While we’ve only finished one quarter, 2015 is shaping up to be the year of the dollar, which has risen more rapidly against major foreign currencies than any time in the last 40 years. The dollar’s rapid rise and enduring strength have created significant changes in the outlook for earnings and the economy. This dynamic particularly hurts U.S. companies that do most or all of their manufacturing domestically and have a strong component of overseas sales. These companies, reporting their earnings in dollars, cannot fully offset weaker local currencies with pricing moves. As a result, many companies have reduced their outlook for earnings in 2015. Market expectations have adjusted accordingly, with earnings growth expected at just over 1% for 2015 with year-over-year declines in the first two quarters. Slow growth, along with valuations near a ten-year high, increase the likelihood of a stock market correction.
The drop in energy and commodity prices worldwide continues to present a headwind for many companies, particularly in sectors such as industrial manufacturing, mining and agriculture. In addition, weather related factors and a labor shutdown of ports along the west coast combined to hold the first quarter back somewhat, giving a slow start to the year. We saw an illustration of this when industrial supplier Fastenal (held in the Mairs & Power Growth Fund) reported slowing sales beginning in January. Because of its broad exposure across multiple sectors, Fastenal is viewed as a “canary in the coal mine” in terms of the pace of the industrial economy. Continue Reading »