MarketMinder Europe 

MarketMinder Europe

MarketMinder Europe provides our perspective on current issues in financial markets, investing and economics. Our goal is to analyse key topics in an entertaining and easy to understand manner, helping you see the news of the day in a unique perspective.

Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

What Now, GDP Nowcast?

Bear markets—typically gruelling stock market declines of -20% or worse with fundamental causes—often precede recessions.[i] Not always, but often. So when US stocks breached -20% on 13 June in US dollars, recession chatter hotted up amongst commentators we follow globally.[ii] Given US gross domestic product (GDP, a government produced measure of economic output) accounts for nearly a quarter of global GDP and US stocks represent nearly 70% of the MSCI World Index market capitalisation, the focus is understandable—troubles in America have a history of spilling over into the rest of the world.[iii] So a lot of attention is turning to the tools that look to forecast US recessions, including the US Federal Reserve (Fed) Bank of Atlanta’s GDPNow—a statistical model designed to estimate the quarter’s GDP based on incoming data and forecasts. This so-called nowcast fell to -2.1% annualised for Q2 on 1 July—prompting further recession warnings.[iv] Whilst we don’t dismiss the possibility of a Q2 contraction, which would technically be the second-straight quarterly decline, we think there are reasons to be sceptical this outcome is assured. Or that it means America would be in recession.

The Atlanta Fed’s tool is one of several like it that aggregate incoming data, apply mathematical modelling and try to predict the US’s eventual GDP release. It mashes together Fed forecasts and actual US economic data releases, evolving throughout the quarter as data arrive. It also, the Atlanta Fed’s website stresses, isn’t the bank’s official forecast. It is a research exercise above all else, based largely on ideas cooked up in the private sector.

As you might imagine, the earlier in the quarter one looks at GDPNow, the less accurate the nowcast tends to be. But even at quarter end, when most data are in, deviation from the final result (otherwise known as tracking error) exists. And it is up since the pandemic. (Exhibit 1) That doesn’t mean we think GDPNow is wrong or useless. It just means we think investors should handle it with caution because, like all economic data, it is far from perfect—especially given the oddity of 2020’s lockdown-driven downturn.[v] Exhibit 1 shows GDPNow’s historical tracking error on the day before the US Bureau of Economic Analysis published the relevant quarter’s advance GDP estimate. (This quarter, that would be on 27 July.)

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What Boris Johnson’s Resignation Means—and Doesn’t Mean—for Stocks

Editors’ Note: MarketMinder Europe favours no politician nor any political party. We assess political developments for their potential economic and market impact only.

It is official: Prime Minister (PM) Boris Johnson is out, announcing his resignation after a torrid week of ministerial resignations and scandal. As we write, he remains in office as caretaker PM pending a Conservative Party leadership election, and financial publications we follow are full of speculation about what the change means for the UK economy and markets. We do think rising uncertainty has weighed on UK stocks lately, and we think it is fair to presume falling uncertainty will be beneficial. But we wouldn’t go beyond that and argue the leadership change points to big policy changes with a big impact.

In our view, market movement over the past three days shows the power spiking—and falling—uncertainty can have. On Tuesday, when the parade of resignations started, the MSCI UK Investible Market Index fell -2.7%.[i] But on Wednesday, as the trickle turned into a flood and it became increasingly clear to most observers we follow that Johnson wouldn’t survive the week, UK stocks rose 1.2%.[ii] They echoed that feat Thursday as Johnson stepped down.[iii] Now, we aren’t arguing this is because stocks disliked the outgoing administration—far from it. Our research shows stocks don’t care one whit about political personalities or which party is in power. But high and rising uncertainty can hit sentiment hard, which discourages risk-taking and investment. That can show up in negative stock returns. As the eventual resolution gradually becomes clear, we think it lets investors eye the future and form more realistic probabilities for which policies stand the best chance of passage.

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A Look Around the US Economy

The US—the world’s biggest economy and the largest constituent country in the MSCI World Index of global developed stock markets—released a spate of economic data this week, giving those on recession alert much to chew over.[i] The report on May consumer spending received most attention from commentators we follow, as it showed household consumption falling -0.4% m/m once adjusted for inflation (or on a “real” basis, to use the technical term).[ii] Given US gross domestic product (GDP, a government-produced measure of economic output) is about 70% consumer spending, its drop prompted many commentators to warn recession is imminent, if not underway already.[iii] Yet in our view, a broader look at the latest data suggests things aren’t uniformly negative in America’s economy, which could create substantial room for positive surprise to boost stocks. What did financial commentators we follow seemingly overlook in the latest data? Read on!

