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.”
One year ago this week, the Federal Reserve raised interest rates for the first time since the pandemic began. After two years of holding rates near zero, this first hike to combat rising inflation only raised the policy rate by a mere 0.25%.
Although investors hoped the change of seasons would bring a change to the news headlines, in recent days global central banks managed to stay front and center as the Bank of England and Bank of Japan took swift action to provide stability within their respective currency and bond markets. Domestically, Federal Reserve officials were busy defending their “unconditional” stance on tackling inflation. Not surprisingly, capital markets remained under pressure as the prospects of higher-for-longer interest rates and slower economic growth were being digested.
This year has been anything but straightforward for investors, and the most recent Fed minutes are prolonging this state of confusion. While we have seen some reduced inflation pressure in the last several weeks, the Fed minutes point out that “risks to inflation were weighted to the upside,” citing factors such as further supply chain disruptions, continued geopolitical turmoil and persistent real wage growth. For investors, the focus continues to surround the pace of Fed rate hikes for the remainder of the year.
The recent intensity of economic and earnings data matched the temperatures outside this week. In absolute terms, inflation remains too hot and while there is some evidence of moderation, the Federal Reserve doubled down on its commitment to return inflation to its 2.0% long-term target, suggesting further interest rate hikes through the end of this year.
Earlier this week, the Federal Reserve raised its benchmark interest rate to 1.75%, an increase of 0.75% from the previous rate. This increase, the largest since 1994, was considered a possibility, albeit one the market hadn’t fully discounted.
The S&P 500 was up nearly 1 percent again this week as economic data continues to confirm a growing economy. An underwhelming jobs report on Friday took yields on 10-year U.S. Treasuries to a new low on the year of 2.15 percent.
Releasing minutes from their most recent meeting indicating that a June rate hike was still very much on the table, the Federal Reserve threw a wet blanket on the equity markets this week. Pursuant to that meeting, several Fed Governors conveyed the same feeling about the strength of the
by Ralph Cole, CFA
Executive Vice President of Research
The Federal Reserve delivered some early Christmas cheer with a new policy statement on Wednesday, and by Thursday afternoon the Dow average had advanced 700 points. Please excuse us for being frustrated by the constant attention to the Fed and the parsing of every statement they utter. This tends to happen during any Fed tightening cycle. The chart below shows the average S&P 500 performance around the last five Fed tightening cycles. As you can see, about six months before the Fed starts raising rates the market goes through a correction of 5–7 percent and volatility rises.
The U.S. economy continues to hum along, and there is no lack of positive economic indicators. We believe that the Fed will be raising short-term interest rates in the middle of next year and they are doing their best to signal that move to the markets well in advance. The most recent examples last week were jobless claims, which dropped to a six-week low, consumer comfort climbing to a seven-year high, leading economic indicators rising an additional .6 percent and retail sales increasing by the most they have in eight months. In short, there is plenty of good economic news to go around, and enough momentum for the Fed to justify raising rates next year.
Wind of Change
While oil prices fell modestly this week, energy stocks began to rally. Since the peak in oil prices in June, the S&P energy sector fell 25 percent. This week oil prices are down another 2 percent, but oil stocks in the S&P were up 7 percent. We can’t say that we are surprised. Whenever you get such a dramatic drop in prices, it tends to produce bargains. Financial buyers aren’t necessarily brave enough to step into these situations, but strategic buyers are. This week Repsol, a Spanish oil company, made an offer to buy Talisman Energy for $12.9 billion. Talisman’s share price was as low as $3.96 on December 8, and now trades for just over $9.00 per share. We made the case last week that the sell-off in oil was overdone, and it appears others are coming to the same conclusion.
Our Takeaways from the Week
