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.”
Chocolate-loving parents may be in for a sour surprise as they rummage through their children’s Halloween candy this year. With cocoa prices double the levels seen last year, food companies are getting creative, reducing the size of chocolate bars and adding more non-chocolate treats to their Halloween candy bags for sale. Trick-or-treaters weren’t the only ones to experience an eventful week, as an action-packed capital markets provided investors with their own bag of surprises to unpack.
“Have you used ChatGPT?” Wherever I go, whatever the context, I keep getting this same question. Clearly, the excitement around artificial intelligence (AI) is real… look at the stock market.
In an otherwise quiet week on Wall Street, the benchmark S&P 500 turned the page on one of its longest-running bear markets. Rebounding by over 20% from its October lows, the blue-chip index has officially surpassed the threshold marking a new bull market. What is notable about the advance from last fall’s lows is how few stocks have participated in the upturn.
This week, there was a plethora of economic and company-specific news for investors to digest. Specifically, the release of first quarter U.S. GDP, reported quarterly earnings by major technology companies and the unanimous vote by Twitter’s board to approve Elon Musk’s offer to take the company private. In response to this news, the market declined 4%, with all of the weekly losses occurring Friday afternoon.
This week, Federal Reserve Board Chair Jerome Powell announced that later this month the Fed will begin “tapering” its asset purchase program now that the economy has moved past the need for extraordinary stimulus. As a reminder, to combat the recessionary effects of the pandemic and stimulate the economy, the Fed reduced interest rates to 0% and reintroduced an asset purchase program to the tune of $120 billion per month. By any measure, this is a remarkably large stimulus program.
A week that began with the sharpest pullback in equities since last fall concluded in remarkable fashion, as investor concerns about the economic repercussions of rising COVID-19 infections gave way to an increasingly constructive second quarter earnings season.
Last November, Pfizer announced a 95 percent efficacy of their COVID-19 vaccine. Since that time, there has been a notable shift in leadership within the stock market.
For many, 2020 has been a year to forget. Headlined by the COVID-19 pandemic and the ensuing global response, stimulus from central banks and governments has helped limit the damage, as the U.S. economy has now experienced its shortest and steepest recession ever.
“The path of the economy will depend significantly on the course of the virus.” Chairman Jerome Powell reiterated this point emphatically in his comments following the two-day meeting of the Federal Open Market Committee (FOMC). To most people this may seem like stating the obvious, but sometimes it bears repeating, especially considering the data released this week.
This week, Alphabet Inc., parent company to Google, became the fourth company to join the “trillion-dollar market value club,” that includes Apple, Microsoft, and Amazon. Besides the significance of their “trillion dollar” size, why do we care so much about the market value of these companies?
This week we experienced something we haven’t in some time: a down week. Stocks struggled to a close, down 3.8 percent with no help from blue-chip names. Alphabet (GOOGL) and Apple reports weren’t favored by Wall Street, driving the stocks down 5.2 and 4.3 percent, respectively.
Friday revealed strong earnings in large cap tech-fueled stocks, resulting in a slightly positive week for the market. This leaves the S&P 500 at another all-time high. Interest rates ticked up as well, as economic data continued to show improvements. The 10-year U.S. Treasury ended the week with a yield of 2.43 percent, up from 2.35 percent.
As investors, the best thing about earnings season is it filters a lot of the other noise out of the market. A month ago, a tweet, tariff headlines or even a longshot tax proposal would have moved the equity markets. But now that we are in the throes of earnings season, equity investors are focused on the most important factor in investing: earnings.
by Jason Norris, CFAExecutive Vice President of Research
Back in Business Again
It has been a volatile year for equities and as we head into the holiday season, that doesn’t look to dissipate. After the 12 percent sell-off investors went through over the past few months (Fed rate hike concerns, China market crash, Greek debt issues and the constant geo-political flare-ups), the S&P 500 has rallied back, culminating with its best week of the year. While 2014 proved to be a narrow market, 2015 is even more so. When you look at the 10 largest U.S. companies (see table below), you notice the majority of them, have enjoyed significantly greater returns than the 3 percent for the S&P 500.
Source: FactSet data through Nov 20, 2015
What is even more dramatic is that three stocks were responsible for all of this return: Amazon, Alphabet/Google and Facebook.
There have been prior periods of large cap driven markets, coupled with a handful of names driving that performance. But what we have experienced this year is less than a handful of mega cap names delivering all the index returns.
One thing to note on this narrow focus is the emphasis on “growth.” The sell-off we experienced this summer was a classic “growth” scare. Investors believed that due to the strong dollar and the slowdown in China would cause global economic growth to slow. While we’ve seen some stabilization in the equity market, there is still concern over global economic growth. As such, investors have been willing to “pay up” for growth companies and avoid cheaper names that are tied to the face of economic growth. For instance, the three stocks mentioned earlier trade at substantial premiums to the overall market.
Source: FactSet data through Nov 20, 2015
Investors are paying a lot more for a dollar of earnings for a select few names due to the concern over growth. This has resulted in growth stocks returning roughly 7 percent this year, while value stocks are down 2 percent.
Takeaways for the Week:
Our Takeaways for the Week
by Jason Norris, CFA
Executive Vice President of Research
In the last few weeks we have received several questions regarding the headlines coming out of Washington that may have major implications to some sectors of the market (although none of the questions were regarding Israeli Prime Minister Netanyahu’s address to Congress).