Durable Goods Orders Look Pretty Durable

The week started with May’s advance durable goods report, released Monday. It showed total orders for goods designed to last three years or more rising 0.7% m/m, beating analysts’ consensus expectations for no change and accelerating from April’s 0.4% climb.[iv] Core capital goods orders (non-defence capital goods orders excluding aircraft), which are widely considered a proxy for business investment, grew 0.5% m/m—their third straight rise and an acceleration from April’s 0.3%.[v] Now, this corresponds only to the equipment portion of business investment, which is only about 40% of the total in America—commercial real estate and intellectual property products (e.g., research & development and software) hold a large influence, too.[vi] And these figures aren’t adjusted for inflation (broadly rising prices across the economy), which is an important caveat. But we think the resilience of a major category is still noteworthy, as it occurred against the backdrop of rising interest rates—a factor financial commentators we follow have warned would derail investment for months.

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Growth? Value? Digging Into Style Definitions

Last Friday was moving day for dozens of stocks as index provider FTSE Russell undertook its annual index reconstitutions. Some companies moved between the small, medium and large-capitalisation categories—all reflecting market movement in the 12 months through early May and its impact on companies’ market capitalisation.[i] There were also shifts within the growth and value world, with several famous growth stocks entering the value index thanks to their falling valuations. For some it was a clean break, whilst others now live in both indexes. In our view, this presents a timely reminder: Growth and value are often judgment calls, in our experience, and we think understanding their qualitative characteristics as well as the more objective criteria can help you delineate between the two investing styles. That could be a critical task moving forward, as we think growth stocks are likely to lead the rebound whenever this year’s stock market negativity reverses.[ii]

Traditionally, growth-orientated stocks represent companies whose returns come from long-term, well, growth—whilst value-orientated stocks’ gains tend to come from investors’ finding and bidding up discounted or undervalued firms. FTSE Russell delineates between the two based on price-to-book ratio, earnings forecasts for the next two years, and a projection of sales growth based on the past five years.[iii] The first of those three seeks to measure value, whilst the latter two measure growth—which is how a company can straddle both styles. MSCI uses the same general approach but with more metrics. On the value side, MSCI adds 12-month forward price-to-earnings ratios and dividend yields, whilst other growth characteristics include short- and long-term forward earnings growth estimates, the long-term historical earnings growth trend and the current internal growth rate, which is an estimate of how much the company could grow by reinvesting earnings and not seeking additional finances.[iv]

Here, too, we find that these criteria—whilst sound—can create significant growth and value overlap. Currently, the MSCI World Value Index has 940 constituents, whilst the MSCI World Growth Index has 805.[v] Yet a whopping 231 constituents are in both indexes, usually weighted as a blend of say, 65% growth and 35% value, 50% each or what have you.[vi] Objectively, they have growth and value characteristics.

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June’s Global Flash PMIs Still Look Ok

Another month, another round of flash purchasing managers’ indexes (PMIs) giving an early read into major economies’ business activity. Though these business surveys from S&P Global mostly ticked down in June (as we will show), prompting more recessionary chatter from commentators we follow, their levels still indicate overall expansion based on the surveys’ methodology.[i] It may not be robust, but we don’t think stocks need perfection to mount a recovery from this year’s downturn—just for reality to beat dreary analyst forecasts and sour investor sentiment.[ii]

PMIs are surveys that aim to measure growth’s breadth. Readings above 50 indicate the majority of surveyed firms reported expanding business activity, hence, PMI readings over 50 signal growth and under 50 contraction—with growth (and contraction) theoretically accelerating the further readings drift from that marker. PMIs don’t say anything about how much their businesses grew (or shrank), only that they did, so we think they are a timely but loose estimate of economic activity at best. Amongst the various readings, the composite PMI combines services and manufacturing, but it is a narrower measure of their output that focusses only on production. The services and manufacturing PMIs are broader, including new orders, backlogs of unfilled orders, suppliers’ delivery times (a measure of supply chain pressures) and employment. That is why, for example, the composites for June’s US, UK and eurozone PMIs can be below each of their services and manufacturing PMIs.

Exhibit 1 shows major economies’ PMIs remain above 50—though they are down from the spring, implying deceleration (Japan excepted). The US and eurozone’s June flash composites, released with only 85% – 90% of responses in, fell to the low 50s, continuing a generally slower trend. This includes both services, which comprise the bulk of developed market economies, and manufacturing.[iii] But whilst low-50s PMIs aren’t historically robust, our research shows they generally coincide with pedestrian growth.

