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by Shawn Narancich, CFA
Executive Vice President of Research

Up, Down & All Around

Hello, Volatility. After having very little of it for nearly two years, stocks and bonds rode a roller coaster this week on trading volumes that exploded to the upside. Investors were forced to come to grips with how much could have really changed in such a short period of time. In our view, not nearly as much as the markets would imply. But whatever your persuasion on the topic, what we witnessed this week is exceptional. Blue chip stock gains for the year evaporated Wednesday on nearly 12 billion shares traded and benchmark 10-year Treasuries surged on decade high volumes, all in a remarkable flight to quality bid driven by concerns about a weaker Europe teetering on the edge of recession, plummeting oil prices, and concerns about Ebola. That markets promptly reversed themselves mid-week and stocks moved back into positive territory for the year is a testament to what we believe are still solid fundamentals for the U.S. economy. Healthy levels of job growth, slowing inflation aided by lower energy prices, and newly diminished interest rates that should help extend gains in housing activity all argue for domestic economic growth of 3 percent or better in the second half of this year.

Black Gold?

Unusual markets sometimes elicit misleading interpretations, and no shortages of would-be pundits have attempted to explain a 25 percent free-fall in oil prices since the summer solstice. The Wall Street Journal, as much as we read and respect this quality newspaper, did readers a disservice by proclaiming on Wednesday’s front page banner: Global Oil Glut Sends Prices Plunging. What we observe is that developed market inventories of the black stuff now stand below five-year average levels and, despite the International Energy Agency’s recent minor 200,000 barrel/day reduction in expected global demand for this year, the world is still using more oil than it ever has.

Yes, Chinese demand growth has slowed, the U.S. energy boom has added new production to a global oil market, and OPEC member Libya’s exports have risen by about 500,000 barrels/day recently, but all the hub-bub about swing producers Saudi Arabia, Iran, and Iraq (combined export volumes = 15.5 million barrels/day) cutting official selling prices is nothing more than these countries acceding to recently lower prices on stable sales volume. Although oil demand is unquestionably tied to economic growth, which recent developments have called into question, we still see growing demand for oil tied to what we believe will be record levels of economic output globally. The lack of any smoking gun supply surge and evidence that hedge funds have been exceptionally active in trading oil contracts leads us to conclude that the downside in oil has been more about speculation than physical supply and demand. As seasonal refinery maintenance concludes and crude demand rises into winter, we expect oil prices to climb out of their hole in the low $80’s.

And They’re Off. . .!

Third quarter earnings season has begun and results from the 50 or so companies that have reported to date have been relatively encouraging. Banks like JP Morgan and Citigroup are beginning to benefit from rising loan volumes and higher trading volumes in fixed income, currencies, and commodities, while benchmark industrials like GE and Honeywell are demonstrating the ability to navigate a stronger dollar environment without reporting excessive hits to the bottom line. In part because of the industrials’ foreign currency exposure, investor expectations for earnings in this group were muted into earnings season, so decent results are being met with enthusiasm. Next week the floodgates will open wide, as hundreds of additional companies across industries come to the earnings confessional.

Our Takeaways from the Week

  • Modest losses in the stock market belie what was one of the most volatile and actively traded weeks in recent times
  • Third quarter earnings season is underway, and results so far are encouraging




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Jason Norris of Ferguson Wellman

by Jason Norris, CFA
Executive Vice President of Research

The first couple weeks of trading in October have been volatile, primarily on the downside. While the U.S. economy continues to print positive data points, most other regions around the globe seem to be experiencing some headwinds. We continue to see deteriorating economic data coming out of the Eurozone. Germany had been stronger; however, recent data is pointing to the country possibly entering into recession. Industrial production and manufacturing orders came in weak, and this concern has pushed the yield on the 10-year German Bund to 0.84 percent.

China is a wildcard as well. Growth has been slowing moderately; however, Thursday evening technology investors were greeted with bad news from a key component supplier. Microchip Semiconductor, a supplier of chips that go into a broad array of consumer, household and industrial products, issued a warning citing weakness in China. The company believes this is a short-term issue, but demand just three months ago was strong. This resulted in a drubbing of the Philadelphia Semiconductor index and caused the industry to be down over 5 percent on Friday. Even though there may be some general hiccups in demand, we continue to play the semiconductor space through specific technologies and applications, primarily in the wireless space.

