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.”
In one of the most anticipated weeks of monetary policymaking in recent memory, the Bank of England became the first major central bank to raise interest rates off the near-zero bound and the U.S. Federal Reserve laid the groundwork for such a move by proclaiming the impending conclusion of its quantitative easing (QE) stimulus program by next March.
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.
All eyes were fixated across several facets of policy this week: the U.S. military withdrawal and civilian evacuation in Afghanistan, the much-anticipated bargaining in Congress to pass the budget resolution and lastly Fed Chair Powell’s comments regarding the plans for removing the extraordinary accommodation put in place during the pandemic-induced recession.
Assumed to be postulated by Aristotle, “horror vacui” roughly translates to “nature abhors a vacuum.” The financial market equivalent would be “horror incertae,” or “markets abhor uncertainty.”
“The Bad News Won’t Stop, but Markets Keep Rising,” read the headline of the business section of the NY Times this week. I have received many questions from many clients and friends over the past couple of weeks regarding this notion.
We are pleased to present our Investment Strategy Video for the second quarter of 2020 titled, “Gimme Shelter.”
Federal Reserve Chair Jerome Powell announced this week that the central bank will once again be purchasing U.S. Treasury securities, reversing the recent trend of allowing its balance sheet to shrink. Immediately, many market participants experienced déjà vu, recalling the first time this monetary policy tool was implemented in 2008.
The passing of Hurricane Harvey and the imminent landfall of Irma failed to rock the boat for equities, which remain near all-time highs despite puts and takes amid industries being impacted by severe weather events. More remarkable than trade posturing in home improvement and insurance stocks is the observation that benchmark interest rates and the dollar continue to slide.
The stock market was slightly positive on the week up around .20 percent taking a break from the strong move upwards following the election in November. Both the S&P 500 and the Dow Jones Industrial Average are within striking distance of all-time highs. The 10-year Treasury bond sold-off this week with the yield rising from 2.47 percent to 2.55 percent as treasury prices and yields move inversely to each other.
After an unusually long spell of low volatility, stocks and bonds sold off in tandem to end a week that was previously on the quiet side following the Labor Day holiday. Coming into Friday, stocks had essentially earned out the high single-digit returns we foresaw for 2016. Low levels of economic growth globally should renew profit growth in future quarters, but neither stocks nor bonds are cheap at this point.
Investor confidence rallied the S&P 500 this week with the index climbing to all-time highs mid-week and returning more than one percent by the week’s end. Bonds were lower in price and higher in yield with the 10-year Treasury moving from a 1.43 percent yield on Monday to a 1.59 percent yield at
With change at the economic margin beginning to improve (e.g. recent U.S. payrolls, durable goods orders and manufacturing PMI), investors are beginning to see cyclical elements of the equity market improve. Oil prices are now up year-to-date, energy and industrials are all of a sudden outperforming the broader market, and financials, which so far this year have pulled up the rear, are starting to get a bid.
Please click here to find our Market Letter First Quarter 2015. We hope you find our economic insights interesting and informative.
by Ralph Cole, CFA
Executive Vice President of Research
In a much anticipated move, the ECB joined the rest of the developed world by announcing a comprehensive quantitative easing package this week. Investors were worried that maybe the plan would not be big enough or long enough to satisfy global capital markets. Bond yields and equity indices gyrated as the official announcement was released but eventually stocks moved higher and European bond yields moved lower. Yields on 10-year bonds around the world remain shockingly low, and it appears they may remain low for some time. Here is a list of global 10-year yields:
| U.S. | 1.88% |
| UK | 1.51% |
| Canada | 1.42% |
| France | 0.61% |
| Germany | 0.38% |
| Italy | 1.54% |
| Spain | 1.41% |
| Switzerland | -0.20% |
The goal of quantitative easing is to lower longer-term borrowing costs in an attempt to incentivize businesses and individuals to borrow money and invest. Some of the excess liquidity in the system can also flow to equity markets, and drive prices higher. This acts to boost confidence and hopefully trigger investment and spending. This recipe worked well in the U.S. during QE3, and Europe is hoping to follow the same path.
