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.”
Having climbed the proverbial “wall of worry,” all the major domestic equity indices are poised to end the year at, or near all-time highs. In fact, it was a great year for virtually every asset class as bonds enjoyed their best return in a decade, international equities returned roughly 20 percent and real estate and commodities have also prospered.
After six years of exceptionally low “turbulence,” volatility returned with a vengeance last year. We expect this bumpy flight path to persist as investors digest slowing economic expansion, materially lower earnings growth and broadening trade and political tensions.
As the U.S. economy enters its 10th-consecutive year of growth, significantly it has been joined by an increasingly synchronized expansion of the major world economies. Though asset prices across-the-board are elevated at this stage of the economic cycle, we believe that in 2018 equity investors stand to benefit from further economic expansion and lower corporate tax rates that together could result in another year of double-digit earnings growth.
Last year was one of the most volatile periods in the history of the U.S. stock market. The Japanese earthquake and tsunami, a festering European debt crisis and dysfunctional U.S. politics weighed on consumer, business and investor sentiment in 2011—creating economic and market headwinds. Having endured a decade of boom and bust cycles in technology, real estate and commodities—U.S. investors are fatigued by a roller coaster stock market that has made little forward progress.
2010 drew to a close with fears of a double-dip recession abating and economic data revealing that the global expansion was intact and gaining momentum. After a mid-year slowdown, the preponderance of economic indicators now point toward a modest reacceleration in domestic growth. For all that was written about the “new normal,” last year looked surprisingly like the “old normal.” Looking forward, the extension of Bush-era tax cuts suggests that the pace of activity will likely accelerate in the first half of 2011 and a second round of quantitative easing (“QE2”) renders a “double dip” highly unlikely. In our view the cyclical equity bull market is not yet over.
What a difference a year makes. After one of the worst years in history for investors, 2009 brought above-average returns across all equity styles. Aided by unprecedented monetary and fiscal stimulus, credit markets thawed and investors’ risk tolerance returned. Like the emergency room patient who doctors stabilize before nearly losing to anaphylactic shock, stocks rose from what felt like the dead in March, climbing a wall of worry to recoup roughly half of the damage done since the highs of 2007.
A year ago, we published our 2008 Outlook entitled “Stepping Back From Risk.” The somewhat cautious report listed potential capital market risks as a “significant housing recession, commodity inflation and the possibility of the banking crunch intensifying.” With those concerns in view, we recommended modestly reducing equities, increasing allocation to bonds and emphasizing quality in the selection of all debt and equity securities. However, never in our wildest imagination did we anticipate the severity of the economic storm that unfolded. Amid a virtual credit market meltdown, the U.S. led the world into a recession that decimated equity values across the globe, proving our forecast of mid-single digit equity returns wrong both directionally and by several orders of magnitude.
Though our expectations for a wide divergence between the returns of the primary asset classes proved to be correct last year, in 2008 we anticipate that the return differentials between asset classes will be materially compressed. Specifically, with both long rates and the dollar perhaps probing for a bottom, slowing global growth, and the domestic economy flying at “stall speed,” we anticipate that large-cap domestic equities, international equities and investment grade bonds will perform much as they did last year. That is, we expect volatility to remain at elevated levels, but with a generalized upside bias. In that context, we are forecasting mid-single-digit returns for the year.
