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 almost two years now, investors have been waiting for one of the most anticipated recessions—and understandably so. After 11 rate hikes in the past 18 months, the most aggressive rate hike period in over six decades, the U.S. has defied the odds of a hard economic landing so far. When the Fed has raised rates this aggressively in the past, it’s typically been followed by a recession or “something breaking.”
Krystal Daibes Higgins, CFA, was on KOIN AM Extra's Wallet Wednesday to discuss the unemployment rate, high cost of living and the possibility of another rate hike.
As the Western states struggle with wildfires and the Southeastern states get pounded by hurricanes, the stock market quietly made new highs. The S&P rallied this week 1.4 percent, closing in on the psychologically important 2,500. Conversely, bonds felt the swing into equities with rates on the 10-year U.S. Treasury rising 13 basis points to 2.20 percent.
As traders were nursing their wounds from early bracket pains, the market saw that U.S. stocks were muted this week, up 0.2 percent. Investors’ reactions to finally getting the anticipated Fed rate hike were tempered by oil production figures from OPEC, causing concern early in the week.
This week, investors recognized the 8-year anniversary of a bull market that is now second only in length to the tech-fueled run of the 1990s. In March, blue chip stocks consolidated a small portion of recent gains, but nevertheless, the S&P 500 has now returned over 250 percent since the bear market lows in March of 2009.
Stocks finished the week off by only 0.80 percent, recovering some of the losses suffered Thursday after the Fed voted to keep interest rates unchanged. Similarly, the Bank of Japan and Bank of England are also maintaining their monetary
by Deidra Krys-Rusoff Senior Vice President
The S&P 500, Dow Jones Industrial Average and NASDAQ ended the week nearly flat from last Friday, despite a volatile trading day today. The financial sector retreated 1.4 percent, as investors’ hopes of a Federal Reserve interest rate hike dwindled on the release of today’s nonfarm payrolls report. Utilities and phone stocks rose this week, benefitting from the prospects of lower rates. The Bloomberg Commodity Index rose to a seven-month high and is nearing a level marking of a 20 percent advance from the gauge’s January bottom, close to meeting the common definition of a bull market. The dollar dropped and ended the day trading at $1.14 per euro. International markets were mixed, with European stocks slightly down and the MSCI Emerging Markets Index advancing 1.5 percent to a one-month high. The benchmark 10-year Treasury rallied, with rates falling 15 basis points over the week to yield of 1.70 percent.
What’s in a number? A lot, when the number is the nonfarm payrolls reporting significantly weaker than even the most pessimistic economist expected. May’s payroll numbers rose by a mere 38,000 versus the consensus estimate of 160,000. The report further muddied the economic waters by revising the April increase downwards to 123,000 from 160,000 and March’s numbers to 186,000 from the robustly reported 208,000 increase. The Verizon strike temporarily played into these numbers, subtracting roughly 40,000 from the overall job growth that should reverse after the strike ends. This boost, up to what would have been a gain of 78,000, is still shockingly low. The report shows that the labor market deceleration was widespread. Private-sector hiring was at 25,000 versus 130,000 in April and government hiring added a scant 13,000 jobs to the May numbers. Job losses were seen in construction, manufacturing and wholesale trade. Hiring in the paid professional and business sectors also showed slowing.
Markets initially took the news hard: The S&P 500 Index initially dropped as much as 1 percent from a recent seven month high, the dollar sold off against the euro, and bond prices increased dramatically – dropping the yield of the benchmark 10-year Treasury to 1.70 percent from 1.80. However, U.S. equities pared the early losses to around 0.2 percent as commodity producers extended gains.
The unemployment rate fell to 4.7 percent, but this is unfortunately attributed to declining labor force participation or labor force dropouts. This year’s earlier rebound in jobs participation may be stalling out. One good piece of information from the government report was that the broader U-6 unemployment rate (which reflects underemployment) remained steady at 9.7 percent. Another positive note is that average hourly earnings advanced last month by 0.2 percent, which resulted in earnings 2.5 percent higher than last year’s levels.
The weak jobs number almost certainly takes a Federal Reserve rate hike off of the table for June. The Fed governors have repeatedly stated that their policy decisions will be data-dependent and we didn’t have to wait long to hear how the Fed governors feel about the number. Federal Reserve Governor Lael Brainard spoke to the Council on Foreign Relations this morning and stated, “In this environment, prudent risk management implies there is a benefit to waiting for additional data to provide confidence that domestic activity has rebounded strongly and reassurance that near-term international events will not derail progress toward our goals.” Prior to the jobs report release, the market was pricing in one to two hikes for the remainder of the year. Now the market is placing odds of a hike below 50 percent for July, September and November.
One stand-alone jobs number does not make a trend and this could easily be a one-time blip on the radar. As noted earlier, unemployment numbers are often revised in months following releases and this extremely low number may be revised upwards in coming months. While predicting unemployment numbers is a fool’s game, we can confidently predict that everyone will be watching and waiting for the June unemployment numbers release on July 8.
Our Takeaways for 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
