U.S. Q2 GDP was below forecast at 2.3%, and the first half average of 1.5% is below last year’s 1.9% first half gain which was essentially inline with the annual average increase of 2% since the start of 2012. Last year’s weak first half was blamed on the weather, and this year, despite oil prices that are much lower year over year, we have seen weak retail sales and consumer confidence and a surging dollar since last years end of QE. Weak consumer demand coupled with massive headwinds to corporate profits (stagnate global economy and strong dollar) has caused a unique strain on corporate expenditures at what is amounting to be a very late stage economic recovery.
Eternal optimists will suggest that the Q2 GDP number was baked in the cake, and it’s hard to disagree. It’s clearly backward looking, but a US Fed that remains data dependent, and apparently very near rate increases for the first time in nine years may be focused on the wrong things at the very wrong time. The Fed’s previously stated employment and inflation targets are being tested, but maybe they are running towards the incorrect goalposts, as underlying economic activity appears to be tepid at best with the backdrop of a Chinese economy that could be on the precipice of an aha moment.
So what’s this all mean for stocks here in the U.S.? First and foremost, it doesn’t appear that we have the underlying economic strength that speaks to the sort of environment that investors should continue to throw caution to the wind. Oh, and the consolidation in the S&P 500 this year, the relative under-performance to almost every other equity market in the world and the weakening breadth suggests that 2015 is the year we finally get a 10% plus correction, something that has not happened since 2011.
I continue to believe that this is not the time to be adding new cash to U.S. stocks.
Take profits near 2130 in the SPX and pick at some stuff on the long side between 2050 and 2000 with the chance that we see 1950.