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.”
The U.S. consumer continues to be the sweetheart of the global economy. Personal consumption represents approximately 70 percent of U.S. GDP and this morning’s University of Michigan Consumer Sentiment Index release suggests the consumer remains both confident and resilient.
It was an eventful week in Washington and on Wall Street. Republicans appeared to be moving along on the tax bill, but a hiccup occurred Thursday evening that has delayed voting until sometime next week. Strong economic data and hopes for a corporate tax cut led the S&P higher by 1.6 percent this week.
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.
For the shortened holiday week, equity markets were down by almost 1 percent as investors followed events in Russia and North Korea. Interest rates were lower with the 10-year Treasury declining in yield from 2.36 to 2.22 percent.
Most markets, international stocks and the U.S. Dollar ended the week near where they started. Stocks are quietly ending a strong first quarter, with this week leaving the S&P 500 up a little over 1 percent and the Dow Jones up about 0.5 percent.
It was a relatively quiet week in capital markets. Trading volume was very low, and the S&P 500 was down 1 percent. Interest rates were also down for the week with the 10-year U.S. Treasury finishing the week at 2.44 percent.
The stock market was up for the week with the S&P 500 returning .20 percent. During the week, the S&P 500 climbed to an all-time high on Thursday. Bonds were higher in price and lower in yield with the 10-year Treasury moving from a
by Jason Norris, CFA
Executive Vice President of Research
You Better Believe It
This holiday week equities continued their historic seasonal trend of strength in December. Driven by positive economic data in the U.S, although many investors had started 2014 with a lot skepticism regarding the durability of the U.S. economy, we are now getting confirmation as to just how healthy it really is. For example, this past Tuesday brought an impressive GDP revision of 1.1 percent to 5 percent. This solid upgrade was driven primarily by consumer spending. This data resulted in a post-winter vortex snap back of 4.8 percent over the last six months. While this may be above expected trend for 2015, it does highlight the underlying stability in the U.S. economy. Wednesday’s unemployment claims confirmed such vitality with only 280,000 people filing for initial jobless benefits (a number under 300,000 is considered healthy). The recovery we have seen in jobs in 2014 is the best we have seen in over a decade. Case in point, through November, the U.S. has added 2.65 million new jobs, which is the best annual job growth since 1999. Lower gas prices and higher consumer confidence provides a tailwind into 2015 which keeps us bullish on the U.S. economy, and more specifically, the U.S. consumer.
Somebody Get Me a Doctor
This most recent data may have put a scare in some of the defensive sectors, specifically healthcare. The sector was hit hard on Tuesday (down over 2 percent) as investors liquidated positions from biotech to pharma. Healthcare has been a popular overweight this year and investors have benefitted with a 25 percent total return year-to-date. However, a shift to more cyclical sectors of the economy (technology, oil and materials, for example) may be a headwind. Investors were also concerned about a recent deal between Express Scripts (a large pharmacy benefits manager) and Abbvie (a pharmaceutical research and development company) regarding their recently-launched Hepatitis C drug. Throughout most of 2014, Gilead Sciences had a virtual monopoly on a Hep C cure; however, the treatment was pretty pricey. Abbvie launched their competitive drug on Friday, December 20, which didn’t bring much fanfare. However, over the weekend they signed a deal with Express Scripts to be the sole regimen for two-thirds of Hep C cases. Speculation is that Abbvie was pretty aggressive on discounting. Investors initially took Gilead to the “woodshed.” However, they followed through with broad selling over concerns of future pricing pressure for all drugs and devices. While Gilead garners close to 50 percent of the revenues from Hep C treatments, Abbvie is estimated to only have 10 percent. Therefore, while it is a great complement to their portfolio, the company has a solid pipeline of novel drugs as well.
Spirit of the Season
Here’s hoping for a bountiful holiday season and if the equity returns stay true to their seasonal trends, we should finish with a strong December and hopefully hold the 18,000 mark on the Dow. Fun fact: since 1987, the month of December has posted the highest monthly returns for the entire year.
Happy Holidays to you and yours from all of us at Ferguson Wellman and West Bearing.
Our Takeaways for the Week:
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
