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.”
For investors, this year started with more than a passing resemblance to 2015, according to executives at Portland-based investment firm Ferguson Wellman Capital Management.
At the firm’s annual investment outlook Wednesday at Deschutes Brewery, in Bend, two Ferguson Wellman vice presidents advised cautious optimism. They took their theme from the
by Brad Houle, CFA
Executive Vice President
Millennials get a bad rap. They are characterized as the generation that was born between 1980 and 2000 and are often considered to be indulged and coddled. They are often accused of being the by-products of a society where everyone receives a participation trophy. This is quite different than the baby boomer generation, born at the end of World War II through the mid-60s and often considered wealthy, active and the result of an economic boom. And while the millennial birth rate in 1990 matched the 1957 baby boomer birth rate with greater than 4 million births, similarities between the two generations begin and end there.
Following the baby boom of the 1950s, there was a significant pick up in household formations roughly 20 years later. Consumer spending on the acquisition of homes, furniture and other durable goods define household formations, which makes up almost 70 percent of our gross domestic product or, said differently, our national income. This consumer consumption of household formation drives the economy and the millennials cannot keep up the pace. According to Federal Reserve data from 1997 to 2007, about 1.5 million households were formed on average each year in the United States. Then the Great Recession hit, and in the ensuing three years, the rate fell to 500,000 per year.
In addition, the Great Recession resulted in a drop in millennial independent living. The Pew Research Center, in the first third of 2015, found that 67 percent of millennials were living independently, compared with 69 percent of 18-to-34 year olds living apart from family in 2010 and 71 percent in 2007. Also, unemployment in the millennial demographic shot up over 12 percent during the recession. Moving back in with Mom and Dad and/or possibly pursuing further education became a viable option for many in the group.
Today we learned that current unemployment has dropped to around 5 percent. This begs the question: If unemployment has improved, why are millennials still so reluctant to leave the nest? The rising cost of tuition, the student loan debt that results and an increased home down payment are thought to be a few of the culprits of these nest-bound millennials. The College Board, responsible for several standardized college tests such as the SAT, points out that the average “published tuition and fees at public four-year colleges and universities increased by 13 percent in 2015 dollars over the five years from 2010-2011 to 2015-2016, following a 24 percent increase between 2005-2006 and 2010-2011.” As a result, according to the Brookings Institute, the average balance of outstanding student loan debt for households with some debt was $25,700. In addition, following the financial crisis the required down payment on a home was raised to 20 percent. Considering these factors, it is possible this generation is making rational economic choices by living at home as opposed to a desire to have their parents clean their room for them.
Ned Davis Research estimates that there are roughly 3 million incremental millennial households that have yet to be formed. As millennials leave the comfort of their parent's basement, pay off their student debt and join the real world, this household formation could be a tailwind for the housing market as well as the consumer economy.
The employment report for the month of October was released on Friday and was much better than expected. 271,000 jobs were created in October and there was an upward revision to the number of jobs created in the prior month. As mentioned earlier, unemployment dropped to 5 percent and the average hourly earnings was up more than expected rising 2.5 percent on a year-over-year basis. With this stronger-than-expected data the implied probability of a Federal Reserve rate increase is now at 70 percent for the month of December.
Our Takeaways from the Week
by Shawn Narancich, CFA
Executive Vice President of Research
Don’t Look Back!
As investors question the underlying strength of the U.S. economy, stocks are consolidating gains and bonds are defying Wall Street expectations for yields to rise. Like drivers gawking at a car wreck as they drive past, market participants once again revisited the surprisingly poor economic start to a 2014 that most thought would bring faster economic growth instead of the worst quarterly performance since the depths of the Great Recession. Reasons for the 2.9 percent contraction in first quarter U.S. GDP have been widely discussed, but the cold, inclement weather and late Easter don’t negate the math of such a poor start to the year, and its impact on full year estimates that economists are now scrambling to reduce.
Back on Track
Relatively healthy payroll growth, rising retail sales, and healthy manufacturing indicators bely the wreckage of first quarter GDP, but this week’s surprisingly poor May personal consumption numbers prolong the debate about how strong the economy really is. Few indicators are as simple as they first seem and this number is no exception, being dampened by accounting for the Affordable Care Act that economists first thought would boost healthcare spending. As it turns out, this component of consumer spending actually fell in May, and with the Fed’s preferred inflation measure ratcheting up to 1.8 percent year-over-year, real consumption spending used to compute the GDP number actually dropped sequentially. So what’s an investor to believe? Notwithstanding the disappointing May number, we expect Q2 consumption spending to increase at a faster pace and look for better capital spending and housing investment to produce GDP growth somewhere in the 3-4 percent range. If achieved, this level of growth will be the best in a couple years and should go a ways toward allaying concerns about the pace of economic expansion. In this environment, we expect bond yields to rise.
Clear as Condensate?
The U.S. energy industry was jolted this week by surprise news that the Commerce Department has granted approval for two energy companies to begin exporting very light crude oil known as condensate. The U.S. energy renaissance has boosted domestic oil production by over 70 percent since the lows of 2008 and, owing to the nature of unconventional development, an increasing amount of the liftings are of the clear variety. The challenge for U.S. refiners has been to revamp their capital intensive facilities to accommodate this light production after years of gearing up for heavier Mexican and South American imports. The reaction on Wall Street was dramatic, as stocks of oil producers rallied and refining stocks tanked. If the first government approvals this week turn out to be a harbinger of additional exports to come, benchmark WTI oil prices should increase relative to the global benchmark Brent. Accordingly, the producers would realize higher prices at the expense of the refiners, which have benefited greatly from the discount at which they buy U.S. light crude. Only time will tell whether additional export approvals are granted, but the risk for refining investors is not only that their feedstock costs increase, but that investments made in recent years to process lighter grade crudes fail to pay off.
Our Takeaways from the Week
