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Second Quarter 2015 rebound

The U.S. economy appears to be bouncing back from another first-quarter setback. Kyle Tetting explains in a Money Talk Video what that could mean for investors.

Joel Dresang: Kyle, we just finished the second quarter of 2015. How does it compare with the first?

Kyle Tetting: The first quarter was interesting because for a second consecutive year, we saw a decline in U.S. GDP, a lot of concern about what that meant for the U.S. recovery.

What we’ve seen in the second quarter is a vastly different environment. You look at GDP growth, which should be significantly improved when we get the numbers a little bit later here, but that’s come on the backs of things like a pretty significant pickup in consumer spending, consumer spending representing two-thirds of the U.S. GDP.

Joel: We talk about the importance of earnings and interest rates for investors long-term, so what does that improvement in the GDP in the second quarter, what does that mean for earnings?

Kyle: You go back to that first quarter and look at earnings, which were slow. They grew, but they grew quite slowly. A lot of that had to do with oil prices. Certainly, some of that had to do with that stagnating consumer spending.

The oil price picture hasn’t changed much here in the second quarter. But hopefully that consumer spending will help drive earnings a little bit higher.

As we get further into what has been now about three quarters almost of that fallen oil prices. That’s going to start to come off the books, and oil should start to contribute to earnings as well again.

Joel: And what about interest rates?

Kyle: We have heard more and more now over the last month or so that the Fed is prepared when necessary to raise interest rates. And what I think is important in that is that they’re not raising rates to combat inflation – not tapping on the brakes because we’re going too fast. But they’re letting off the gas a little bit, letting the car slow down on its own because the economy has significantly improved.

Joel: What does that mean to investors?

Kyle: To investors, I think the concern has been that rising interest rates are going to sink their bond ship. I think, for short-term thinkers, that is a concern. But if we’re looking longer term at what that means, it’s a real positive because you can generate significantly more income from these bonds if rates are higher.

And you look from the stock side of it, what we’ve seen is that stock markets tend to do quite well when interest rates are rising for the right reasons.

Joel: So Kyle, we know that the markets don’t like uncertainty. Greece has defaulted on a payment for some debt to the International Monetary Fund. What does that mean to the markets short-term?

Kyle: The big concern over Greece was not necessarily Greece itself – representing just 2% of eurozone GDP, globally a much smaller percentage, certainly – but the concern was what kind of spillover there might be. For investors who were not maybe directly invested in Greece but now feeling the impact, it is a concern.

Certainly, the volatility has shown that investors are wary of what may happen. I think it’s important to remember how small of a player they are globally and how little really this likely is going to have an impact on the long run.

Joel: As you said, the world’s top economy, the U.S., is picking up momentum. What does that mean to investors?

Kyle: Really important for investors to remember that if you’ve got a balanced portfolio, you’ve got a pretty significant portion in U.S. stocks. I think what they really want to focus on is this idea that the economy is improving domestically. You look even at other areas of the world, even some areas that are a little bit dependent on Greece, the economy is showing signs of improving there as well.

But for U.S. stocks, I think we’re in an environment where they should continue to do quite well. We’re now into the second half of the current business cycle, certainly an environment that should support a little more diversity in stock returns. Maybe some active managers have the ability to add a little value there.

Kyle Tetting is director of research at Landaas & Company.

Joel Dresang is vice president- communications at Landaas & Company.

Money Talk Video by Peter May

(initially posted July 20, 2015)

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