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.”
The holidays are upon us, and at Ferguson Wellman, that means giving thanks, being grateful, staying humble and wishing for the best . And while we take the time to enjoy the festivities, we also keep one eye on the markets to see what lies ahead as the year closes. From now to the end of the year, market participants wait to see what rewards the “Santa Claus Rally” brings.
This week, volatility returned to capital markets due to the recent emergence of the Omicron variant. Initial reports indicate Omicron shows increased transmissibility and mild symptoms, a “mixed bag” of changes over Delta. And while it will be several weeks before we see a more accurate picture of its impact on human health, capital markets immediately responded with increased stock market volatility and lower interest rates.
by Ralph Cole, CFA
Executive Vice President of Research
Although this time of year is often described as the summer doldrums, that certainly was not the case this week. Earnings, the Fed and economic data dominated the tape … and made for interesting market activity.
All Along the Watchtower
Fed-watching during a time of taper is an essential part of managing money these days. The Federal Open Market Committee (FOMC) announced on Wednesday that they would continue to taper their purchases of Treasuries and mortgage-backed securities by an additional $5 billion each this month. The Fed continues on pace to stop all security purchases by October. While they made mention that there is still slack in the labor market, the Fed must be comforted by the consistency of job growth in 2014. The U.S. has added an average of 230,000 jobs per month this year versus 194,000 per month in 2013. Commentary after their two-day meeting continues to signal that they are on pace to begin raising rates in the middle of 2015.
Too Hot?
The Bureau of Economic Analysis reported that U.S. GDP grew 4 percent during the second quarter. This robust growth and some of the comments by the Fed may have spooked investors this week into thinking that the Fed will raise rates sooner than expected. We believe this was more of an excuse for a sell off rather than a good reason for selling stocks. There will be volatility in the stock market as we move into next year and the Fed communicates their outlook. In the end, we believe that they will be raising rates for the right reasons … the economy is getting better and extraordinary stimulus is no longer needed.
Upside Down
Earnings season is always one of the more volatile times of the quarter. While earnings have come in very strong (7.7 percent growth up to this point), seemingly minor misses are punished unmercilessly. The healthcare sector has provided the biggest positive surprise for the quarter. Thus far, healthcare companies have reported 14.8 percent growth. On the other end of the spectrum, consumer discretionary companies have only reported 2.9 percent earnings growth.
Our Takeaways for the Week
by Ralph Cole, CFA
Executive Vice President of Research
Melt with You
It feels like the market is melting up these days as stocks continued their year-long rise during the shortened holiday week. Investors continue to be heartened by positive economic data signaling stronger growth as we enter 2014. Durable goods orders were up 3.5 percent in November with automobiles, airplanes and refrigerators helping drive end demand. Also, new home sales remain robust with record-setting sale prices. Both of these data points hit on some important topics for our 2014 Investment Outlook. Specifically, we think demand for capital equipment will finally accelerate in 2014 due to underinvestment and substantial cash balances on corporate and consumer balance sheets. Furthermore, consumers are increasing their spending as a result of the “wealth effect” that has been fueled by increased home and stock prices.
Crosstown Traffic
Our investment team has been writing for some time about the shift to online shopping and this trend came to a head this week for Amazon and UPS. For those of us who like to start shopping closer to Christmas, Amazon Prime© seems like the perfect solution. For an annual fee of $79.00, Amazon provides two-day free shipping on most merchandise. We don’t think anyone is surprised to learn that we live in an era of procrastinating techno-geeks who wait until the last minute to ship gifts. This time, the sheer volume of orders overwhelmed both Amazon and UPS. Though UPS has not stated how many packages were affected, the number seems to be in the hundreds of thousands. While both Amazon and UPS are doing what they can to satisfy customers, the real story is the volume shift to cyberspace. Amazon signed up over 1 million additional Prime© customers in the third week of Christmas alone. This is a nice development for Amazon because these shoppers tend to spend twice as much in a given year as those who don’t have Amazon Prime©.
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
