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.

Britain’s Intraparty Gridlock Takes Center Stage

Editors’ Note: MarketMinder Europe favours no politician nor any political party, assessing developments solely for their potential market and economic impact.

Falling uncertainty and gridlock. These are the twin political forces we think are likely to help lift stocks over the period ahead—in the US, midterm elections split Congressional control by the slimmest of margins.[i] Divided coalition governments, like Sweden’s or Germany’s, may also make gridlock self-evident. But in nations with single-party governments with strong majorities—on paper—it is stealthier, in our experience. Case in point: the UK, where our research suggests political uncertainty has dropped off after this fall’s leadership reshuffling. We think this has helped UK stocks rise more than 7% since late September, beating the MSCI World Index by several percentage points over this stretch.[ii] Now the secondary tailwind—gridlock—is taking shape, in our view, as divisions within the Conservative Party become clear to all.

In our view, the internal strife, as ever, centers on two fronts: fiscal policy and—sigh—Brexit. Starting with the latter, over the weekend, the ever-reliable unnamed senior government sources told The Sunday Times that the UK would embark on a path to sign a Swiss-style deal with the EU within the next decade.[iii] The deal would entail the UK having free trade access to the EU’s single market, but in exchange, it would have to sign on to all EU laws and regulations. As you might imagine, this did not sit well with a lot of people, including many in the current cabinet. Prime Minister Rishi Sunak leapt to damage control, vowing this wasn’t under consideration, whilst Chancellor of the Exchequer Jeremy Hunt said that, whilst he will seek freer trade with the EU, it won’t include signing on to the bloc’s diktats.[iv] Other cabinet ministers and government spokespeople joined the fray, declaring the report categorically untrue.[v]

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What We Think Investors Can Glean From the UK’s Unsurprising Autumn Statement

Editors’ Note: MarketMinder Europe favours no politician nor any political party, assessing developments solely for their potential market and economic impact.

Last Thursday, the UK’s fiscal drama took another turn as Chancellor of the Exchequer Jeremy Hunt delivered the widely watched Autumn Statement. After the recent fireworks, some observers we follow anticipated markets would experience some volatility in the announcement’s wake, but they got very, very little.[i] That predictably led to observers claiming he had successfully assuaged markets, but we think that is personality politics, not analysis. In our view, the answer is much simpler: We think Hunt’s plan can best be described as a package of rather meagre tax hikes and the usual not-so-austere slower pace of spending growth. It seems more likely to us the market’s big collective yawn was related to the sheer lack of anything surprising in this announcement, given the government’s widespread telegraphing of what would be in it.[ii] So we suggest setting that aside. We think the more telling thing about this plan—and the analysis around it—is just what it shows about sentiment toward the UK economy today.

First, here are the particulars of the new fiscal plan, which replaced the mini-budget, which amended the Budget, all in a matter of a few months.[iii]

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Leading Indicators Point to Slowing US Inflation Ahead

Recent US inflation (rising prices economy-wide) reports have slowed some, and given America’s sizeable weight in world markets, we think they offer global investors a modicum of relief.[i] Yet many commentators we follow warn that high inflation won’t subside anytime soon, with October’s readings a false dawn.[ii] They say it is “too soon to celebrate” and argue the US Federal Reserve has more work to do.[iii] Perhaps. Monthly inflation data variability is unpredictable, in our experience. However, we see growing evidence inflation is likely to slow—and defang one of the global market’s biggest concerns this year.

From America’s headline consumer price index (CPI—a government-produced measure of goods and services prices across the economy) and its “core” CPI excluding food and energy to producer prices and import prices, US inflation has come off the boil since the summer.[iv] Yet commentators we read argue other measures—like the “sticky price” CPI (a gauge of less-volatile prices)—continue to rise.[v] Whilst we agree about not reading too much into short-term wiggles, we don’t think various inflation measures—or subsets of them—are any more telling than others. For example, our research shows producer prices don’t reliably lead CPI. We find they are coincident, rising and falling together. Instead of poring over backward-looking inflation data—past prices, which our research shows never predict—we think it is more helpful to take cues from forward-looking measures, which indicate inflation is likely to fade over the coming year.

