third quarter on concerns over a slowdown in China coupled with the potential market impact of the Fed’s plans to normalize monetary policy. Stock market volatility remained high as equity prices again fell in the waning days of September after battling back from a late August rout. All U.S. large-cap indices were down similarly for the quarter with the S&P 500 Index, the Dow Jones Industrial Average and the NASDAQ Composite losing approximately 6% to 7%. Small cap stocks performed even worse as the risk-off trade intensified during the month. Large-cap international stocks fared no better than their domestic counterparts with the developed-market MSCI/EAFE Index off 10% and the MSCI Emerging Markets Index off a shocking 18% for the quarter.
Yields on longer-term Treasury issues fell over the quarter as investors, concerned about global growth, shed riskier assets and flocked to the safety of U.S. government debt. The fall in bond yields pushed broad bond market indices into positive territory for the quarter, reversing negative second quarter returns. Investment-grade and high-yield corporate bond spreads increased as investors also eschewed credit risk. Nevertheless, corporate debt issuance remains strong. A consensus appears to be building within the Fed that an increase in the Federal Funds Target Rate is in order by the end of the year. Nevertheless, debate remains. While the U.S. economy appears solid, some Fed officials are also worried that inflation is running too low to warrant a rate increase.