Investment manager: Markets could be due for a correction

Doug May
Doug May

Phil Castle, The Business Times

Doug May was nearly spot on in his forecast for continued economic growth in the United States through the first half of this year.

Heading into the second half of the year, though, May said he’s worried stock markets that have climbed over the past six years have reached their peaks and could be due for a correction.

“I think this is a pricey market,” said May, regional manager for Avant-Garde Advisors in Grand Junction.

May detailed his expectations during a mid-year update to his economic outlook for 2015.

In January, May offered a mostly upbeat  forecast in calling for continued growth and falling unemployment rates. He predicted a 3 percent increase in gross domestic product, the broad measure of goods and services produced in the country. He also predicted that improving labor conditions would drive down the jobless rate to 5 percent.

GDP increased at an annual rate of 2.3 percent in the second quarter following a six-tenths of a percent gain in the first quarter. The U.S. unemployment rate stood at 5.3 percent in July, the lowest level since April 2008.

May also called in January for increases in both short- and long-term interest rates. While the increases haven’t been significant, he said he got the direction correct.

In the stock markets, he called for the health care sector to perform best and utilities to perform the worst — predictions that proved accurate as well, he said.

“The year is not unfolding with a lot of surprises,” May said.

Slumping prices have curtailed oil exploration and production activities. But lower gasoline prices that were expected to bolster consumer spending for other goods and services and, in turn, other sectors of the economy, have moved back up, May said. “It just doesn’t feel cheap anymore.”

Consequently, it remains uncertain whether or not pains associated with lower oil prices will be offset by gains, he added.

Policy and regulatory changes prompting a switch from coal to natural gas to generate electricity constitutes bad news for the regional mining industry, but could benefit the region over the long run in promoting the increased use of natural gas. Exports of liquefied natural gas could help as well, May said.

Looking ahead to the remainder of the year, May said a proprietary leading economic index of 10 indicators offers mixed signals, with some numbers pointing to slowing conditions.

Bank lending remains strong, although small businesses account for a decreasing proportion of financing. The money supply has grown weaker, but the overall growth in the supply remains good, he said.

Manufacturing capacity has yet to reach the point at which factories will expand.

Corporate profits have increased. But many corporations are using cash to buy back shares of stock rather than investing in the expanded facilities or additional staffing that would bolster the economy, he said.

Slowing in the energy sector remains a concern, as do the ramifications of a slowing economy in China. Devalued Chinese currency makes Chinese goods less expensive, but U.S. goods more expensive and therefore less competitive, he said.

May said he’s more concerned about stock markets than the U.S. economy, including the possibility of what he termed a noneconomic bear market in which stock markets retreat without a corresponding economic downturn. While a noneconomic bear market is usually a third of the duration of an economic bear market, the correction is only slightly less, he said.

The longer-term outlook includes the potential for investment returns below historical levels, but returns nonetheless, May said.