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On Wednesday's Dreary British and Canadian Inflation Data

The Anglosphere suffered another inflation blow Wednesday, this time courtesy of May data from Canada and the UK. Unsurprisingly, in our view, inflation (broadly rising prices across the economy) worsened in both nations, with consumer price index (CPI) inflation speeding to 7.7% y/y in Canada and 9.1% y/y in Britain.[i] And similarly unsurprisingly, in our view, coverage from commentators we follow was quite dour. We think that is understandable, considering inflation makes life difficult for many. It has also become a thorny political issue, so please understand that we are addressing this from an investing perspective only and don’t intend any political statements. To that end, whilst we don’t think either report yields any great insight from a data analysis standpoint, we find observers’ reactions rather illuminating on sentiment, as we think they show how far market outlooks have deteriorated. We hesitate to call it capitulation, but we think it does indicate it shouldn’t take much for reality to surprise positively later this year, which, in our view, could help bring stocks some relief.

In both countries, coverage from commentators we follow fixated on the alleged failure of monetary policy institutions to act against rising prices sooner and forecasts for inflation to get even worse before it gets better. There was a lot of blame tossed around by politicians, and a chorus of calls from publications we follow for the Bank of Canada and Bank of England (BoE) to do more to tackle the problem. Many of them also bemoaned that the rate hikes they view as necessary to beat inflation also risked “possibly” inducing recession (a decline in broad economic output), echoing US Federal Reserve head Jerome Powell’s comments to Congress Wednesday.[ii]

These forecasts for worse to come stem largely from the knowledge that oil and petrol prices continued rising in June, with food and metals prices also jumping.[iii] The weaker Canadian dollar and British pound also factored into warnings from observers, as they raise import costs.[iv] That got the blame for Canadian services prices rising 5.2% y/y, which we think seems rather suspicious considering US services inflation is even faster at 5.7% y/y in May and the dollar has soared this year.[v] In our view, a better explanation is that services prices are under a trio of pressures from reopening-fuelled demand, supply costs and labour shortages, creating a supply and demand mismatch. We think it is a global pandemic-driven dislocation that, whilst frustrating, is likely to ease as economies gradually return to pre-lockdown trends. But if observers’ hyper-focus on weak currencies creates much more dismal forecasts, then so much the better for stocks, in our view. Surprise power to lift markets up will theoretically be that much easier to attain.

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Some Key Concepts You Can Use in Navigating Today’s Markets

World stocks’ difficult first half of 2022 has continued in June amidst a cavalcade of concerns, evoking a constant drumbeat of headlines we read warning of worse to come.[i] In these trying times, the urge to do something may seem overwhelming—but doing something can easily backfire. In that vein, here are some dos and don’ts we think can help you in difficult times like the present.

We know market downturns can be hard—and frightening. Enduring one is far from ideal, in our view. When one comes amidst a series of seemingly relentless negative news stories, cutting equity exposure may feel like the sensible and prudent thing to do: Take your losses and live to fight another day. In our experience, though, that isn’t necessarily wise, as selling crystallises declines into losses and increases the chances you miss the recovery—the chance to recoup those declines. Hence, our first recommendation.

Don’t panic. When all seems lost, we think it is best to stay calm and collect yourself. First, assess your situation. Ask: Is my portfolio’s asset allocation (the mix of stocks, bonds, cash and other securities) designed with market downturns—even bear markets (typically lasting, fundamentally driven declines exceeding -20%)—in mind? Meaning, are the expected long-term returns it is based on inclusive of bear markets? If so, we think it is important to remember the returns this allocation plan hinges on include rough times like the present—or even worse. Mitigating bear markets’ drops may be nice, even beneficial, but we find it isn’t necessary to obtain equity-like returns over time.

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France's Parliamentary Elections Deliver Divides

Editors’ Note: MarketMinder Europe favours no politician nor any party. We assess political developments for their potential economic and market impact only.

France’s legislative elections delivered a major shift Sunday, but not the one political analysts we follow forecasted. Entering the weekend’s second-round vote, most observers anticipated President Emmanuel Macron’s Together! movement would lose its majority, and they did.[i] But the biggest beneficiary of Macron’s collapse wasn’t the leftist alliance known as Nupes (short for New Popular Union), which won the second-most seats but badly underperformed polling projections.[ii] Rather, Marine Le Pen’s National Rally—a nationalist party with a leftist economic platform—surprised observers by jumping from 8 seats to 89.[iii] Le Pen’s ascendance as the second-largest single party in the National Assembly has garnered attention from publications we follow in the days since, with most commentators foreseeing chaos and deadlock dooming Macron’s reform agenda. In our view, they are merely putting a colourful, hyperbolic spin on traditional political gridlock, which we think stocks will likely be just fine with once the uncertainty weighing on markets globally eventually starts clearing.

