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.”
For almost two years now, investors have been waiting for one of the most anticipated recessions—and understandably so. After 11 rate hikes in the past 18 months, the most aggressive rate hike period in over six decades, the U.S. has defied the odds of a hard economic landing so far. When the Fed has raised rates this aggressively in the past, it’s typically been followed by a recession or “something breaking.”
It is no surprise that all eyes are focused on the economic headlines – investors and consumers are searching for tangible pieces of information to guide decision-making and create a logical roadmap for 2023. You don’t need to look far to see the latest news plastered across the media: corporate layoffs.
by Ralph Cole, CFA
Executive Vice President of Research
The global economic expansion continues to run at very different speeds around the world. However, the common thread among most all developed economies has been easy money. Today, China joined the party by lowering interest rates for the first time since 2012. The reasons for lower rates has been stubbornly slow growth, and as long as inflation remains low, central banks can feel confident in their choice to stimulate their economies.
Markets were also buoyed this week by dovish comments out of the European Central Bank. With most European economies mired in little to no growth, and the ECB has embarked on its own version of quantitative easing (QE). Mario Draghi hinted in a speech yesterday that their asset-buying program could expand if necessary. The lack of economic growth in Europe can at least be partially explained by Draghi’s habit of speaking about, rather than actually enacting, central bank policy. In Texas, they would call this “all hat and no cattle”.
Thrift Shop
This week just about wrapped up earnings season for retail companies. Earnings were basically strong across the board for retailers from Dollar Tree and Target to Foot Locker and Best Buy. We believe retailers and consumers are starting to feel the benefits of lower prices at the gas pump. Lower gas prices often coincide with higher consumer confidence numbers, which in turn leads to increased consumer spending.
What makes the retail industry so interesting is the plethora of stores from which shoppers have to choose. I don’t think any of us would argue that we aren’t over-retailed in the U.S. This abundance is one reason we don’t see much inflation. Despite a zero percent interest rate policy and a massive expansion of the Fed’s balance sheet, inflation is not yet finding its way onto store shelves. Competition for the consumer’s discretionary dollar remains fierce. Case in point: the phenomenon of Black Friday sales moving earlier into our Thanksgiving holiday week.
Our Takeaways from the Week
by Ralph Cole, CFA
Executive Vice President of Research
Over When It’s Over
It has been quite a week here in the U.S. on a number of fronts. First, the U.S. men’s soccer team brought society to a halt on Tuesday afternoon with a heartbreak loss to Belgium in the second round of the World Cup. While the game showed just how far we have to go to catch up to the rest of the world, the team made all their supporters very proud. It will be interesting to see if the current soccer enthusiasm will have the “legs” to build on this momentum in the U.S. beyond the conclusion of the World Cup.
What’s Going On
As for the markets, they did not take the holiday-shortened week off as the Labor Department announced May payrolls a day early in observance of the Fourth of July. The numbers were unabashedly strong with a whopping 288,000 jobs added across the nation in May. This strong reading moved the five-month average up to 248,000 which is roughly 60,000 more than we averaged in all of 2013. Perhaps most impressive is the fact that this was during one of the worst winters on record.
Contrary to just two months ago, all signs now point to an improving economy, but headline GDP numbers have been surprisingly weak. Mark Twain once said, “There are lies, damn lies and statistics.” As investors, we can’t rely on any one statistic to determine the direction of either the economy or the capital markets. Rather, we rely on a mosaic of information that is force-fed to us each day through our computer screens. What that information is telling us today is that we have moved from a tentative expansion to one that appears sustainable. While some may lament the speed of the recovery and robustness of economy, we would point to a lack of excess in any given area.
While consumer spending hasn’t been overly strong, it does appear to be durable because unlike recent economic expansions, this has been not driven by borrowing. While job growth has been somewhat sluggish, it also hasn’t reached inflationary levels. While housing has improved, it is far from the bubble levels experienced in 2005 and 2006 and while the stock market is at record highs, so too are earnings.
So sit back and enjoy it this Fourth of July holiday weekend. Next week we can get back to worrying about an Iraq oil shock, inflation and stock market valuations.
Our Takeaways for the Week
