George Hosfield, CFA, discusses Ferguson Wellman's quarterly strategy titled, "Inflation's Flame Flickers," which addresses the narrow market leadership, the impact of higher interest rates on inflation and how assets are priced at this stage of the economic cycle.
George Hosfield, CFA, discusses the firm's quarterly strategy titled "Stalemate," which highlights the Fed's ongoing battle to tame inflation along with our views on the health of the banking industry and capital market expectations for the balance of the year.
Director and Chief Investment Officer George Hosfield, CFA, discusses the Fed raising interest rates, peaking inflation and our view on equities and volatility across all asset classes in our Investment Strategy titled, “Balancing Act.”
Now that individual taxpayers have submitted their 2022 tax returns and Tax Day 2023 is in the rearview mirror, a largely self-made crisis surrounding raising the debt ceiling will begin to resonate through the halls of Congress, possibly lasting through the summer months.
Our Director and CEO Emeritus Jim Rudd, has long been a fan of the Wayne Gretzky quote, “don’t skate to where the puck is, skate to where it is going.” While it important to keep an eye on current data, it is more important to understand current data in the context of where you think the puck, or the economy in this case, is going. Let’s look at what is currently going on in Washington and the economy, and where we expect they are going later this year and into 2022.
As autumn dawned this week, investors witnessed the first move by a developed market’s central bank to raise interest rates since the COVID-19 pandemic began. No, the Fed didn’t raise rates. Rather, it was Norway’s central bank that moved its short-term interest rate target off the zero bound, citing improved economic activity that no longer justifies such monetary policy accommodation.
Treasury Secretary Janet Yellen called for a global minimum tax in a speech this week coinciding with the Biden administration’s call for a corporate tax increase. Just like the rules of recess football, it’s not the rate that’s important, it’s the certainty in the rules itself that matter.
As long-term investors, we were pleased to see market news pivot away from last week’s GameStop mania and shift back to a focus on fundamentals. Although we prefer rational markets, we take no pleasure in the knowledge that many retail investors who purchased GameStop at more than $300 per share have seen the share price tumble to around $60.
This week, as we usher in a new administration, there has been an increased focused on another stimulus package to keep the economy on solid footing. While the lame-duck session of Congress recently passed a $900 billion stimulus and checks have started being issued, the current administration is looking for an additional $1.9 trillion in stimulus. While negotiations will most likely bring this number lower, clients are voicing concerns about the national debt.
Today’s Bureau of Labor Statistics jobs report spotlighted the difference between Wall Street and Main Street. The net loss of 140,000 jobs in December, driven by the loss of 372,000 restaurants and bar workers, was balanced by the increasing employment in other sectors of the economy, notably the manufacturing sector. These sectors continue to heal from the wrenching effects of the pandemic that took hold in last year’s first quarter.
The blight of COVID-19 resulted in unfortunate milestones this week – record hospitalizations, ICU stays and most sobering, a single-day high in fatalities from the infection here in the U.S.
The aggressive fiscal and monetary response to the COVID-19 crisis has been unprecedented in terms of speed and magnitude. A common topic we receive from clients is about the risk of inflation as a result of the response to the crisis.
“The Bad News Won’t Stop, but Markets Keep Rising,” read the headline of the business section of the NY Times this week. I have received many questions from many clients and friends over the past couple of weeks regarding this notion.
We are pleased to present our Investment Strategy Video for the second quarter of 2020 titled, “Gimme Shelter.”
Equity markets finished the week up by 1.5 percent, and now are up almost 7 percent for the year. This is the 4th best start to the year for the S&P 500. The U.S. Treasury 10-year bond yield continued its march higher by 6 basis points, finishing at 2.65 percent.
Markets moved modestly higher this week with domestic stocks up nearly 1 percent and the benchmark 10-year Treasury was off 2 basis points. As if held up by a mysterious force, Bitcoin set a new high Friday just shy of 18,000.
Stocks climbed in the U.S., Asia and Europe as the U.S. government averted a shut down and the jobs report reinforced optimism. The U.S. added 228,000 jobs in the month of November, higher than the expected addition of 195,000 jobs, due to an accelerating hiring trend which economists expect to continue into the next year. The S&P 500 hit new highs today, trading above 2,650.
