Investment Strategy Update Webinar - April 20, 2021 - Ferguson Wellman
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Investment Strategy Update Webinar
April 20, 2021
Today’s Presenters
George Hosfield, CFA Brad Houle, CFA
Director and Chief Investment Officer Executive Vice President and Head of Fixed Income
Approaching 88 MPH
Investment Strategy Q2 2021
Approaching 88 MPH • Inflation is rising, but well under control • Robust earnings growth results in cheaper stocks • Shift in market leadership underway • Positioned for rising rates • Correction likely, but not a bear market
Beyond Stimulus, a Growing Labor Force to Drive Growth
Total Continuing Jobless Claims (in Millions)
25,000,000
25
20,000,000
20
15,000,000
15
In Millions
10,000,000
10
55,000,000
0
Jul-19
Nov-19
Jul-20
Jul-20
Nov-20
Nov-20
Dec-19
AprilApr-19
May-19
May-19
Jun-19
Aug-19
Aug-19
Sep-19
Oct-19
OctoberOct-19
Dec-19
Jan-20
Mar-20
AprilApr-20
Aug-20
Sep-20
Sep-20
OctoberOct-20
Dec-20
Jan-21
Jan-21
Mar-21
AprilApr-21
Feb-20
Feb-20
May-20
May-20
Jun-20
Feb-21
2021
2020
2020
2019
2019
Source: Federal Reserve
• Those filing for unemployment has declined by 19 million since May of 2020
• Unemployment is still twice as high as it was before the pandemic. A continued decline in the unemployment rate is key for sustained economic growth
• After the financial crisis, it took more than six years for employment to return to pre-crisis levels, but that did not prevent markets and the economy from reaching new highs well beforehandFed Effectively Now Has a Single Mandate: Full Employment
155,000
152.5 million
150,000
Total Nonfarm Payrolls
145,000
143 million
140,000
76 Months
135,000
130,000
130.3 million
129.7 million
125,000
2008 2010 2012 2014 2016 2018 2020
Source: StrategasSurplus Savings to Drive Spending
$7
$6
Savings is 6x
Personal Savings in Trillions, Annualized
$5 the annual
average
$4
$3
$2
$1
$0
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: Federal Reserve
• The economy is re-opening, growth is surging; stimulus checks are arriving, vaccinations are accelerating and the housing boom continues
• Pent-up demand and high savings will be a robust tailwind for consumer spending in 2021
• The savings number is 6x the average rate, and this data is before the March stimulus checkStimulus Checks and Resilient Consumers Drive Retail Sales
$650
$600
U.S. Retail Sales (in Billions)
$550
$500
$450
$400
Dec-15
Jun-15
Sep-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
Sep-18
Dec-18
Mar-19
Jun-19
Sep-19
Dec-19
Mar-20
Jun-20
Sep-20
Dec-20
Mar-21
Source: Federal Reserve
• Vaccines and an improving jobs market should further strengthen consumer spendingNear-Term Inflation to Trend Higher in 2021
3.5 %
3 Estimate
2.5
2% Fed Target
Rate of Inflation
2
1.5
1
0.5
0
Mar-18
Jul-18
Sep-18
Nov-18
Sep-20
Nov-20
May-18
Jan-19
Mar-19
Sep-19
Nov-19
May-19
Jul-19
Jan-20
Mar-20
May-20
Jul-20
Jan-21
Mar-21
May-21
Jul-21
Sep-21
Source: Bloomberg
• Fed Chairman Powell “likely a transitory increase in inflation where longer-term inflation expectations are broadly stable at levels consistent with our framework and goals”We Expect Inflation to Remain Well-Anchored
16 %
14
Core CPI Year-Over-Year Change
12
10
8 Dot.com $140 Oil 3.5%
Bubble Unemployment
6
Rate
4
2
0
1965
2017
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
2013
2021
Source: Bloomberg
• Deflationary forces that were in place prior to COVID will still be in place after COVID – demographics, technology and an excess of savings
• The Fed has many tools to keep inflation from getting out of hand – QE taper, interest rate increasesRising Interest Rates
“Statement of Confidence” in Robust Outlook
18%
Peak of 15.8% in 1981
16
14
10-Year U.S. Treasury Yield
12
10
1.75 — 2.25%
8
target by
6 year-end
2021
4
2
0
2021
1978
1962
1966
1970
1974
1982
1986
1990
1994
1998
2002
2006
2010
2014
2018
Source: Bloomberg
• Interest rates are rising for the right reasons which are anticipated increased economic growth and a normalization of inflation expectations
• Rates still likely to remain historically lowWe Are Positioned for Rising Rates
Stock Portfolios Bond Portfolios
Staples Duration
Utilities Treasuries
Financials Corporate
Energy Asset Allocation Bonds
Industrials
Bonds
Stocks Alternatives
Sources: Bloomberg, Ferguson Wellman
• We have adjusted portfolios to benefit from rising rates both across asset classes and within asset classes
• Within fixed income portfolios, we are overweight corporate bonds which benefit from an improving economy and underweight treasuries. We also have moved into bonds with less interest rate sensitivity
• Within equity portfolios, we are underweight “bond proxy” sectors and overweight sectors that benefit from higher rates, economic growth and inflationRobust Earnings Growth Results in Cheaper Stocks*
21%
15%
-6%
S&P 500 Price S&P 500 Earnings Valuation
*Seven months ending March 31, 2021
Source: FactSet
• In the last six months, the S&P 500 has increased 15 percent. Such strong returns in a short period of time are often associated with more expensive valuation
• These factors are typical of a market expansionThe Vaccine Cyclical Pivot
Pfizer
Vaccine
Growth Announcement
+31% Value
+25%
Value
-8% Growth
+5%
Performance from 1/1/20 - 11/6/20 Performance from 11/6/20 - 3/31/21
Source: FactSet
• As confidence in a 2021 reopening increased, economically cyclical stocks started to lead
• Vaccine distribution and stimulus will continue to be tailwinds for the economyStrong Equity Markets Result in Strong Inflows
$60 4000
Monthly US Domestic Equity ETF and Mutual Fund Flows S&P 500
$40 3700
$20 3400
Billions of dollars
S&P 500 Index
$0 3100
-$20 2800
-$40 2500
-$60 2200
-$80 1900
Aug-20
Oct-20
Dec-20
Feb-21
Aug-15
Oct-15
Dec-15
Aug-16
Oct-16
Dec-16
Aug-17
Oct-17
Dec-17
Aug-18
Oct-18
Dec-18
Aug-19
Oct-19
Dec-19
Feb-16
Apr-16
Jun-16
Feb-17
Apr-17
Jun-17
Feb-18
Apr-18
Jun-18
Feb-19
Apr-19
Jun-19
Feb-20
Apr-20
Jun-20
Sources: FactSet, ICI
• February and March showed record inflows for domestic equitiesCorrection Is Likely, Not a Bear Market
1980
1985
1990
1995
2000
2005
2010
2015
2020
Calendar Year Return Drawdown
60%
40%
20%
0%
-20%
-40%
-60%
1996
1980
1982
1984
1986
1988
1990
1992
1994
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Source: FactSet
• Corrections are frequent, bear markets are rareUse the Q&A tool below for questions Survey immediately following webinar
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