WE’VE LANDED By GEORGE HOSFIELD Director & Chief Investment Officer Ferguson Wellman Capital Management
The dog days of summer have brought a degree of market volatility ab- sent in the first half of 2024. The S&P 500 is correcting from all-time highs reached in the middle of July despite blue-chip companies re- porting another quarter of better-than-projected earnings and the first quarter of meaningful profit growth since 2022. Factors precipitating the pullback include concerns about a slowing labor market and earnings from several bellwether technology companies that failed to deliver the upside surprise of past quarters. Net of the recent decline, large-cap stock investors are enjoying a year of double-digit returns driven by growth in technology earnings. In addi- tion, the recent bond market rally has investors finding opportunities in more defensive, interest-rate-sensitive areas like utilities and consum- er staples. In technology, the rush to harvest productivity from artificial intelligence (AI) has put a premium on companies like Nvidia that are enabling the ensuing applications. Meanwhile, the U.S. economy continues to expand despite elevated short-term interest rates. Inspired by the Olympics, our 2024 Investment Outlook titled “Sticking the Landing,” stated our belief that this year would reveal whether the Federal Reserve had engineered a “soft landing,” that rare outcome when a central bank raises interest rates and quells infla- tion without causing a recession. As the accompanying chart shows, the Fed has raised rates by over five percentage points since March 2022, helping to substantially lower inflation while leaving the unemployment rate only modestly higher and near generational lows.
George Hosfield, CFA, is a director and Ferguson Wellman’s chief investment officer. Ferguson Wellman is a privately owned investment advisor with offices in Portland, Oregon and Bellevue, Washington. As of June 30, 2024, the firm manages $8.7 billion for 1,005 clients.
Fed wants to see as it seeks to complete its goal of returning inflation to 2%. Accordingly, we now believe our central bank will begin lowering rates toward a more neutral level in the second half of this year. Additive to the Fed’s efforts, AI stands to make the economy more effi- cient by enabling additional output with proportionally less labor—pro- ductivity gains that also herald the potential for improving company profit margins and positive earnings surprises. Microsoft has begun in- corporating AI applications into its ubiquitous Office software suite, Qual- comm is now supplying semiconductors that deliver the power of AI to handsets and PCs, and healthcare companies are using it to accelerate drug discovery and development. The vast computing power necessary to run AI workloads has also de- livered a bid to electricity markets, which are beginning to demonstrate meaningful growth opportunities for regulated utilities and independent power producers. We recognize that the frenzy surrounding AI may ap- pear speculative, and not all companies investing in AI will deliver the earnings necessary to justify their current stock prices. Nevertheless, we believe AI technology has staying power, much like the PC and internet eras preceding it. Our recommendation to overweight large-cap U.S. equities has proven rewarding so far this year. Despite higher equity valuations and recent market turbulence, we believe this remains the correct call amid expec- tations for renewed earnings growth. We believe the worst is behind the bond market, and with its attractive yields, we have reduced our weight- ing to alternative investments like real estate and increased our weight- ing to fixed income. DISCLOSURES Opinions and statements of financial market trends based on current market conditions constitute our judg- ment and are subject to change without notice. Due to the rapidly changing nature of the financial markets, all information, views, opinions and estimates may quickly become outdated and are subject to change or correction. We believe the information provided is from reliable sources but should not be assumed accu- rate or complete. Reference to or by non-employee individuals and institutions herein does not serve as an endorsement of, or testimonial for, the investment strategies and services of Ferguson Wellman and West Bearing Investments. The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or to buy securities, investment products or investment advisory services. Ferguson Wellman and West Bearing are not qualified or licensed to, and do not provide tax, legal, insur- ance, or medical advice or services. We may provide referrals for third-party professionals including tax and legal advisors. You are solely responsible for the ultimate selection of such professionals. Ferguson Wellman and West Bearing are not responsible for (i) the appropriateness, quality or accuracy of advice or services rendered by any third-party professional engaged by you, (ii) the implementation, monitoring or updating of any recommendations made by any third-party professional engaged by you, or (iii) the implementation, monitoring or updating of any recommendations made by Ferguson Wellman which are considered or acted upon by any third-party professional engaged by you. You may find links to websites that are not managed by Ferguson Wellman or West Bearing. We do not take any responsibility for reviewing, updating or ensuring the accuracy of information on other websites. Fergu- son Wellman and West Bearing disclaim responsibility for the legality of materials and copyright compliance on other websites. This information is provided for informational purposes only. All commenting functions have been disabled as SEC regulations prohibit testimonials. As a result, comments on Ferguson Wellman publications (printed or electronic) are not permitted to be posted publicly. If you have questions or comments regarding the content from our website (including the Ferguson Wellman blog), please contact us at: info@fergwell.com
Source: Bloomberg Two and a half years after the Fed began its aggressive rate tightening campaign, the U.S. economy is passing through the time lag typically associated with negative economic outcomes. Despite slowing levels of job creation, U.S. GDP continues to expand, reflecting gainfully em- ployed American consumers who continue to spend and higher domes- tic investment. Accordingly, we believe the Fed has indeed stuck the landing, a feat last achieved in the Greenspan-led Fed of the mid–1990s. Acknowledging that inflation has proven stickier at the 3% level, the Fed has yet to reduce interest rates. Given an optimistic economic outlook entering the year, our non-consensus view was that the Fed would deliv- er few if any rate cuts in 2024. Eight months later, slightly higher levels of unemployment and slowing consumption growth have markets anticipat- ing several rate cuts before year-end, beginning in September. Indeed, a cooling job market is a labor market with less pricing power, which the
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