Exhibits 1 through 3 show a few leading US inflation indicators. Now, as the charts also show, these aren’t super-precise gauges. Their lead times to American CPI can vary—sometimes by a lot. They probably won’t pinpoint inflation’s peak, but together, we think they give a good sense of US CPI’s likely general direction ahead.

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Weak UK GDP Probably Isn't Sneaking Up on Stocks

UK gross domestic product (GDP) fell -0.2% q/q in Q3—the first major nation to announce a contraction last quarter—and most commentary we read portrayed the decline as just the start of a long-gruelling recession.[i] After all, whilst the Office for National Statistics (ONS) reported September’s monthly GDP had some artificial downward skew from the late Queen’s funeral bank holiday, cost-of-living pressures ramped up in October as the household energy price cap reset higher.[ii] Many political analysts we follow warn Chancellor of the Exchequer Jeremy Hunt will dial up the pain with tax hikes and spending cuts at this week’s Autumn Statement. In our view, the UK economy is pretty clearly weakening, and obstacles lie ahead. Yet from an investing standpoint, we see more cause for optimism than gloom. UK recession chatter from commentators we follow isn’t new, and we think its power over stocks seems to be waning. Moreover, with sentiment so low, the potential for positive surprise seems high, in our view—we think reality has a very low bar to clear.

We didn’t see much to cheer in either the Q3 or September GDP releases, both of which hit Friday. September’s -0.6% m/m decline may have been milder without the extra bank holiday, which shut most retail and services, but the ONS warned this explains only half of the service sector’s -0.8% monthly contraction.[iii] The rest appears to stem largely from cost-of-living pressures, which knocked consumer-facing services hard, extending August’s -1.6% m/m drop.[iv] Heavy industry eked out slight monthly growth, but that stemmed primarily from power and other utilities and mining, which includes oil production. Manufacturing, meanwhile, was flat overall, but that was because growth in pharmaceutical products and transport equipment offset declines in high-tech and commodity-heavy industries—more evidence of pressure from rising costs, in our view.[v] Meanwhile, for Q3 overall, most positivity came from government spending and investment, whilst household spending and business investment declined. Net trade (exports minus imports) added a solid contribution, but imports’ -3.2% q/q drop played a big role in this.[vi] Whilst this adds to GDP, it could represent weakening demand as the weak pound raised costs.[vii]

Mind you, we think it is a mistake to extrapolate any of the above forward. GDP reports tell you what just happened in the broad economy, not what will happen. They aren’t predictive, and our research shows some variability from month to month or quarter to quarter is normal. Moreover, the ONS initially reported a -0.1% q/q contraction in Q2 GDP before revising their estimate to 0.2% growth.[viii] Q3 results could get a similar boost as more data come in. They could also be revised downward, but we are highlighting possibilities here, not assigning probabilities. Fiscal policy is a wildcard for now, in our view, but even the rumoured austerity isn’t necessarily a huge negative, to us. The last time the UK launched an austerity programme, total public spending grew by less than originally planned but didn’t contract outright.[ix] More tax hikes could squeeze households, but the aspects of former Prime Minister Liz Truss’s mini-budget that have so far survived—including the reversal of a small national insurance tax hike and some assistance for household energy costs—could be a partial offset. This is all very much wait-and-see, in our view.

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Our Snap, Preliminary, Too Early Take on America’s Midterm Elections

Editors’ Note: MarketMinder Europe favors no party nor any politician, assessing developments solely for their potential market and economic implications.