Golden Years
Golden months may be a better term. Somewhat under the radar, gold has turned up in a strong performance in the last three months. It appears that a race to the bottom in currencies is finally starting to resonate with global investors. Gold is up 15 percent from recent lows to nearly $1,300 per ounce. Gold is viewed as a hard currency that can't be debased like fiat currencies. When we held gold in client portfolios several years ago it was for this very reason.
Takeaways for the week
by Jason Norris, CFA
Executive Vice President of Research
Headline sales numbers from Black Friday looked disappointing with revenues falling 11 percent in 2014, which follows a negative year in 2013 as well. However, when we dig into the data, we see that sales have spread out over the entire week. Many stores have been starting their promotions earlier in the Thanksgiving week, meaning Black Friday is not the seminal event it once was. Coupled with an increasing amount of shoppers going online, the post-holiday shopathon is not the signal to the markets it once was.
Data from the entire weekend looked fine with sales rising approximately four percent, with a 15 percent clip coming from online sales. In forecasting the entire holiday season, industry analysts still expect low to mid-single digit growth. In light of gasoline prices down 35 percent from last year, we are comfortable with that growth forecast. In fact, this led us to increase our allocation to the consumer discretionary sector recently.
Quantitative Speaking
With the Fed wrapping up its quantitative easing last month, the European Central Bank has upped their rhetoric. This week, ECB president Mario Drahgi was more adamant that the ECB will be in the markets buying bonds. This put a small bid on the Euro; however, we are still waiting for the ECB to actually make meaningful purchases. Since 2012 when Drahgi stated the bank would do "whatever it takes" to prop up the Euro economy, there has been a lot of speaking, with little actual easing.
The economic data points coming out of Europe have been neutral at best. While the old adage of "don't fight the Fed" may be appropriate for the ECB and European equities, we would rather focus on large cap U.S. stocks due to a strong economy, falling commodity prices and low interest rates. One potential headwind for multinationals is going to be the strength of the U.S. dollar. The dollar has rallied 10 percent the past few months and this will start effecting overseas results this quarter. Due to this, recent portfolio additions have focused on the domestic economy, rather than the global economy.
Our Takeaways for the Week:
by Jason Norris, CFA
Executive Vice President of Research
Exit Stage Left Wednesday’s release of The Federal Reserve’s meeting minutes raised more of a hawkish tone. On the surface, the minutes may be viewed as negative; however, due to an improving labor market and an indication of a better growth environment we would welcome an increase in the Federal funds rate next year. As expected, the Fed did formally end its quantitative easing (QE) program with its final active purchase of mortgage-backed securities and government bonds. This is a positive sign for the equity markets and the U.S. economy at large. Coincidentally, U.S. Gross Domestic Product (GDP) data was released this week showing a solid 3.5 percent growth rate, which was better than most expectations. Our forecast has been for the U.S. economy to pick up steam throughout the year, and this data has confirmed that call. This information has supported stocks, yet it has a minimal effect on the bond market with the 10-year treasury yielding 2.3 percent.
Signals Third quarter earnings reports have reinforced our belief of continued economic growth. Seventy percent of the companies in the S&P 500 index have reported earnings to date and the results have shown year-over-year earnings-per-share growth of nine percent and revenue growth of four percent. Healthcare and technology companies have led the way with higher reporting of 11 percent and nine percent top-line growth, respectively. These are two sectors we favor in our equity strategies. These positive earnings reports have enabled stocks to reclaim their footing in this bull market. From the recent all-time high in September, the S&P 500 fell 10 percent over the subsequent four weeks. However, in the last two weeks we have seen a nice snap back with equities sitting just below the record of 2020 set on September 19, 2014. At current valuations (the market is trading 15.5x forward earnings) and with the strong earnings we are witnessing, we continue to favor stocks over bonds.
