May Economic Outlook Newsletter

Greg Sweeney


This is a monthly newsletter by Greg Sweeney, CFA, Chief Investment Officer, at Bell State Bank & Trust. Sweeney holds a bachelor’s degree in business from the University of North Dakota, is a CFA charter holder, and is a 25-year veteran of the Investment Management team.


Federal Reserve Monetary Policy

  • The next Federal Reserve meeting is scheduled for June 22. We do not expect the Fed to change its position on the current rate, leaving it between 0 and 0.25%.


  • The year-over-year consumer price index (CPI) is 2.7%. This was even higher than our estimate. As mentioned, the release was accompanied by banter about how it is temporary. There is more on the way. The next meeting isn’t until June 22. Expect the CPI to be above 3% by then.

Economic Activity

  • The debate about raising or not raising the debt ceiling really isn’t much of a question at all. We predict with about a 98% probability that the debt ceiling will be raised. It really doesn’t matter whose great budget plan is put in place, there is still a lot of deficit spending. The most recent Congressional Budget Office forecast for the next decade shows deficit spending every year. The smallest deficit in that forecast is still above a half a trillion dollars. This estimate is also known to be rosy. That “rosy” label is already evident in the forecast, as tax revenue estimates are budgeted to go up 14%, 20% and 11% in 2012, 2013 and 2014, respectively (deficit projections are $1.1 trillion, $0.7 trillion and $0.53 trillion and go higher after that). With outstanding federal debt already at $14.3 trillion (the limit of the ceiling), it is hard to see the debt ceiling remaining unchanged with this budget outlook.
  • The big news was S&P downgrading the outlook for its AAA rating on U.S. debt. We see this as a bold move for an industry that owes most of its existence to regulatory mandates requiring certain average rating quality standards in various bank and insurance company portfolios. If this happens, Microsoft, Johnson & Johnson, Exxon Mobile and ADP will have higher bond ratings than the U.S. government. Six states are also AAA rated: Delaware, Indiana, Iowa, Maryland, Minnesota and Missouri.
  • The U.S. dollar remains under pressure against other major foreign currencies.

Fixed Income

  • This is one of the more perplexing environments we have seen for fixed income. Factors that suggest longer-term interest rates should be rising include excessive federal debt, the coming end of QEII, rising inflation, declining value of the dollar, the potential rating downgrade and talk from China that they are full on U.S. Treasury bonds. In the face of all of this, yields are not moving higher. Data coming from the Fed says the economy is strengthening, the consumer is doing fine, unemployment is declining and housing markets are seeing firmer footings. This info appears to be verified by the rising stock market, while the bond market appears content with current yields.
  • What is so strange about current bond yields? Real after-tax return on a ten-year Treasury bond is currently negative 0.5%. For the market to continue to support this yield, logic would say there are still large concerns about the ongoing strength in the economy, contrary to the data from the Fed.

Stock Market

  • The trend is your friend. The stock market’s tendency is to continue to push higher. Earnings are generally good, and outlooks are mostly for continued progress.
  • At the same time, fund flows into stock mutual funds appear to be flat, so it is hard to see the support for the market from that perspective. Consumer discretionary spending is seeing pressure from rising energy and food costs.
  • We still feel caution is in order, while at the same time there appear to be limited opportunities in bonds, money market or real estate sectors that round out the major asset classes. It is a delicate balance.

View previous Economic Outlook newsletters.

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