A Light in the Black


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by Jason Norris, CFA
Executive Vice President of Research

A Light in the Black

What a week! With concerns about growth in China, continued deterioration of the Chinese equity market and U.S. investors rushed to the sidelines by redeeming over $17 billion in equity mutual funds and ETFs. This, coupled with concern over when the Fed will raise rates, led U.S. equities to experience a 12 percent correction from recent highs on Tuesday (see last week’s blog for more detail). This was long overdue as it had been almost four years since the S&P 500 had corrected by at least 10 percent, which was the third longest period in history. However, after six consecutive days of selling, on Wednesday the near-term bottom was reached on the S&P at 1867, down from its all-time high of 2130 which was reached on May 21, 2015.

Understandably, rapid downward moves in equities can be disconcerting. We don’t know if we’ve seen the bottom; however, we believe there is a light at the end of this tunnel in the form of domestic market fundamentals. For example, U.S. GDP was revised higher on Thursday from 2.3 percent q/q annualized to 3.7 percent. This was driven by several factors – primarily capital spending and consumer spending. Earlier this month we also saw retail sales numbers revised higher. When this data was originally reported, we did view it with some skepticism since our bottoms-up analysis did show better strength than the broad government reports.

After analysis of the earnings reports for the companies we own, it revealed annual growth in earnings of 2 percent; however, excluding Energy, growth was close to 13 percent. Even when looking at the broad market, earnings growth (excluding Energy) was around 5 percent. This growth was driven by the U.S. consumer and healthcare. These fundamentals signal to us that the U.S. economy is healthy and improving.

Earnings Growth for the 10 Economic Sectors of the S&P 500

  Q2 y-o-y growth 2015e
Consumer Discretionary 9.2% 11.3%
Consumer Staples 2.5% 1.7%
Financials 6.8% 15.9%
Healthcare 14.4% 12.7%
Industrials -4.5% -1.0%
Info Tech 4.5% 4.9%
Basic Materials 6.0% -1.0%
Telecom 8.5% 8.3%
Utilities 6.5% 1.6%
Total (ex. Energy) 5.3% 7.0%
Energy -55.7% -56.3%
Total -0.7% 1.0%

Source: FactSet

The table above highlights the underlying sectors of the U.S. market, showing both the actual growth rate for the second quarter and an estimate for 2015. The key to focus on is that commodity prices are bringing down Energy and Basic Materials, and the strong U.S. dollar and China is hurting Industrials. However, when you lift up the hood of the market, corporate America is still exhibiting solid growth.

Our Takeaways for the Week

  • Corporate earnings remain healthy
  • While volatility may remain until the Fed tightens, we still like equities long-term





Shawn Narancich Quoted in Portland Business Journal


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Posted on Portland Business Journal website

Oregon Stocks Stumble as Market Plunges
By Matthew Kish
August 24, 2015

The stocks of 18 of Oregon’s 20 biggest public companies dropped Monday as the stock market tumbled. The S&P 500, Dow Jones industrial average and the Nasdaq Composite each closed down nearly 4 percent.

Northwest Pipe Co. (NASDAQ: NWPX) and Lattice Semiconductor Corp. (NASDAQ: LSCC) were the only large Oregon stocks to post gains. Each ended the day up less than 1 percent.

While there’s no consensus on the market stumble, local analysts pointed to weakness in the Chinese economy and uncertainty about central banks and interest rates.

“I would venture to guess it’s more people being skittish about the direction of the Fed right now,” said Chris Abbruzzese, chief investment officer for Portland’s Rain Capital Management. “The Federal Reserve is going to be less supportive of equities markets going forward.”

They also said the market was due to hit a speed bump.

“The markets had been unusually stable and had come up quite a bit over the past three years,” said Kraig Kerr, a senior vice president and financial adviser at D.A. Davidson in Portland. “So most people were expecting a correction at some point and were surprised it hadn’t happened earlier.”

Shawn Narancich, executive vice president of equity research and portfolio management at Ferguson Wellman Capital Management, said the firm doesn’t see anything “sinister” happening.

“Our mantra continues to be keep calm and carry on,” Narancich said.

Ferguson Wellman expects the U.S. economy to continue growing in the second half. The economy is adding jobs and inflation is low. Consumer spending, which accounts for roughly 66 percent of the economy, remains strong.

“Gas prices are going to start dropping,” he said. “Unemployment is low. Disposable incomes are up.”

Rain Capital’s Abbruzzese said there’s also “quite a bit of evidence” that “we’re due, if not overdue,” for a resurgence in spending on capital projects that would stimulate the economy.

Kerr said D.A. Davidson’s advice for clients depends on circumstances.

“Clients that are going to need cash in the near term may want to consider locking in gains,” he said. “For the most part if a client has a well balanced portfolio we’re not doing anything.”

Abbruzzese said Monday’s market volatility highlights the need for investment strategies that minimize risk.

“This is the type of market where we really thrive,” he said. “The approach thrives because we are more mindful of risk factors in portfolio construction.”