We don’t anticipate a slowdown here in the states. The U.S. economy should continue to exhibit solid growth and decouple itself from the rest of the globe. The most recent positive development has been the decline in energy prices over the last couple weeks, which will result in a nice increase of discretionary income for U.S. consumers.

When Doves Cry

The Fed released its meeting minutes earlier this week and the capital markets were pleasantly surprised. There had been some concern that the Fed may become more hawkish and looking to tighten. However, contents of the minutes showed the Fed to be focused on the data. They highlighted benign inflation, a strengthening U.S. dollar (which is positive for low inflation) as well as increased risks of a global slowdown due to Europe’s stalling growth. We still believe that the Fed will be looking to raise the funds rate in the second quarter of 2015. Even though inflation remains low, U.S. economic growth will support the beginning of a rate hike cycle.

European Central Bank President Mario Draghi also signaled his dovish intentions for the ECB earlier this week. At a speaking engagement in Washington D.C., he stated that the bank was willing and able to alter its current bond buying program which may eventually move from just asset-backed securities to actual sovereign debt. We believe the ECB will be active in the market and will attempt to push growth higher to fight any possibility of deflation.

Our Takeaways for the Week: 

  • While the Eurozone looks to be slowing, U.S. economic growth remains healthy which is positive for both the U.S. dollar and equities
  • The Fed will remain data dependent when determining when to increase rates, which probably won’t happen for another 6-9 months


Unemployment: State by State


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by Ralph Cole, CFA
Executive Vice President of Research

A major cornerstone of our service philosophy at Ferguson Wellman is education and communication. We believe that everyone can benefit from more information on the economy and markets and we aim to bring timely and useful information to our clients and business partners. As we have stated before, unemployment numbers are the most firm examples of our country’s economic growth and unemployment has the most impact on monetary policy as stipulated by the Fed. As you can see in the chart linked below, the recovery from a jobs perspective varies from state to state. Overall, the workforce picture is improving and we believe the trend will continue to move the economy in the right direction.

Please click here to view the unemployment map. Please note that by clicking on this link you will be routed to a third party website.


Growing Pains


by Ralph Cole, CFA
Executive Vice President of Research

Outside of the United States, global growth is challenged. Stagnant economies in Europe, Japan as well as slowing growth in China have led to concerns that the U.S. economy will have a difficult time moving forward on its own. Economic numbers this week were on the slower side here at home.

On the first Friday of each month the jobs report is released and today’s number was quite strong with the economy generating 248,000 new jobs in September. Wages continue to rise slowly and aggregate work hours are expanding to improve as well.

This slow-and-steady growth should enable the stock market to grind higher in the coming months. Worries about slowing global growth and the end of quantitative easing have led investors to take some profit in the past several weeks. These pullbacks were anticipated with the imminent Fed rate hikes in the second quarter of next year.

It’s All About the Money, Money, Money

Or should we say it is all about the currency? With U.S. growth outpacing all other developed markets around the world, with the exception of the United Kingdom, it has caused the dollar to rally relative to other currencies. This strength has several ramifications.
Trade Weighted Dollar Vs Major Currencies

First, it makes our assets more appealing to the rest of the world. With rising interest rates and higher government bond yields than other developed economies, capital is starting to flow to the U.S. This has led to a drop in interest rates and further strengthening of the dollar. Think of this as a virtuous cycle.

Second, this could act as a headwind for third-quarter earnings for multinational corporations. U.S.-based companies that sell overseas will take a hit on earnings that occur in other countries, depending on how much the dollar has strengthened relative to the currency of the country where the revenue was generated.

Finally, it is very good on the inflation front because a strong dollar allows U.S. consumers to purchase goods brought in from other countries at a lower price, especially commodities. On the margin, this should help keep a lid on inflation.

Our Takeaways from the Week

  • Job growth continues at a steady pace. This a big positive for the economy and will eventually lead to Fed tightening next year
  • Growth fears in the U.S. and around the world have led to increased volatility in recent weeks