The dog days of summer have officially set in. Millions of people took Monday off to watch the eclipse, while millions more merely peeked out their office windows.
Stocks sold off this week as Congress debated the replacement bill for Obamacare. The S&P 500 was down a little over 1 percent over the past five sessions. Bonds rallied on stock weakness with the 10-year Treasury finishing the week at a 2.40 percent yield.
by Ralph Cole, CFA
Executive Vice President of Research
Talk, Talk, Talk
It seems that every time you turn around, the Fed is trying to communicate information to the capital markets or to Congress. This week, Janet Yellen made a trip to Congress to speak to the Joint Economic Committee where she gave a very balanced view of the economy and of possible future Fed actions.
Chairwoman Yellen said that the U.S. economy paused in the first quarter, but appeared to be gaining steam in the current quarter. This view dovetails perfectly with our own views at Ferguson Wellman. The questions from Congressional members centered on job growth, unemployment and the labor participation rate. As we watch testimony of this type, it is interesting to observe the new Fed Chair sidestep the clearly partisan questions and get to the heart of what the Fed is tasked to do and what duties are tasked to Congress. This inculcation occurs every time the Fed Chair is invited to give testimony. The Fed has a dual mandate ― maximum employment and stable prices. This slower than usual recovery has placed an increased focus on employment, and what the definition of “full” employment actually is. Congress and the markets want to identify the exact unemployment rate at which the Fed will begin raising rates, which we think is foolhardy. The Fed Chairwoman explained the importance of not reading too much into any one data series, and any one data point. Rather, it will depend on a number of factors.
Here in our office we are turning our focus toward wage-related inflation. Increasing wages are often a precursor to overall inflation for the economy, and just like the Fed, we will be looking for acceleration at the margin for a number of indicators, not any one indicator.
What’s Going On
What has surprised us has been the movement of rates going lower in the face of better growth. Many explanations have been floating around and we suspect it is a combination of slower growth in the first quarter of the year and low rates around the world, making the yield on the 10-Year U.S. Treasury look appealing. We continue to believe that an improving labor market and positive GDP growth will move rates higher in the coming months.
Our Takeaways from the Week
by Jason Norris, CFA
Senior Vice President of Research
Let’s Make a Deal
After two weeks of a partial government shutdown and on the eve hitting the debt ceiling, the Senate cobbled together a short-term fix to reopen the Federal government and kicked the debt ceiling “can” down the road for a couple months. Despite all the hysterics in the media that included dire warnings and countdown clocks, the U.S. economy, as well as the equity markets, held up fine. While we expect a short-term hit to economic growth due to the shutdown, we do not believe it will have a lasting effect. Though equity markets have been volatile during this period, stocks actually traded higher in October, resulting in an all-time high for the S&P 500. We believe that consumer confidence will pick back up through the remainder of the year. The wildcard in Washington is whether or not there will be a “grand bargain” before we hit the debt ceiling again or will the short-term band aids be more common, thus creating more uncertainty.
While interest rates fell a bit over this time, it was another story for the U.S. dollar as the major European currencies are close to 52-week highs relative to the greenback. While this may not positively impact a planned European vacation, it will benefit major exporters because their goods will be relatively cheaper in the world market.
Blackened Big Blue
IBM reported a disappointing and sloppy quarter earlier this week. While once a bellwether for the technology space, the company has struggled in recent years, and have been unable to post revenue growth on a year-over-year basis for eight quarters. However, IBM has been able to hit profit targets due to reduced costs, lower tax rates and share buybacks. The key metric we have been watching is free cashflow and this has not been compelling enough for us to step in at current levels, even though the stock is 20 percent off its high.
Earnings Redux
Third quarter earnings have been coming in mixed across the market. Semiconductor stocks are seeing a slower fourth quarter while Google’s growth continues to exhibit strength. The regional banks are experiencing sluggish loan growth and some compression in net interest margin. However, they are hitting profit targets due to cost cutting. Although the big industrials, such as GE and Honeywell, have delivered healthy reports this week, they are showing a bit of caution in their outlooks over the next few quarters. Looking toward 2014, overall corporate earnings are still forecasted to grow close to 10 percent. While this may prove to be too optimistic, we remain bullish on equities due to continued earnings growth and low inflation, which should translate into further P/E expansion.
Out Takeaways from the Week