Six days after America’s midterm election votes were due, a bit still remains unclear. The state of Georgia is headed for a Senate runoff election on 6 December, as neither candidate received the required majority of votes.[i] Quite a few races are undecided in the House of Representatives (or, “the House”), too.[ii] Over the weekend, the Democratic Party sealed control of the Senate after confirming victories in both Arizona and Nevada—giving them 50 votes in the 100-seat chamber.[iii] Even if they don’t win the runoff in Georgia, Vice President Kamala Harris—a Democrat—breaks the tie if there is a 50 – 50 vote, extending the Democrats’ control. Meanwhile, although the House seems to be heading for Republican Party control—which would usher in the bullish gridlock that our research finds typically benefits markets after midterms—that isn’t assured yet. In our view, all this is keeping uncertainty high right now, but we think it is likely to start falling fast before long.

In our view, there are only a couple definitive statements one can make about the midterm election for now. One, it went off without much protesting or squabbling over improprieties. Two, it was a very close election. Despite what some political commentators we follow predicted, there wasn’t overwhelming Republican success in the House. However, the lack of a Republican landslide is basically what we thought likely heading into the contest. As Fisher Investments founder and Executive Chairman Ken Fisher explained in his August LinkedIn column, the House’s structure made a wave election highly unlikely:

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From the Mailbag: Some Considerations About Those ‘Real’ Returns

Here is a question we have seen a few times in our proverbial mailbag this year: Shouldn’t you adjust stock market returns for inflation (broadly rising prices across the economy)—i.e., “real” returns? We understand the sentiment, given the backdrop in 2022. And, in our experience, this has given recent rise to another question: Shouldn’t corporate earnings be adjusted for inflation? But in our view, there are some pretty big drawbacks we think anyone considering these practices ought to weigh.

To start with, investors earn nominal (meaning, unadjusted) returns. Like a worker’s paycheque, that is what shows up on statements and in brokerage accounts, making them the most meaningful, in our view. Furthermore, corporate earnings and fundamentals are also reported on a nominal basis, so adjusting stock returns would compare apples and squirrels, if you will pardon the metaphor, since a stock is a share in a company’s future earnings.

But that is just the beginning. In our experience, statisticians typically adjust economic data for inflation to remove skew caused by rising prices. Consider UK retail sales: For much of this year, growth in sales values was quite strong.[i] But was that because prices rose, or because people actually purchased more goods? Enter the inflation-adjusted measure, sales volumes. It fell in seven of the nine months for which we have data so far this year.[ii] Similarly, nominal US GDP (gross domestic product, a government-produced measure of economic output) grew 6.6% annualised in Q1, 8.5% in Q2 and 6.7% in Q3.[iii] Without the inflation-adjusted dataset, it is likely we would never know whether this stemmed from rising prices or an actual increase in economic activity. Deflating the figures gives investors an idea of what actually happened—slight Q1 and Q2 contractions, followed by growth in Q3.[iv]

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Q3 US Corporate Earnings Take Shape

With about 85% of America’s S&P 500 companies reporting Q3 corporate earnings, what can global investors glean from them?[i] As US stocks constitute 70% of the MSCI World Index’s market capitalisation, we think a look at their earnings—and what they reveal about how Corporate America is weathering this year’s storms—can provide useful insights.[ii] Beneath the surface of what we think are overall mixed headline results, we see strong indications that inflation (rising goods and services prices across the broad economy), supply chain issues and other headwinds are working their way through the system. We don’t think this predicts stocks, but it adds colour to what markets have spent this year pricing in and suggests to us warnings from commentators we follow of much greater pain from here will likely miss the mark.