Different Stages The quarter’s earnings season has not been friendly to the higher growth, momentum stocks. Last week Amazon “cautioned” investors that they are going to reinvest more money into “growth”. Historically, this wouldn’t have been viewed very negatively but it seems investors may be getting impatient for their return on investment as the stock declined by almost 10 percent. Over the last 10 years, Amazon’s profit margins have fallen from six percent to under one percent, while the stock has been a stellar performer. It looks like investors are shortening the leash. Twitter suffered a similar fate this week. Twitter’s growth metrics (advertising, users, etc.) were disappointing, resulting in a 20 percent decline this week. The overall growth of the company is still strong, but investors may be getting anxious when they are paying over 100x future earnings. While many of us are big users of both of these companies’ services that does not make the underlying stock a great investment. Investors need to make sure that the price they are going to pay for future cash flows allows them to earn a competitive return. We just don’t see that in these two names at this time.
Our Takeaways for the Week:
by Shawn Narancich, CFA
Executive Vice President of Research
A good indicator of financial markets adjusting to a slower rate of news flow is the frequency with which the same stories are replayed and debated in the financial press and on television. With retailers now wrapping up second quarter earnings season, Wall Street strategists and commentators have resorted to debating ad nauseum what will happen to short-term interest rates once the Fed ends its program of quantitative easing. Minutes of the latest Fed meeting this week revealed that the Fed will remain data dependent, letting incoming economic reports and anecdotal Beige Book reports tell the story of progress for the economy in general and for the labor markets and inflation in particular.
On the latter topic, policy makers received reassurance this week that inflation is not presently a problem, as headline CPI numbers came in spot-on with the Fed’s 2.0 percent target. Tame inflation indicates that labor markets, absent select areas in energy and manufacturing, still contain the sufficient slack necessary to boost output without spurring a wage spiral. As the old saw says, time will tell. In the meantime, investors seem to be tuning out the chatter as they bid equities to new record highs.
Like Sands Through the Hour Glass. . .
Believe it or not, we’re now halfway through the third quarter and, once again, the error of estimates appears to be on the downside with regard to economic growth forecasts. While this week’s housing statistics were encouraging, with July new housing starts up 16 percent sequentially, a key fly in the ointment was last week’s retail sales report, which came in flat with June numbers and continued a disappointing trend of sequentially slowing retail sales since May. At a time when international headwinds are increasing thanks to Europe teetering just above stall speed and China continuing to undergo a growth-slowing transition away from excessive investment, our forecast for 3 percent GDP growth domestically is starting to feel just a bit optimistic.
Ka-Ching!
As tempting as it might have been to write-off last week’s poor retail sales report as a statistical anomaly when juxtaposed against increasingly positive employment numbers, considerable anecdotal evidence from retailers reporting fiscal second quarter numbers affirms the data. Two key bellwethers of American retailing – Wal-Mart and Target – both reported earnings declines on moribund U.S. sales, and investors have consistently overestimated the companies’ earnings power over the past six months. In addition, Macy’s surprised investors by uncharacteristically missing numbers and lowering sales guidance. Alas, this week brought some better news on the retailing front, with Home Depot reporting strong sales and earnings coupled with a boost to their full year earnings forecast. In contrast to the drubbing that Macy’s took, stock of the home improvement leader broke out to new all-time highs. Similarly, off-price merchandisers T.J. Maxx and Ross Stores both outperformed Wall Street expectations and were accordingly rewarded by investors. With retail earnings reports nearly wrapped up for the quarter, we observe that results are hit and miss, and that investors are best served to take a rifle shot approach to owning specific names advantaged by key trends in retail.
Our Takeaways from the Week
by Brad Houle, CFA
Executive Vice President
Investors hang on every single syllable of every utterance by the Fed Chairperson, and to a lesser extent, speeches given by the members of the Federal Reserve Board. While one cannot minimize the importance of what the Federal Reserve does, it is probably the most overanalyzed organization in the world today - only overshadowed by the attention placed on the Kim Kardashian and Kanye West marriage by the tabloids. Gone are the days when the Greenspan "briefcase indicator" on CNBC attempted to predict the outcome of Fed meetings based upon how thick former Chairman Greenspan’s briefcase appeared to be when he headed into the meetings. While the “briefcase indicator” was mostly in jest, it points to the obsession of investors and the media on the outcome of these meetings.
