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.”
Spooky season was in full force this week with contradictory messages from the economy versus the stock market. The week was chock-full of news with over 40% of the S&P 500 market capitalization reporting third quarter earnings, the release of third quarter economic growth, and finally, fresh data on the Fed’s preferred measure of inflation, the Personal Consumption Expenditure Index.
One of the most surprising economic impacts of the COVID-19 pandemic has been the changes in the employment market. As highlighted in the chart below, the number of job openings in this country is twice as large as the number of unemployed people. This highly unusual situation defies a simple explanation. [DH1] What happened? Where have the workers gone?
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.
U.S. factory production exceeded growth expectations and the University of Michigan consumer confidence survey came in at a 14-year high, helping U.S. stocks to break out of their four-day slump (triggered by tariffs and White House turmoil). However, it won’t be enough to turn in positive numbers for the week.
This week we experienced something we haven’t in some time: a down week. Stocks struggled to a close, down 3.8 percent with no help from blue-chip names. Alphabet (GOOGL) and Apple reports weren’t favored by Wall Street, driving the stocks down 5.2 and 4.3 percent, respectively.
With the opening ceremonies of the Rio Olympics set to begin tonight and on the heels of a strong number in the month of July in which the U.S. added 255K jobs, stocks ended the week with a bang. This was meaningfully ahead of
Speaking before a packed Portland Business Alliance audience, economist John Mitchell predicted that the region’s economy will continue to expand at an annual rate of about two percent through 2016.
by Ralph Cole, CFA
Executive Vice President of Research
Stuck With You
We all know too much of a good thing is no longer a good thing: that has been the case with interest rates in recent years. Coming out of the financial crisis, banks needed lower interest rates so they could repair their battered balance sheets. Short-term rates came down even faster than long-term rates and allowed banks to pay virtually nothing on deposits and make loans at a substantial profit. As long-term rates have come down, banks have had to lower what they charge for loans, thus reducing their profit margins (otherwise known as net interest margins). For the last couple of years, banks have been hoping for higher rates. Thus far this quarter they have received their wish and we can see that regional bank stock prices have responded well.
Source: FactSet
The correlation between U.S. 10-year Treasury yields and the regional bank index has been remarkable. The theory is that as long-term rates rise banks will be able to charge more for the loans than they make. They will also get higher returns on bond investments that they offer. These improved profit margins will help bank earnings. Much like the relationship between oil and gasoline prices at the pump, banks will be slow to raise interest on deposits and much quicker to increase what they charge on loans. We expect rates to continue to move higher throughout the rest of the year.
Every Little Thing Is Going to be Alright
In a year when the Fed is expected to raise interest rates every piece of economic data is parsed and picked apart. This week it was retail sales and consumer comfort. Retail sales were strong, whereas consumer comfort came in weaker than expected … So let’s just step back for a moment.
Employment gains have resumed their 200,000+ trajectory from 2014. Wage growth is finally starting to flow through the economy. Consumers and corporations continue to benefit from generationally low interest rates. We believe the consumer and the economy are on solid footing and that bodes well for whenever the Fed starts raising rates - be it June, September or December. We caution all not to worry too much about the daily economic numbers or the daily movements in the stock market.
Takeaways for the week:
