Staying the Course

George Hosfield, CFA, is Ferguson Wellman's chief investment officer and chairs the firm's Investment Policy Committee. 

On the heels of Friday's four-point gain, last week's slim 0.10 percent return on the S&P 500 enabled the index to narrowly miss posting a negative return for a seventh consecutive week. Since the April 29th high, this unsettling correction has seen the S&P 500 relinquish 6.25 percent of its value. Though painful, such corrections are quite common in all bull markets (see chart below) as we have now experienced eight corrections of at least 4 percent in a market that is now up 95 percent since its cyclical low in March of 2009.




Underlying this most recent sell-off has been a spate of weaker than expected economic news and one-off factors, notably: slower U.S. economic growth, persistently high unemployment, a double dip in U.S. housing prices, resurgence of the Greek/European debt crisis, the Japanese earthquake and tsunami, fears of a hard landing in China, and a lack of material progress on the ever growing U.S. Government debt problem. As unpleasant as the aforementioned factors are, we do not believe that they will either derail the global expansion or prevent the domestic equity market from rallying in the second half of this year. 

A list of key factors that we have outlined in recent months continues to underpin our expectation that stocks will outperform bonds this year: 


• Booming corporate profits, aided by a weak dollar, record exports and faster growth in emerging markets 

• Low interest rates couched against a Fed that we expect will be easier for longer 

• Compelling equity valuations 

• Moderating energy prices, and

Diminished supply chain disruptions emanating from Japan



Our somewhat bullish outlook does not mean that we are unconcerned about the future costs of our current fiscal and monetary policies; rather, it is simply a reflection of the time necessary for these "costs" to materialize. We think Jason Trennert of Strategas Research Partners sums it up best by stating that we remain "bullish until the bill comes due." We are monitoring all of the macroeconomic variables quite closely and will not hesitate to change our stance should the data warrant, but until then, we are staying the course. 


We will cover this topic in more depth in our second quarter Market Letter in July. 


Best regards, 


George W. Hosfield,
CFA 
Chief Investment Officer 


The information provided herein is for educational purposes only and should not be construed as investment advice or as an offer or solicitation. Not all securities are suitable investments for all investors; therefore, Ferguson Wellman Capital Management will not necessarily implement any particular strategies discussed herein for all clients. We recommend that you discuss questions regarding your individual portfolio and investment strategies with your portfolio manager.