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.”
Economic statistics are inherently backward looking while interest rate actions by the Federal Reserve Bank (the Fed) generally have a six to 12-month lag effect. The Fed is raising interest rates to slow the economy, which in turn should bring down inflation. This has typically been the relationship and the order of events, and we believe that will be the case this time around.
U.S. stocks ended higher this week as investors digested news of solid corporate earnings against a more hawkish-than-expected Fed and better-than-expected labor data. Throughout the year, rising rates and macroeconomic headwinds overwhelmingly pressured asset prices and valuations, even for companies that have demonstrated earnings resilience.
The U.S. government has endorsed a “strong dollar” policy for much of the last thirty years. Besides sounding much better than the alternative, this messaging has reminded markets that the U.S. dollar remains the world’s reserve currency, despite frequent projections of its demise or threats to its dominance.
Last Friday, the market closed out the day, week, month and quarter all with negative returns. Fears of higher inflation, more tightening by the Federal Reserve and potentially lower corporate earnings weighed on investors’ minds. The S&P 500 broke below the June low last week, extending the bear market that began in January. At 269 days as of quarter end, this is the most protracted correction since the March 2009 low. Surprisingly, the market decided to pull a 180 early this week, returning almost 6% on Monday and Tuesday. So, what was the deal?
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.
Investors were expecting Wednesday's Federal Reserve announcement of a .75% increase in short-term interest rates. However, they were unprepared for Fed Chairman Powell's hawkish press conference afterward, resulting in a decline in both the stock and bond markets.
The hotter-than-expected August Consumer Price Index (CPI) data released this week was a shock to financial markets, as other recent measures had suggested a moderation of inflationary pressures. While there is clear evidence that energy and gasoline costs have declined since earlier this summer, broad-based increases observed in major categories like food (14% of CPI) and shelter (32% of CPI) reinforce that significant and upward price momentum remains intact.
With second quarter earnings season complete, a relatively quiet week of company specific news was supplanted by central bank action in the European Union and Canada, with both raising their short-term interest rates by three-quarters of a percentage point. The European Central Bank (ECB) has now lifted rates off the zero bound, to 0.75%, but is behind both the U.S. Federal Reserve and the Bank of Canada in the amount of tightening already implemented.
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?
The major event in the capital markets this week took place Friday morning in Jackson Hole, Wyoming. Every year, Federal Reserve Bank leadership meets for a conference to discuss current and future policy. Ahead of today’s meeting, some investors had been optimistic that Powell would soften his stance on the pace of tightening.
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 last time I wrote the blog was April 14 and inflation data was the topic du jour. Serendipitously, the July inflation announcement was the major market event this week. So, to keep me honest, let us revisit some items from the April post.
It’s always a strange time in the market when good economic data is treated as bad news. As investors, we can’t help but feel good about the jobs report today, even if it means the Fed will keep aggressively raising short-term interest rates in the coming months.
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.
U.S. markets have begun the third quarter with positive returns, erasing some of the losses that occurred in the first half of the year. Specifically, the market has recouped about one-fourth of the year-to-date loss in stock prices. It remains to be seen how long this rally will last, but there have been a couple of positive developments, despite a palpable slowing in economic growth.
Years ago, a market technician compared the markets to a car windshield. In this analogy, an investor is in the driver’s seat looking out for future obstacles or opportunities in the “road” ahead, such as discounting future earnings, economic data or signs of a recession. However, as any good driver knows, the rearview mirror is also in view, giving us a glimpse of what recently passed.
Today the employment data for the month of June was released and was stronger than analysts’ expectations. Nonfarm payrolls increased 372,000 in the month of June, well above the estimate of 265,000. In addition, average hourly earnings growth moderated on a month-to-month basis, which should help the inflationary pressures in the economy.
This year, investors have wrestled with several paradoxical headlines: rising inflation, a tighter Fed, possible recession, a strong labor market and a healthy consumer. Unfortunately, the paranoia caused by these reports continues as markets wrapped up the first six months of 2022 with the S&P 500 down 20%, resulting in the worst start of the year since 1970.
While it was a relatively quiet week of macroeconomic news, investors are still busy making sense of the inflation and interest rate paradox: that is, inflation stoking recession fears, but also rising rates to combat inflation also stoking recession fears.
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.