As many analysts we read point out, earnings that exclude the Energy sector are down—not terribly much, but perhaps consistent with what this year’s mild bear market (typically prolonged fundamentally driven decline exceeding -20%) in US dollar terms hinted at in advance.[iii] Whilst the S&P 500’s Q3 earnings are up 2.2% y/y (combining actual results and remaining estimates in US dollars), Energy’s 138.6% haul is swelling the figure.[iv] Excluding Energy, they fell -5.3% y/y, the second-straight decline after Q2’s -4.0%.[v]

The weakest sectors were Communication Services, Financials and Materials, which are facing year-over-year earnings declines of -22.2%, -20.0% and -15.9%, respectively.[vi] Based on our research, declining ad revenue was Communication Services biggest detractor, whilst Financials’ decline is partially an accounting construct—banks’ loan loss provisioning is contributing to their earnings weakness, especially after releasing reserves last year. US accounting rules require banks to set aside reserves based on projected potential losses over the life of a loan, which can fluctuate with economic forecasts, and this gets booked as a cost in their financial results. Banks are also allowed to release these provisions as their forecasted future losses change, which gets booked as income in their financial results. Then, by our analysis, commodity prices’ steep drop from a year ago seems mostly behind Materials’ profit slide. All this is backward looking, which our research shows doesn’t affect forward-looking stocks fundamentally. So we wouldn’t presume any of it signals worse to come for the sectors in question or the S&P 500 overall. Nor do we think Energy’s jump is some massively bullish feature looking forward—it is an artefact of higher oil and gas prices, in our view.

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What Q3 Eurozone GDP Growth Tells Investors

Surprise! After the release of America’s Q3 gross domestic product (GDP, a government-produced measure of economic output) last Thursday, the eurozone’s four biggest economies followed suit. And, rebuking widespread recession (broad, economy-wide decline in activity) chatter, Germany stole most headlines in financial publications we monitor thanks to Q3 growth beating contraction projections. Yet most coverage we observed didn’t cheer the better-than-estimated numbers. Instead, we saw many analysts warn the surprise beat was a passing anomaly before more troubling times ahead—especially given persistent elevated inflation (rising prices economy-wide). Whilst last quarter’s data are old news, we think this dour reaction reeks of the pessimism of disbelief, a psychological phenomenon in which investors emphasise bad news and look for negatives in developments that would otherwise appear good. These conditions are often the foundation of a recovery, based on our research. 

First, the numbers: Eurozone GDP grew 0.2% q/q in Q3, topping expectations of 0.1%.[i] Of the 19 eurozone nations, 9 have reported data as of 1 November, with 3 (Belgium, Latvia and Austria) contracting.[ii] But the common currency bloc’s biggest economies all expanded. Italy grew fastest (0.5% q/q), beating flatline expectations, as national statistics bureau ISTAT noted service sector gains offset contractions in industry and agriculture.[iii] The findings were also mixed but growthy in France (0.2% q/q) and Spain (0.2% q/q).[iv] For the former, France’s National Institute of Statistics and Economic Studies (INSEE) reported gross fixed capital formation contributed whilst household spending stagnated; for the latter, tourism boosted the services sector as Spain relaxed its COVID restrictions.[v] However, the Continent’s largest economy, Germany, grabbed most attention amongst financial publications we monitor, growing 0.3% q/q.[vi] Though the first estimate doesn’t share a component breakdown, statistics agency Destatis credited private consumption expenditure for Q3 growth.[vii]

In a vacuum, we think the data were fine—most were slower than Q2 growth rates, but they largely beat analysts’ consensus expectations.[viii] However, we found most coverage expressed reason to be downcast, as it acknowledged the positive news, yet added caveats: a yeah, but response. Based on our research, that is evidence of the pessimism of disbelief.

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What Recent Data Suggest About America's Economy

Mixed. That is the word most financial publications we follow used to describe the US’s Q3 gross domestic product (GDP, a government-produced measure of economic output) report, which hit the wires late last week. On the bright side, the 2.6% annualised growth erased Q1 and Q2’s sequential declines and brought US GDP to a fresh high, with consumer spending and business investment also notching new records.[i] But residential real estate detracted bigtime, and two of the three biggest contributors were (in our view) relatively less meaningful: government spending and net trade.[ii] Furthermore, what we consider the most meaningful segment of the US’s yield curve—the difference between 3-month and 10-year US Treasury yields—slightly inverted in recent days, fuelling warnings from financial commentators we follow that recession, or a broad decline in economic activity, is just around the corner.[iii] To be fair, we think it is possible economic conditions in the US get worse from here. But it isn’t a foregone conclusion, in our view, and for stocks, a mild US recession probably lacks much surprise power anyway.