Here’s a look at how Oregon’s biggest stocks fared:

Nike Inc. (NYSE: NKE) — down 2.81 percent to $103.87

Precision Castparts Corp. (NYSE: PCP) — down 1.95 percent to $228.85

Lithia Motors Inc. (NYSE: LAD) — down 2.82 percent to $101.89

StanCorp Financial Group Inc. (NYSE: SFG) — down 0.85 percent to $112.59

Schnitzel Steel Industries Inc. (NASDAQ: SCHN) — down 2.66 percent to $16.10.

Keep Calm and Carry On


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Shawn-00397_cmykby Shawn Narancich, CFA
Executive Vice President of Research

Feeling Violated

Worries about competitive currency devaluations emanating from China’s small haircut to the yuan last week were supplanted this week by manufacturing related fears that the world’s second largest economy could be experiencing a hard landing. The result was a tough week for equity investors, as European stocks entered correction territory and U.S. stocks fell five percent.

Timing is Everything

As the sell-off accelerated into today’s close, we couldn’t help but wonder what market soothing policy moves the Chinese might institute next, nor could we ignore the palpable sense that the Fed’s lift-off from zero interest rate policy just got delayed again. Volatility in stocks will register with Yellen & Co. as they attempt to time this cycle’s first interest rate hike. However, more impactful will be the continued deflation in commodities that threatens to leave the price level far from the Fed’s stated goal of two percent inflation. As oil seeks out new cyclical lows and Treasuries benefit from a flight-to-quality bid, the trade-weighted dollar actually declined today. At a time of increased economic and market turmoil overseas, this hints of US monetary policy remaining easier for longer.

Reasons For Optimism

Low fuel prices and an increasingly healthy job market are combining to boost the collective spending power of U.S. consumers, helping drive the economy to what we believe will be a stronger second half of the year. Notwithstanding this week’s pullback in stocks, we look forward to a better second half of the year for corporate America, which should benefit from easier foreign currency comparisons and a turnaround in oil prices, two key factors that have helped keep earnings flat so far this year. As profit visibility improves, we expect stocks to make forward progress.

Ringin’ the Till

With all but a small number of companies having now reported, the sun is setting on a second quarter earnings season characterized again by companies under promising and over delivering. Retailers book-ended Q2 numbers this week by reporting a decidedly mixed bag of results. While America’s largest retailer struggles to grow, Wal-Mart’s rival Target came through with earnings just strong enough to make investors believe that this beleaguered retailer has put the worst of its merchandising and credit breech struggles behind it. Standing out to the upside was Home Depot, which reported another impressive quarter of sales driven by higher house prices and rising home improvement spending. While closing down for the week amidst market turmoil, Home Depot’s stock outperformed the broader market as management once again raised its profit forecast for the year.

Our Takeaways from the Week

  • A sell-off in global equities pierced the veil of U.S. market tranquility
  • Retailers concluded second quarter earnings season by reporting mixed results


All the Beer in China


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by Brad Houle, CFA
Executive Vice President



Currency markets are extremely difficult to grasp and most people’s experience with foreign currency is limited to travel. These experiences generally involve moments where someone realizes they just paid roughly six dollars for a Diet Coke at the Eiffel Tower or that they can buy a substantial amount of beer for the equivalent of a dollar in China. This week the news that China had devalued its currency the renminbi or (RMB) by two percent was headline financial news and drove market volatility around the world. Two percent is not a lot of anything so why does this matter so much? On the surface, having a strong economy and a strong currency should be the goal of every country. However, in times of economic weakness central governments only have a few leavers to pull to stimulate economic growth.

One of the obvious and favorite methods is to stimulate economic growth to lower interest rates. This has been done in the United States since the financial crisis and numerous other governments around the world have used this play from the economic rescue playbook. One of the other techniques is to have a weak currency. Having a weaker currency gives a country a potentially large economic tailwind because it makes goods that are exported from the country with a weak currency relatively less expensive when exported to a country with a stronger country. To use a beer analogy, Tsingtao beer from China is normally 8 dollars a six pack at the supermarket and Stella Artois from Belgium is also around the same price. If China devalues its currency, the beer distributor can then buy Tsingtao for a discount because the U.S. dollar buys more Chinese RMB and therefore more Tsingtao. The relative price of the Tsingtao is now less than the Stella Artois and consumers will substitute the less expensive good for the more expensive good. It can be broken down to an ECON 101 scenario of supply and demand and consumer preference. If you then multiply this effect by a billions of dollars of exports from China or another country devaluing its currency it becomes impactful.

Officially, most countries profess to maintain a strong currency policy as that is often associated with a strong economy. Zhang Xiaohui, an assistant governor of the central bank of China, was quoted in The New York Times stating that the RMB is a strong currency and there was “no basis for the continued depreciation of the renminbi.” The decision to depreciate the RMB was characterized by the Chinese government as a move to make the currency more market-oriented.

The fear by investors is that this is a sign that China is struggling to keep its economy growing. While China’s last GDP growth number was 7 percent year-over-year, there have been worries about the Chinese economy slowing and that the actual growth rate was materially lower than what was “officially” reported. Data has been mixed relative to economic growth in China with worries about a property market bubble and economic indicators such as auto sales being very weak.



Our Takeaways for the Week

  • Currency devaluation can be positively impactful to economic growth as it creates a tailwind for an export economy
  • The signal that the markets took from the Chinese currency devaluation this week was that the growth in China is possibly weaker than the government was officially reporting