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.”
After being caught flat-footed by inflation last year, the Federal Reserve maintains a steely resolve to ensure that the beginnings of slowing inflation witnessed last fall continue in 2023. Following the stock market’s worst year since 2008 and the worst year ever for bonds, investors are hoping for better days in 2023.
One topic we are consistently asked about is the risk of another housing crisis. Housing is clearly softening in the wake of the increases in interest rates, causing mortgage rates to climb sharply this year and making home ownership unaffordable for many Americans.
It has been a very challenging year for the capital markets. Not only have stocks entered a bear market, but bonds are on pace to have their worst return in more than a century. Typically, bonds have a negative correlation with stocks, and, as such, tend to have strong returns when stocks decline. However, this is the first time in 52 years that stocks and bonds fell in the same year.
This week, all eyes were on the inflation report and the subsequent Federal Reserve announcement a day later. Since these were the last announcements of their kind for 2022, market participants were paying close attention, with the hope of gaining some insight into what the rest of the year might look like for markets.
As investors handicap the most anticipated recession in history, fourth quarter equity returns are playing out as expected. Historically, the fourth quarter, specifically the month of December, delivers the best results for equity investors. While this quarter has continued the positive trend, December is not acting as planned.
Jerome Powell has the most difficult job in America. The Fed Chairman and the Federal Reserve Open Market Committee are tasked with lowering inflation and they primarily have only one blunt tool to accomplish this goal, adjusting interest rates.
For much of the prior decade, both savers and bond investors alike tolerated low yields and a modest total return. The Federal Reserve couldn’t achieve liftoff from their near-zero interest rate policy for over six years following the Great Financial Crisis. Their efforts to stimulate the U.S. economy with low rates and quantitative easing achieved about the same level of success as an attempt to ignite a pile of damp newspaper. Bonds’ greatest virtue during that decade may have been to provide a reliably unattractive foil for a strong stock market and expanding price-to-earnings multiples.
After the most aggressive tightening cycle in Federal Reserve history, we are beginning to see signs of a slowing economy and more mixed messaging from corporate America. While counterintuitive, stocks have rallied over 10% from their October lows as inflation looks to have peaked and third quarter earnings have come in better than feared.
We have long observed that what matters most for investors is not the outcome of elections but rather what happens to the economy and earnings. That said, historical performance indicates that mid-term elections are clearing events - regardless of the partisan outcome. In each such event since World War II, stock prices have risen in the 12 months that followed. Although a handful of election results are still yet to be decided, the U.S. Congress appears to be headed for a split…
In recent months, investors have understandably been obsessing over the Fed and inflation. This week was action-packed for the markets, with the Fed meeting and October employment report taking place. Writing about the Fed has come to feel like Groundhog Day…
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.