The US GDP report did clear up one thing, in our view: It cuts against commentators’ argument that the US economy was already in recession when GDP slid in Q1 and Q2. In both quarters, consumer spending and business investment rose—and even when you factor in residential real estate’s burgeoning slide, pure private sector components overall grew.[iv] (We consider consumer spending, non-residential fixed investment and residential fixed investment to be the pure private sector components.) That repeated in Q3, contributing to US GDP more than erasing its Q1 and Q2 slide.[v] But under the bonnet, the script flipped a bit. US government spending and fast-rising imports pulled headline GDP negative in Q1, whilst the US government and falling private inventories were Q2’s detractors.[vi] Yet in Q3, net trade (exports minus imports) added 2.77 percentage points to headline growth as exports rose 14.4% and imports fell -6.9%.[vii] That isn’t great news, in our view, considering we think imports represent domestic demand and the strong dollar—in theory—should have enabled US businesses and consumers to import a higher quantity of goods for less money. So we think that is something to watch. Meanwhile, consumer spending growth slowed from 2.0% in Q2 to 1.4% as spending on goods contracted again (-1.2%) and spending on services slowed from 4.0% to 2.8%.[viii] Business investment was more of a bright spot, accelerating from 0.1% annualised growth in Q2 to 3.7%, but residential real estate’s -26.4% plunge weighed heavily on total private sector growth.[ix]

Now, we aren’t of the school that thinks slowing private sector growth is an automatic prelude to an economic contraction. Past behaviour and data don’t predict. However, we also think it is fair to presume elevated inflation (broadly rising prices across an economy) forced US consumers to cool their jets a bit, and that could continue. Imports’ slide could be a sign domestic demand overall is slipping in America. Inventories’ continued slide could mean US businesses are in cost-cutting mode. We think a lot of this stuff is open to interpretation.

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A Counterpoint to Dour Economic Forecasts

Forecasts of recession—broad, economy-wide weakness—have dominated financial headlines we have seen this year. That is understandable, in our view, given the global economy’s soft patches and risks (e.g., Europe’s energy situation). Moreover, today’s economic headwinds, from elevated inflation (rising prices economy-wide) to possible energy rationing, may heighten the prospect of recession in certain regions.[i] That said, projections of a severe global downturn seem overstated, in our view. Based on our research, fundamental drivers—key amongst them bank lending—suggest reality isn’t as poor as many outlooks we have seen anticipate and underpin the recovery we think is coming.

Our review of headlines has found many prominent outlets and voices say things are going to get worse before they get better. A recent Wall Street Journal survey found a majority of polled economists think America will enter recession in the next 12 months.[ii] World Bank President David Malpass warned of a “real danger” of a worldwide contraction next year.[iii] The International Energy Agency lowered its global oil demand growth forecast because major institutions downgraded their latest global GDP estimates.[iv]

But the kicker: The IMF’s latest “World Economic Outlook” (WEO) cranked recession warnings into overdrive, according to our review of coverage. Interestingly (and unsurprisingly to us), most coverage we reviewed focussed on one line in the WEO’s foreword: “In short, the worst is yet to come, and for many people 2023 will feel like a recession.”[v] (Boldface ours) We don’t dismiss people’s emotions or hardships, but feelings don’t predict people’s economic behavior, based on our market research. Looking a bit deeper at the report, the IMF isn’t even forecasting a global GDP contraction next year—it is predicting annual growth of 2.7%, 0.2 percentage point below its July WEO estimate.[vi] Yes, that is slower growth—but it is still growth.

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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.