It takes 289 seats to win a majority in the 577-seat National Assembly, and most polls projected Macron’s bloc would get close. But in the end, they got just 245, followed by 131 for the Nupes, then the National Rally’s 89 and finally the centre-right Republicans’ 61.[iv] But even this is more fragmented than it looks, as the Nupes isn’t a party—it is an alliance of the green, centre-left and far-left parties.[v] The four participating parties agreed to field only one candidate for each seat, with candidates running under the alliance’s umbrella instead of their actual party.[vi] That alliance is already crumbling, with the participating parties shying away from leftist leader Jean-Luc Mélenchon’s desire to make the bloc a formal coalition in the assembly. Doing so could risk wiping out their parties’ identities and subsuming them into Mélenchon’s France Unbowed, which won the most seats amongst the four.[vii] That is probably a particular anathema to the centre-left Socialist Party, which has been fighting hard against its own obsolescence since 2017, when Socialist presidential incumbent François Hollande didn’t even bother seeking re-election.[viii] So, we think we will most likely see the Nupes splinter into four, with France Unbowed reportedly taking about 70 seats, followed by the Socialists, Greens and Communists.[ix]

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A Quick Reminder: Feelings Don’t Foretell

In America, the University of Michigan’s (U-Michigan) widely watched US consumer sentiment index fell to 50.2 this month—a record low, if the final reading confirms the preliminary estimate on 24 June.[i] This confidence measure matches other recent dour polls highlighted in financial headlines we monitor: See Bank of America’s June fund manager survey (73% of respondents anticipate a weaker US economy over the next 12 months) or GfK’s May UK Consumer Confidence Barometer, which hit a record low in May.[ii] In our view, the U-Michigan index’s record figure is an opportunity to revisit an important lesson for investors globally: Sentiment gauges, at best, reflect respondents’ feelings at the present moment. However, moods don’t foretell economic activity, and we think it is often wiser to view them as a sign of what markets already incorporated into share prices than what is to come.

All components of the U-Michigan index fell in June, from the outlook on business conditions over the next year (-24% m/m) to consumers’ assessment of their personal financial situations (-20% m/m).[iii] Amongst consumers, 46% attributed their negative views to inflation (broadly rising prices across the economy)—the second-highest share since 1981.[iv] Half of respondents “spontaneously” mentioned rising petrol prices in survey interviews, up from 30% in May and just 13% in June 2021, with consumers projecting petrol prices to rise by a median of 25 cents over the next 12 months.[v] From a historical perspective, the U-Michigan’s sentiment measure undercut its prior record low of 51.7 in May 1980, amidst that year’s recession (a prolonged and widespread economic contraction).

Exhibit 1: Feelings at a New Low?

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Italian Debt Catches the ECB's Eye

When global stock and bond markets entered this year’s rough patch, we thought it was probably only a matter of time before investors returned to a long-running perceived negative: Italian debt.[i] Any time eurozone bond yields rise, financial commentators we follow warn Italy’s debt woes will return, with soaring borrowing costs rendering the country unable to finance its debt—and resurrecting the eurozone debt crisis that occurred in 2011 – 2013. So it went this week as Italy’s 10-year yields jumped past 4.0%, leading to an emergency European Central Bank (ECB) meeting Wednesday to address the issue.[ii] In what we consider typical eurocrat fashion, the bank announced a plan to have a plan but offered scant detail, leaving observers guessing.[iii] Time will tell what exactly they roll out, but we don’t see much to suggest Italy needs the help.

Commentators we follow expressed some surprise last week when the ECB didn’t address Italian debt at its regularly scheduled meeting. Italian 10-year yields exceeded 3.0% at the time, and warnings about Italy’s debt were already percolating.[iv] The bank’s silence, coupled with its discussions about raising its policy rate later this summer, seemingly sent sentiment sharply lower, triggering that jump over 4.0% for the first time since 2013, as the eurozone crisis wound down. (Exhibit 1) Hence, Wednesday’s emergency meeting.

Exhibit 1: Italian Yields in Context

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Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

This article reflects the opinions, viewpoints and commentary of Fisher Investments MarketMinder editorial staff, which is subject to change at any time without notice. Market Information is provided for illustrative and informational purposes only. Nothing in this article constitutes investment advice or any recommendation to buy or sell any particular security or that a particular transaction or investment strategy is suitable for any specific person.

Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.