There are some reasons why all this attention on the Fed is warranted – just not at the level it experiences today. The Fed does have control of the Federal funds rate and has been impactful in lowering longer-term interest rates via quantitative easing. However, the Fed's real influence comes in the form of managing the market expectations by what is said. In fact, setting expectations by what is said is perhaps more important than what the Fed actually does in many cases. While the Fed needs to have the authority to back up what it is signaling to the market, the way in which they suggest the direction of how they are moving policy is the most important factor.
One recent example of this “power of suggestion” occurred last summer. At the time, then-Fed Chairman Ben Bernanke made a statement in a post-Fed meeting press conference that tapering of quantitative easing would begin in the near future. This announcement caused interest rates to move sharply higher in anticipation of the tapering which was probably beyond the intention of Chairman Bernanke. In fact, even the notion that there must be post-meeting press conferences is a relatively new phenomenon. Originally, the stated reason for the press conferences was to increase transparency. The less publicly-stated reason was to have a platform available to set expectations.
The Fed statement on Wednesday, June 16, was nothing new. The Fed commented that while unemployment has come down, it is still elevated. However, household and business spending is on the rebound. The Fed also repeated that the tapering of quantitative easing will continue and interest rates should stay low for a long time. This theme continued during the post-meeting press conference where Chairperson Yellen carefully answered reporter questions while taking pains not to add new expectations. No new news was the market expectation going into the meeting, so there was essentially no reaction by the stock or bond market from the Fed meeting minutes and subsequent press conference. Now the markets will turn their hyper vigilance toward future meetings and Fed speeches.
Our Takeaways for the Week
by Shawn Narancich, CFA
Executive Vice President of Research
Early Christmas Gifts
In what turned out to be a surprisingly action-packed week before Christmas, the markets finally shook off the shackles of worry concerning what would happen when the Fed began tapering its program of quantitative easing (QE). Bernanke proved that he’s no lame duck chairman and investors learned that stocks can still go up despite a slightly less accommodative Fed. In reducing monthly purchases of Treasury and mortgage-backed bonds by $10 billion per month, our central bank is acknowledging a slowly improving labor market and an expanding economy that is being boosted by several key drivers: a renaissance in U.S. energy production and manufacturing and, increasingly, the wealth effect of rising house and stock prices that is giving a nice lift to consumer spending. Looking ahead, we expect incoming Fed Chair Janet Yellen to continue what Bernanke started. Our view is that further reductions to QE will be commensurate with continued improvement in labor markets, subject as always to the Fed’s other key mandate—keeping inflation low.
Always a Bear Market Somewhere
In stark contrast to stock prices that are once again setting new highs, gold prices have fallen substantially. After attracting increasing amounts of attention as a hedge against monetary dislocation and unchecked growth in the money supply, gold is increasingly being abandoned by investors now more attracted to robust stock market returns and, for those with a lower risk tolerance, bonds that are now offering real rates of return. From its high in August 2011, gold is now down 36 percent. It may be pretty to look at, but with the Fed now in the early stages of unwinding QE, it has lost its shine.
Blue Burner
Sticking to the commodity theme, one key source of energy whose price is going the opposite direction is natural gas. Much maligned by investors because of its seeming ubiquity, the front-month contract is up 31 percent since August. Cold weather has boosted the demand for natural gas, one of the nation’s most common sources of home heating. Weather vicissitudes aside, we like the longer-term demand case for the cleaner burning fuel to take market share of electricity generation from its dirtier cousin coal. Will gas currently priced for $4.40 per-million-BTUs go to $5.50? In the short-term, probably not, because the prolific shale fields in Pennsylvania, Wyoming and Texas will induce considerably more production if prices continue to rise.
Nevertheless, key suppliers can make a lot of money with natural gas prices in the $4.00 to $5.00 range. More importantly, our economy should increasingly benefit from using low cost natural gas and natural gas liquids to generate cheaper power and manufacture plastics. In the latter case, low cost ethane, propane and butane feedstocks are displacing oil-based naptha, incenting major chemical companies like Dow and the petrochemical arm of Shell to locate plastic manufacturing facilities stateside. The beneficial result for America is new jobs, additional exports, and healthier levels of GDP growth.
In this festive season, we wish all our friends and clients a Merry Christmas and a very happy and healthy new year.
Our Takeaways from the Week
