Phil Castle, The Business Times
Doug May sees a disconnection between the U.S. economy and financial markets: While the economy has stabilized, the markets don’t yet fully reflect the change.
“In my mind, the market is still skittish, much more skittish than the economy deserves,” says May, president and chief investment officer of May-Investments, a wealth management and investment advisory firm in Grand Junction.
May recently updated his economic outlook for 2012, although he says many of the predictions he made in January hold true eight months later. He still expects the economy to expand modestly and unemployment rates to fall slightly by the end of the year. While short-term interest rates will remain unchanged, long-term rates are likely to move higher. Stock prices also will trend higher.
In reviewing a variety of economic indicators, May says many signs point to a stabilizing economy. Consumer spending and bank lending have increased and the housing market has improved. Monetary policies in the U.S. and around the world promote growth.
Although volatility in the stock market has diminished, fear persists in financial markets, he says.
Concerns continue to focus on financial problems in Europe, May says. While Europe is going into recession and faces problems associated with debt, sufficient funding is available to prevent banks from failing, he says.
Given what’s likely to be weaker demand for goods and services in Europe, there are ramifications for economies elsewhere, however, including the United States, he adds.
In the U.S., May predicted in January gross domestic product would grow at a moderate rate of 2 percent. “That’s almost exactly where we’re at. We’re dead on target.”
While the U.S. unemployment rate edged up a tenth of a point to 8.3 percent in July, May still expects joblessness to retreat by the end of the year, perhaps to as low as 7.5 percent. “We could still see that decline.”
May bases his outlook in part on his own leading economic index, although that index has trended down in recent months on lower readings for some of the 10 components. “Does that concern me? You bet.”
Bank lending, the money supply, retail sales and semiconductor sales all are up, May says. But a number of other indicators have declined, among them drilling activity, new orders for manufactured goods, optimism among small business owners and shipping activity.
The Federal Reserve remains committed to keeping short-term interest rates at historically low levels until 2014 to help stimulate the economy.
Long-term interest rates still could move higher this year, May says, although probably not as much as he had anticipated in January.
Despite fear in the financial markets, May expects the stock market to continue to rise, offering opportunities for investors. “I think we’re on target for a good year.”
The Standard & Poor’s index of 500 stocks has fared better than most major global markets, May says, and could rise further.
The stocks of companies in the technology sector should perform especially well, he says.