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Political instability and oil prices complicate outlook

By Banu Simmons

The S&P 500 Index (SPX) and Nasdaq Composite (COMP) indices closed the second quarter in the plus column. That's the sixth straight quarterly gain, a run that investors haven't seen in more than 14 years.

The U.S. economy contracted at a much steeper pace (-2.9 percent) in the first quarter than an earlier April estimate of -0.1 percent, according to the Commerce Department.

Despite the downward revision, markets were not spooked as various economic variables indicated that the GDP growth has since rebounded. U.S. Federal Reserve Chairwoman Janet Yellen believes that an accommodative monetary policy, rising home and equity prices and the improving global economy may lead to above-trend growth in the US.

Indeed, the housing market seems to be flourishing again. According to a report released by the Commerce Department, new home sales in May increased much more than expected, reaching their highest level since May of 2008 and expanding 18.6% to a seasonally adjusted annual rate of 504,000 versus the market's expectation of 440,000.

Another indicator that measures the health of the US housing sector is the number of pending contracts to purchase previously owned U.S. homes. This indicator also jumped in May by the most in more than four years. The pending home sales index climbed 6.1% versus the market's expectation of 1.5 percent, the highest rate since April 2010.

These positive signs seem to indicate that the housing market has been benefitting from a period of low long-term interest rates. That matters because the housing market is an important driver of US consumer confidence and consumption.

So, in my opinion, despite the weather-related dip in the first quarter, I expect the U.S. economy to grow by about 4% in the second quarter. Contrary to the market consensus, I also continue to expect the Fed to raise the rates sooner, perhaps in the first quarter of 2015.

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