May the Odds Be Ever in Your Favor


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Tim-webby Timothy D. Carkin, CAIA, CMT
Senior Vice President

The markets were quiet this week investors awaited Janet Yellen’s commentary on the Fed’s annual Jackson Hole summit. As the week came to a close, the S&P 500 sold off slightly, finishing the week down 0.6 percent. Healthcare stocks fared far worse, selling off 2.2 percent following Hillary Clinton’s statements regarding the price increase of EpiPen®, a Mylan Pharmaceuticals product. The 10-year U.S. Treasury finished the week around 1.62 percent, with yields slightly higher due to the mixed messages from the Federal Reserve regarding when the next Fed hike may occur.

Jackson Hole Summit

As is customary, Janet Yellen spoke after the Fed’s annual Jackson Hole summit. Yellen again made a case for a rate hike by hinting, but not outright saying, a September Fed rate hike is not off the table by stating, “I believe the case for an increase in the Fed Funds rate has strengthened in recent months.” Yellen once again clarified the Fed’s dilemma: they want to raise rates but may stay low in the near term. But Yellen was not the only cheerleader for a rate increase. Vice Chairman Stanley Fischer pointed directly at the August Employment Situation Report as a factor in their rate decision as we are “reasonably close to what is thought of as full employment.” That report will be released on September 2 and the last three jobs reports have shown growth.

However, both Yellen and Fischer were careful to caution that not all data is glowing, hence their reticence to raise rates. Friday gave us a good example: the Department of Commerce released an anemic GDP growth of 1.1 percent for the second quarter, which was slightly below the 1.2 percent expected by economists and far from the solid footing the Fed would like to raise rates. Even so, the futures markets are now pointing to the odds of a September rate hike at 30 percent and a hike before year-end at 60 percent.

Our Takeaways for the Week:

  • The Fed remains data dependent
  • As better economic news is issued the likelihood of a Fed rate hike increase


Leaded or Unleaded?


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by Deidra Krys-Rusoff
Senior Vice President


Market Response to the Fed

Financial markets were volatile this week, influenced by mixed messages from the Federal Reserve. The Fed minutes released on Wednesday were dovish, suggesting little chance of a Fed rate hike, while San Francisco Fed President Williams made hawkish comments backing a rate hike just a day later. The S&P 500 slipped down .5 percent after reaching all-time highs. Crude oil is trading up slightly amid speculation that producers will be limiting output. Bonds sold off slightly, with yields rising to 1.59 percent at the time of this writing.

Leaded or Unleaded?

That was a question asked by gas station attendants around the U.S. prior to 1996, when the U.S. Clean Air Act banned the sale of leaded fuel for use in on-road vehicles. Now parents are asking this question every time they turn on the faucet to get their child a glass of water.

The Flint water crisis brought this question to the forefront, when it was discovered that a water source change brought corrosive water through lead pipes, exposing thousands of children to elevated lead levels. Flint is hardly alone. High lead levels have been found across the country: Sebring, Ohio; Durham, North Carolina; and Washington, D.C. — to name just a few.

Congress passed the Safe Drinking Water Act in 1974 and amended the act in 1986 to provide protection to the nation’s drinking supply. Most municipal water sources are well within the Environmental Protection Agency’s actionable limits, but the old leaded pipes that connect schools and homes to the water system may be contaminating the water we drink. Old pipes and faucet fixtures are creating issues for many school districts, from Boston, Massachusetts to Portland, Oregon. We expect to see more stories as school districts and public entities with older buildings test their water quality.

The costs to fix this growing problem are enormous. The infrastructure costs of this crisis have already cost Flint and the state of Michigan over $200 million in lead pipe replacements and related infrastructure updates. Closer to home, the Portland Public Schools have estimated that it will cost $196 million to fix the districts lead pipes and fixtures. Nationally, the EPA estimates that it will cost at least $384 billion in deferred maintenance to keep our drinking supply safe.

The costs of fixing our nation’s water quality will significantly impact the budgets of local municipal water districts, school districts, cities and taxpayers around the nation. Congress is researching options to address financing the water infrastructure needs of local communities including options such as: a federal water infrastructure trust fund, lifting restrictions on private activity bonds for water infrastructure and reinstating the authority for issuance of Build America Bonds.

