Daily Commentary

MarketMinder’s View: While new free-trade talks are nice and could bring long-term benefits, they aren’t market drivers. Nor are actual deals, necessarily, and this piece demonstrates why (it also names several companies, so we remind you MarketMinder doesn’t make individual security recommendations and highlights this for the broad discussion only). Japan would indeed benefit from freer access to South America’s Mercosur trade bloc (Brazil, Argentina, Bolivia, Paraguay and Uruguay), which already buys a boatload of Japanese auto parts and electrical equipment. “Additionally, Brazil ranks second only to China in rare earth reserves, and Latin America’s crude oil exports account for about 10% of the global total. Since Japan relies heavily on imports for many resources, the agreement would offer significant benefits. A Japanese government official said an agreement would allow the country to diversify where it procures resources.” But Brazil also exports a lot of beef, and Japanese ranchers are wary of increased competition. The agricultural sector is a key voting bloc for Japan’s ruling Liberal Democratic Party, and as the article notes, the person leading the trade agreement task force wants to exclude agriculture from any deal. This isn’t necessarily a stumbling block, but historically, it has led to trade deals taking over a decade to phase in, leaving their benefits outside the 3 – 30 month stretch markets typically weigh.

MarketMinder’s View: As always, we are politically agnostic, preferring no politician nor any party and assessing developments for their potential economic and market implications only. We bring you this article, which discusses comments from an economic advisor to presumptive new UK Prime Minister Andy Burnham, for the classic pitfall it falls into: trying to guess at a new leader’s economic policy based on things they or those close to them once said. In this case, Burnham’s advisor argued the UK can afford to borrow more to build infrastructure since the assets and liabilities on His Majesty’s balance sheet would cancel out, making it a wise investment to boost growth. Now, we have long been of the general view that supposedly overindebted countries like the UK and US have more borrowing bandwidth than presumed once you balance assets against liabilities and interest costs versus revenues. Not that we advocate endlessly piling on debt or think infrastructure is some big growth-producing endeavor, but the math is there. But none of this means these things will become policy. In a Parliamentary democracy, economic policy is pretty committee-driven. Burnham’s personal economic policy preferences (which remain unknown) don’t necessarily matter. Nor do his advisors’. They can argue and urge, but economic policy ultimately comes down to whatever the Chancellor of the Exchequer and their team at the Treasury come up with—and then what the rest of Parliament will actually pass. Chatter like this helps set expectations, which helps markets price in the possible scenarios (and reduce the likelihood of negative surprise), but it doesn’t tell you what will happen. The Labour Party remains divided over fiscal policy, making sweeping change of any sort unlikely. For more, see yesterday’s commentary, “Revolving Door Turns, Uncertainty Starts Falling.”

MarketMinder’s View: We found this piece mixed, and as it mentions several publicly traded companies, please note MarketMinder doesn’t make individual security recommendations. We generally agree sentiment is warming toward Tech stocks. High valuations, burgeoning IPO activity and more stock-based mergers and secondary offerings can signal rising expectations toward a certain sector, region or category of stocks—and some of these measures have been heating up, particularly for Tech. But critically for investors, none of these metrics are effective market timing tools, nor do their upticks necessarily signal euphoria has arrived. History shows bull markets can climb for a while alongside warming and even euphoric sentiment. The dot-com bubble is one example, as the charts herein show—gauges including deal value, stock valuations and stock-based M&A activity all began rising in the mid-1990s, years before the bull market ended in March 2000. Second, today’s stock prices don’t predict tomorrow’s. They can always get “more expensive” or “cheaper,” which even the article cedes. “Worse, the baseline for what counts as expensive can change over time as the structure of companies or accounting standards shift. In the case of book value, it now needs so many adjustments as to be virtually useless. One example: The S&P 500’s ratio of price to forecast earnings currently stands just below 20, well down from the 23 times reached both in 2020 and last year, and the record 24.5 times in the dot-com bubble.” On top of this, most widely watched valuation methods rely on backward-looking data, rendering them useless in predicting markets’ direction. So while we generally agree moods are sunnier toward big Tech and Tech-like companies, that doesn’t mean a downturn is around the corner.