The FCC issued a statement that they are going to enact Title II of the 1934 Telecom Act (yes, 1934) to apply to broadband internet. This basically would regulate internet access, as well as any deals companies may make to transmit data (i.e., if Netflix were to strike a deal with Comcast, this would have to be blessed by the FCC). We haven’t seen the specific details of the act since the actual 300 page order has not been released. I had the good fortune of meeting with top managers of Verizon, Comcast and Charter Communications earlier this week and they addressed the topic. While the carriers have not been engaging in practices the FCC is trying to stop, this new regulation will introduce increased uncertainty. Network service providers have essentially had an open playing field as to what to invest in based on market dynamics. This proposed increase in regulation may present a lot of obstacles and conjecture. The consensus view is that new regulation would have a negative impact on innovation and investment longer-term. Also, the issue would be heavily litigated as well. The belief is that net neutrality needs to come through Congress, not the FCC. The DC Court of Appeals has previously overturned the FCC’s attempt to regulate in 2010 and 2014.
The winners of this move will likely be companies that drive a lot of data over the internet, i.e. Netflix and Hulu. Google is a wild card because they drive a lot of data transmission (YouTube) and they are expanding into telecom services (Google Fiber). Thus Google will see both the positive and negative sides of this proposed regulation. Apparently, Google execs had mentioned to President Obama that they are against net neutrality. The potential losers of the act would be the cable and telecom companies and their equipment suppliers if capital spending is slowed. However, the market didn’t bat an eye due to the amount of guesswork remaining before any implementation occurs.
You Keep Me Hangin' On
The Affordable Care Act (ACA) was before the Supreme Court again this week as challengers of the law asked the justices to find the subsidies (tax credits) the IRS is approving unconstitutional. The law states that only customers on a State-run exchange will get a tax credit; however, the IRS has been giving tax credits to all customers on both Federal and State exchanges. The majority of newly insured customers are on Federal exchanges and are receiving credits from the IRS, which would mean their insurance costs could increase meaningfully if this aspect of the ACA is overturned.
After the arguments were made on Wednesday, most legal analysts were unable to get a “read” from the justices on which way were they were leaning. The expectation is that the four “progressive” justices will vote in favor of the government, and the more “conservative” justices, Scalia, Thomas and Alito, will likely vote in favor of the plaintiff. The last challenge to the ACA was in 2012 where Chief Justice Roberts voted in favor of the act, so he could be the swing vote again. However, Justice Kennedy gave the defense a bit of hope due to his questioning of States’ Rights. The essential question is this: if the Federal government mandated the States to set up their exchanges to get its citizens subsidies, would that result in undue “coercion”? Thus maintaining the subsidies for the Federal exchanges may be allowed. It was an interesting line of questioning, and one that moved the HMO and hospital stocks this past week. The HMOs and hospitals will continue to be beneficiaries of the ACA due to the increased number of insured customers, but the HMOs will have less of a benefit since ACA policies dictate a lower profit margin.
Our Takeaways for the Week:
by Jason Norris, CFA
Executive Vice President of Research
Take Me to the Top
The most common question we have been getting as of late is when is the market pullback going to occur? Stocks are up over to 200 percent from the March 2009 bottom and 75 percent from the most recent market correction (of 15 percent) in October 2011. While it has been almost three years since a major correction, history has shown this trend can continue for quite a bit longer. To that point, Cornerstone Macro Research gathered some data on previous market pullbacks which are highlighted in the chart below.
History shows that there have been numerous periods of much longer durations when stocks have climbed without a major pullback. If you simply look at the fundamentals of the stock market, an argument can be made that the S&P 500 can continue to move higher without a meaningful pullback. First, U.S. economic growth is improving and global GDP should continue to trend in the mid-single digits, resulting in continued earnings growth. Second, with low inflation and low interest rates, the valuation of the equity market is still attractive and the Price-to-Earnings multiple of the S&P 500 still has room for upside from 15.6x at present. While there will always be unforeseen shocks, the risks in the system are not as predominate as we saw in 2011 (Europe debt crisis, U.S. debt downgrade, Fiscal austerity) or 2000 (stretched valuation, falling consumer sentiment, manufacturing data weakening). However, risks that investors should be cognizant of are a spike in oil prices due to Middle East tensions, China’s economic growth slowing meaningfully, and an adverse reaction to Federal interest rate hikes in 2015.
What Do You Do For Money?
Earnings kicked off this week with mixed results from large cap technology. Specifically, there was divergence within the internet ad space, with Google growing and Yahoo stagnant. One wonders how long the Yahoo board will give CEO Marissa Mayer to achieve the turnaround. Intel delivered a strong quarter due to PC upgrades primarily from businesses as Microsoft sunsets its client support for Windows XP. This strength is allowing the company to return cash to shareholders through an announced $20 billion repurchase plan. While Intel stock reacted very favorably to the announcement, it was disconcerting that their mobile business continues to underachieve. This division lost over $1 billion while grossing a mere $51 million in revenue (down from $292 million a year ago). Intel’s move into this area looks to have been a failure which leads us to speculate where they will have to make an acquisition in order to penetrate the market.
Takeaways for the Week