Ferguson Wellman’s fixed income team is following the ongoing situation and monitoring the costs and impacts upon municipal credits. Furthermore, the equity team is researching companies that may be able to capitalize upon such infrastructure updates.

Takeaways for the Week:

  • The chances of a Fed Funds rate hike by year-end have increased to about 50 percent
  • Fixing national water quality will require substantial infrastructure spending by federal, state and local governments
  • Ferguson Wellman is monitoring credit quality and researching investment opportunities that will arise from the water crisis


No Respect for this Bull Market


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Brad-00447-cmykby Brad Houle, CFA
Executive Vice President

The stock market was up for the week with the S&P 500 returning .20 percent.  During the week, the S&P 500 climbed to an all-time high on Thursday. Bonds were higher in price and lower in yield with the 10-year Treasury moving from a 1.59 percent yield on Monday to a 1.51 percent yield at the end of the week. Economic data released this week included retail sales which were largely unchanged in July. Car sales were higher in the month but were offset by a decline in the value of gasoline sales. In addition, University of Michigan released consumer confidence numbers this week which came in at 90.4, which is slightly higher than what was released in July. A score of 90.4 indicates that consumer confidence remains high and the job market continues to strengthen.

Investors are skeptical and distrustful of the bull market. Generally, when the stock market is going up and hitting all-time highs, there is interest among investors and exuberance. Human nature is to buy things that are going up in hopes that they will go even higher. This bull market is behaving differently, with investors still stinging from the financial crisis and feeling distrustful of the stock market. The experience was so scarring, it is thought that the financial markets have permanently lost a significant number of potential investors. In addition, economic growth remains modest domestically and throughout the developed world. As the chart below illustrates, over the course of this seven-year bull market, investors have been consistently pulling money out of the stock market. The blue lines represent equity mutual fund flows, with the preponderance of the observations falling below the “zero line.” Investors have been significant sellers of equities as the psychology has been that every routine correction in the stock market is going to unleash a crisis like we experienced in 2008 and 2009.

S&P 500Source: ICI

Now into its seventh year, this bull market is not young. It is, however, important to remember that bull markets don’t die of old age―they die of overheating. Though equities are no longer inexpensive in this low interest rate environment, there are very few “cheap” or undiscovered asset classes. That said, we are not seeing evidence of speculative bubbles that would be a harbinger of an overheating economy.

Our Takeaway for the Week

  • The Dow, S&P 500 and NASDAQ reached all-time highs this week
  • Despite this, we are witnessing the Rodney Dangerfield of bull markets


Let the Games Begin


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by Jason Norris, CFA
Executive Vice President of Research

With the opening ceremonies of the Rio Olympics set to begin tonight and on the heels of a strong number in the month of July in which the U.S. added 255K jobs, stocks ended the week with a bang. This was meaningfully ahead of expectations and wage growth was steady at 2.6 percent. We believe this continues to demonstrate that the U.S. economy remains healthy. While we don’t believe that the labor market is yet inflationary, bonds sold off this week, driving the yield on the 10-year Treasury up to 1.56 percent. This data also allowed the tech-sector-heavy NASDAQ and the S&P to hit all-time highs.

Low interest rates have already taken a toll on the banks and this week it hit the insurers. Specifically, MetLife reported earnings this week that included a major charge because low interest rates resulted in a $2.0 billion expense in their variable annuity business. Annuities are a contract with an insurance company promising an income stream. With low global interest rates (see chart), it is becoming more difficult for insurance companies to meet their targets.

Rates chart

While it is way too early for annuity holders to become concerned, this does show the ramifications of low rates.

 A popular stock highly touted by CNBC pundit Jim Cramer, Bristol Myers, hit a major roadblock this week. Bristol and its competitor, Merck, are leading the race in immuno-oncology (IO), which is a novel treatment of cancer. Bristol has been trading at a large premium to Merck due to the belief that they were in the lead and had greater revenue exposure to IO therapies. However, this morning Bristol announced disappointing results in its first line of lung cancer treatment and Bristol lost 16 percent while Merck ran up by 8 percent.

Our Takeaways for the Week:

  • Jobs numbers and wage growth were a boost to the trading week
  • Record low interest rates around the globe have some negative consequences