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.”
Mixed economic data led to weaker stock markets around the world this week. U.S. equities were down around less than 1 percent, while international benchmarks were modestly negative as well. One would expect with negative equity markets that interest rates would have dropped as well, but
by Shawn Narancich, CFAExecutive Vice President of Research
While Chinese stocks endured more losses in a week that now puts the A-Shares Index into correction territory, U.S. investors continue to preside over a range-bound market domestically. With U.S. equity indices near record levels and late quarter news flow reduced to a trickle, all eyes were focused on the U.S. Supreme Court decision this week regarding the legality of federal tax subsidies for states not running their own insurance exchanges. A high court ruling upholding a key tenet of the Affordable Care Act (ACA) was greeted with a sigh of relief by investors who own hospital stocks, while sending speculators short names such as HCA Holdings running for cover. While minor tweaks to the ACA are still possible, such as the repeal of the medical device tax, this week’s key ruling all but assures that the key structure of the national healthcare law will remain intact at least until the Obama administration leaves office.
Gathering Pace
As healthcare stocks reacted to the Supreme Court drama, investors with more cyclical leanings received the latest confirmation that moribund first quarter consumption and weak retail sales were transitory. U.S. consumption spending in May rose at the fastest month-to-month rate in nearly six years, and the 0.9 percent surge easily outpaced a smaller increase in consumer income. Indeed, the U.S. consumer has not forgotten how to spend! Coupled with a strong job market confirmed by a surge in May hiring and an upbeat retail sales reported for the same month, we are left to conclude that the U.S. economy has picked up considerable pace from the slight contraction it experienced during the first quarter. Our best guess is that the Federal Reserve will exit zero interest rate policy sometime later this year, and it will most likely be in September.
Greece Ad Nauseum
The melodrama of Greece failed to find a resolution this week, but European stocks seem to have found their footing nonetheless. Regardless of whether ongoing talks with Greece are successful in retaining the country as a solvent member of the Eurozone economy, the European Central Bank (ECB) has demonstrated its commitment to do, as chief Mario Draghi famously observed several year ago, “whatever it takes,” to keep the Eurozone and its currency viable. Exhibit A of this commitment is the ECB’s ongoing program to enhance the European monetary base by purchasing $60 billion of European bonds every month until at least the fall of next year. Exhibit B, key in the latest Greek crisis, is the central bank’s commitment to fund Greek banks with loans to accommodate ongoing deposit flight from these institutions. Our main observation here is that if no acceptable resolution is reached and Greece ends up leaving the common currency, then Europe and its central bank will do what is necessary to keep the region’s banking system and economies liquid, thus preventing any lasting type of contagion from Greece’s exit.
Our Takeaways from the Week
by Ralph Cole, CFA
Executive Vice President of Research
Take Your Time
Greece and Euro Area finance ministers reached a tentative agreement Friday to buy time for Greece to get their financial house in order. The EU has agreed to provide liquidity for up to four additional months if Greece provides a sufficient list of measures they are willing to undertake.1
Greece will have a primary budget surplus in 2015 which means they will have a budget surplus - if you don’t count debt payments. While this may seem unrealistic, it does mean the Greek government could continue to operate if they stop paying their creditors. However, this would not be in the best interest of anyone. Greek bonds would drop in value, as would some of the bonds of other peripheral countries. This situation is known as financial contagion. Greece in and of itself is not a huge economy (it is approximately the size of Indiana), but the world is trying to judge the effectiveness the European Union. Can they hold it together?
We believe that the EU can indeed keep it together in the near-term. In the future, it may be in the best interest of some countries, Greece as one example, to move out of the Eurozone. If a country finds itself politically unable to work within the confines of the European Union, they may want to exit the agreement in order to control their own budgets and currency. The EU would rather have this happen during a time of strength, rather than at a time of ongoing economic stress.
Waiting on a Friend (Fed)
The Federal Reserve board meeting minutes were released Wednesday and markets deemed them to be dovish; meaning that the Fed is afraid of raising rates too soon and choking off a fragile recovery. The surprise to us is that people continue to refer to this as a recovery. Both U.S. GDP and the S&P 500 are at all-time highs and the U.S. passed through recovery territory years ago. While nothing is a foregone conclusion, we believe the Fed will raise rates later this year. There will be a lot of hand wringing over the first Fed rate hike (there always is), but we believe the economy is on very sound footing and can handle higher rates. While it could happen in June, it will most likely happen in the second half of the year. This topic will be discussed ad nauseam throughout the year, but we view tightening as a positive. A rate hike will be a signal to the markets that the financial crisis is officially behind us and extraordinary measures of liquidity are no longer needed.
Takeaways for the Week:
1 Source: Bloomberg
