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.”
One irony from the bond market in 2023 was that the year started with near unanimous calls for a recession, finished with an over 20% return for the S&P500 and consensus for a soft landing, yet the yield on the benchmark 10-year U.S. Treasury ended the year right where it started at 3.88%.
It has been a very challenging year for the capital markets. Not only have stocks entered a bear market, but bonds are on pace to have their worst return in more than a century. Typically, bonds have a negative correlation with stocks, and, as such, tend to have strong returns when stocks decline. However, this is the first time in 52 years that stocks and bonds fell in the same year.
Paul Volcker assumed the chairmanship of the Federal Reserve in August of 1979 and within a year, had raised the target federal funds rate to an eye-popping 20%. This painful but necessary action broke the back of inflation which had run rampant for the prior decade.
We are pleased to present our Investment Strategy Video for the second quarter of 2020 titled, “Gimme Shelter.”
When we met with clients in January of this year we highlighted our thesis that while 2015’s equity returns were anemic and there were concerns at the outset of 2016, we maintained that the equity bull market was not over. This
by Timothy D. Carkin, CAIA, CMTSenior Equity Trader
With the partial shutdown of the government behind us, the equity markets have been on a near constant rise seemingly setting new highs daily. “Kicking the can down the road” gave investors the excuse to jump back into the markets as evidenced by the S&P 500’s 100-point gain since October 9. As the market ran up, Chicago Board Operative Exchange Volatility Index (VIX) was dropping. This is positive – it signals investors’ acceptance of the continued market highs. Looking further into the equity markets we see confirmation of the rally with industrial, healthcare, and consumer discretionary sectors setting new highs. Not surprisingly, almost 70 percent of the Dow Transportation Index are within 3 percent of their 52-week high. Strength in these sectors, coupled with an increase in volume, and a reduction in volatility is a recipe for a continuation of the bull market.
The market’s reaction to Microsoft’s earnings this morning, opening up more than 6 percent, was supportive of a bullish rally. In a typical market rally, quality stocks lead the market up. As the proverbial rising tide lifts all boats, the lower quality stocks rally as well. As the market exhausts, investors seek out newer opportunities and start to buy up those riskier, lower quality stocks, eventually driving valuations to excess leading the market to correct. Continued leadership of other bellwethers like Boeing, Verizon, Nike and American Express is a good sign of the health of this rally.
With all that said, one simple truth is that the market does not go straight up. Most equity markets can handle a loss of a few percent without losing their bullish momentum. As you can see in the chart below, we are at the upper bounds of the market channel. Trading down to the trendline would be perfectly normal and still maintain the trend. However, if that pullback is preceded by higher volatility or rallying lower quality stocks, this might indicate a more significant pullback.
Our Takeaways from the Week
