On the latest edition of Market Week in Review, Director and Senior Investment Strategist Paul Eitelman and Head of Portfolio & Business Consulting Sophie Antal Gilbert discussed highlights from U.S. Federal Reserve (the Fed) Chairman Jerome Powell’s recent speech. They also provided an update on the fourth-quarter earnings season and chatted about key takeaways from U.S. President Joe Biden’s recent phone conversation with Chinese President Xi Jinping.
Inflation disappoints as Powell stresses continuation of accommodative policy
Remarks delivered by Fed Chairman Jerome Powell in a Feb. 10 speech to the Economic Club of New York were not particularly surprising, but the tone of his speech was important for a key reason, Eitelman said. “Powell’s speech was about as dovish as it could have been,” he explained, “with the Fed chair stressing that despite substantial progress in the nation’s economic recovery, the central bank is still a long way from achieving its dual mandate of maximum employment and price stability.” As evidence, Powell pointed to the fact that millions of Americans still remain unemployed as the nation struggles through the COVID-19 crisis, Eitelman said.
“Powell’s comments seem to emphasize that the Fed wants to stay as accommodative as possible for as long as possible,” he noted, adding that the central’s bank switch last August to an average inflation targeting framework means that strong economic growth alone won’t be enough to justify raising interest rates. The potential for any rate hikes will hinge more on the status of U.S. inflation, Eitelman explained, with the central bank already stressing that inflation may be allowed to overshoot its 2% target for some periods of time.
Recently released core inflation data shows that inflation continues to run weaker-than-expected, he said, with the latest numbers from the Labor Department showing a 1.4% increase in consumer prices on a year-over-year basis. The reading, which Eitelman characterized as a negative surprise, reinforces the view that the Fed will refrain from raising rates for a considerable amount of time, he stated. The combination of an accommodative central bank and anticipated strong economic growth is likely to spell a good environment for U.S. risky assets this year, Eitelman added.
Q4 earnings results smashing expectations
Turning to the fourth-quarter earnings season, Eitelman said that the overall performance to-date has been outstanding on a global basis. In the U.S., with roughly 70% of companies reporting results, around 85% have beaten expectations, he noted.
“That’s an impressive number on a stand-alone basis, but what’s even more impressive is the magnitude at which companies are surpassing expectations,” Eitelman stated. He explained that several weeks ago, the consensus among analysts for fourth-quarter U.S. earnings growth was a decline of -9%. Instead, earnings growth is currently tracking around +3%, Eitelman noted. “This is, quite frankly, one of the biggest upgrades to an earnings season that I’ve seen in a very long time,” he stated.
Outside of the U.S., results have also been impressive, Eitelman said. 70% of European companies are beating earnings expectations by a wide margin, while Japanese businesses are also reporting similar results. “All in all, these kinds of numbers are very encouraging,” he remarked.
Call between Biden, Xi shows China-U.S. tensions remain
Switching to China, Eitelman noted that U.S. President Joe Biden and Chinese President Xi Jinping recently held their first phone conversation since Biden assumed office. Accounts of the call between the two world leaders paint a fairly uncomfortable conversation, he said, with reports that Biden expressed significant concern over China’s economic practices and behavior.
“There are still a number of simmering issues between the U.S. and China that, on a secular basis, look pretty challenging—and this call is evidence of that,” Eitelman said. While there’s a baseline expectation in markets that China-U.S. tensions are more likely than not to ratchet down under the Biden administration, the phone conversation demonstrates that there are still tensions remaining, he noted.
“Ultimately, while an escalation in tensions between the two countries is by no means part of our baseline scenario at Russell Investments, I do believe the situation is worth keeping a close eye on,” Eitelman concluded.
Disclosures
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.
Disclosures
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.
Investing involves risk and principal loss is possible.
Past performance does not guarantee future performance.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.
Please remember that all investments carry some level of risk. Although steps can be taken to help reduce risk it cannot be completely removed. They do no not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Investments that are allocated across multiple types of securities may be exposed to a variety of risks based on the asset classes, investment styles, market sectors, and size of companies preferred by the investment managers. Investors should consider how the combined risks impact their total investment portfolio and understand that different risks can lead to varying financial consequences, including loss of principal. Please see a prospectus for further details.
Indexes are unmanaged and cannot be invested in directly.
The S&P 500® Index, or the Standard & Poor's 500, is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.
This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.
CORP-11809
Disclaimer: Opinions expressed by readers don’t necessarily represent Russell’s views. Links to external web sites may contain information concerning investments other than those offered by Russell Investments, its affiliates or subsidiaries. Neither Russell Investments nor its affiliates are responsible for investment decisions with respect to such investments or for the accuracy or completeness of information about such investments. Descriptions of, references to, or links to products or publications within any linked web site does not imply endorsement of that product or publication by Russell Investments. Any opinions or recommendations expressed are solely those of the independent providers and are not the opinions or recommendations of Russell Investments, which is not responsible for any inaccuracies or errors. Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.
Investing in capital markets involves risk, principal loss is possible. There is no guarantee the stated outcomes in the presentation will be met.
This is a publication of Russell Investments. Nothing in this publication is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The contents in this publication are intended for general information purposes only and should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional concerning your own situation and any specific investment questions you may have.
Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management.
Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand.