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.”
On Wednesday, days before the U.S. is projected to run out of money to pay its bills, the House passed the Fiscal Responsibility Act of 2023 in a bipartisan effort. The final vote of 314- 177 received support from 149 Republicans and 165 Democrats. With both sides making concessions, it’s not surprising to see members of each party voicing their displeasure with the deal.
Many people believe the world’s largest and most important economy is on the brink of default. Indeed, politicians generally do a disservice by pushing their agenda until the last minute and then lose the trust of their constituents and investors. However, negotiations on the debt ceiling have improved over the last few days and the risk of default has decreased.
Now that individual taxpayers have submitted their 2022 tax returns and Tax Day 2023 is in the rearview mirror, a largely self-made crisis surrounding raising the debt ceiling will begin to resonate through the halls of Congress, possibly lasting through the summer months.
President Biden held his State of the Union Address this week, and while there was a laundry list of proposals, the two that we believe are on investors’ minds are the debt ceiling and the Medicare drug price negotiation.
As autumn dawned this week, investors witnessed the first move by a developed market’s central bank to raise interest rates since the COVID-19 pandemic began. No, the Fed didn’t raise rates. Rather, it was Norway’s central bank that moved its short-term interest rate target off the zero bound, citing improved economic activity that no longer justifies such monetary policy accommodation.
Global elections continue to stir up markets this week. U.S. stocks and the dollar rose as the British pound declined after the U.K.’s Conservative Party lost its parliamentary majority just as the Brexit negotiations begin
by Jason Norris, CFA
Senior Vice President of Research
Let’s Make a Deal
After two weeks of a partial government shutdown and on the eve hitting the debt ceiling, the Senate cobbled together a short-term fix to reopen the Federal government and kicked the debt ceiling “can” down the road for a couple months. Despite all the hysterics in the media that included dire warnings and countdown clocks, the U.S. economy, as well as the equity markets, held up fine. While we expect a short-term hit to economic growth due to the shutdown, we do not believe it will have a lasting effect. Though equity markets have been volatile during this period, stocks actually traded higher in October, resulting in an all-time high for the S&P 500. We believe that consumer confidence will pick back up through the remainder of the year. The wildcard in Washington is whether or not there will be a “grand bargain” before we hit the debt ceiling again or will the short-term band aids be more common, thus creating more uncertainty.
While interest rates fell a bit over this time, it was another story for the U.S. dollar as the major European currencies are close to 52-week highs relative to the greenback. While this may not positively impact a planned European vacation, it will benefit major exporters because their goods will be relatively cheaper in the world market.
Blackened Big Blue
IBM reported a disappointing and sloppy quarter earlier this week. While once a bellwether for the technology space, the company has struggled in recent years, and have been unable to post revenue growth on a year-over-year basis for eight quarters. However, IBM has been able to hit profit targets due to reduced costs, lower tax rates and share buybacks. The key metric we have been watching is free cashflow and this has not been compelling enough for us to step in at current levels, even though the stock is 20 percent off its high.
Earnings Redux
Third quarter earnings have been coming in mixed across the market. Semiconductor stocks are seeing a slower fourth quarter while Google’s growth continues to exhibit strength. The regional banks are experiencing sluggish loan growth and some compression in net interest margin. However, they are hitting profit targets due to cost cutting. Although the big industrials, such as GE and Honeywell, have delivered healthy reports this week, they are showing a bit of caution in their outlooks over the next few quarters. Looking toward 2014, overall corporate earnings are still forecasted to grow close to 10 percent. While this may prove to be too optimistic, we remain bullish on equities due to continued earnings growth and low inflation, which should translate into further P/E expansion.
Out Takeaways from the Week
