Daily Commentary

MarketMinder’s View: While it is a Republican Congress and White House flirting with a diesel export ban today, fuel bans are a bipartisan temptation whenever prices get high, so set aside the politics here, remember MarketMinder favors no party nor any politician, and let us look at the issue itself. This piece does a great job explaining why banning exports of diesel (or gasoline, if that were in politicians’ sights) would be an own goal. “That’s because a ban could prompt U.S. oil refineries to make less diesel, which would cause the fuel’s price to rise again. Restrictions on diesel exports could even reduce the supply of gasoline, jet fuel and other fuels that are made alongside diesel in refineries.” Currently, US refiners produce more diesel than the country consumes, exporting the surplus. That adds to global supply, helping prices worldwide. If refiners couldn’t export excess production, they would produce only what they could sell here, reducing global supply and lifting prices, since global supply and demand determine prices. Adding insult to injury: “Refineries configure their operations to produce various petroleum products from the crude oil they process. Although refineries could produce more of certain products — such as jet fuel rather than diesel — making such changes is expensive and time consuming. It would be far simpler for refineries to cut production of all fuels, causing the prices of gasoline, jet fuel and other products to increase.” Moreover, refineries have been running at full tilt this year and many require shutdowns for maintenance nearly annually. Banning diesel could encourage that to happen, reducing production quite broadly. Markets are familiar with these tradeoffs, and an export ban isn’t guaranteed to happen, but a backfiring ban could hit sentiment temporarily.

MarketMinder’s View: As a reminder, MarketMinder is nonpartisan and prefers no political party or politician over another. We share this story about far-left presidential hopeful Jean-Luc Mélenchon’s plan to “cancel” around 14% of France’s total debt to discuss a broader point: Radical-sounding campaign promises from both sides of the aisle can shake sentiment but often prove difficult to enact, creating room for reality to exceed expectations. As the article discusses, Mélenchon has claimed, “… France could simply ‘take’ bonds accumulated by the Banque de France during years of ECB quantitative easing and ‘throw them into the fire’.” Sounds spicy, and plenty of public figures, including European Central Bank President Christine Lagarde, have rebuked the idea. Yet before presuming one of the presidential frontrunners in next year’s election risks a French default, consider how Mélenchon’s own La France Insoumise (LFI) Party has softened the rhetoric: “LFI has clarified more recently that it wanted to convert the sovereign debt into perpetual zero-coupon bonds. Mélenchon would not act unilaterally, said Éric Coquerel, an LFI MP on France’s parliamentary finance committee, but a Europe-wide solution was needed as financing and investment needs ballooned across the bloc.” Now, a perpetual zero-coupon bond isn’t exactly worth the paper it is printed on, and an involuntary swap would still be a default, but the rest of that sentence sounds mostly like an exercise in bureaucracy, debate and nothing changing. Politicians are in the business of winning votes, and given three-quarters of voters say they are worried about the national debt, Mélenchon’s rhetoric is likely finding at least a somewhat receptive audience. But don’t let hot rhetoric spook you into thinking French politics may torpedo the French economy. As the economist quoted in the conclusion notes, “… Like Mélenchon, politicians in the US are making seductive pledges ahead of November’s midterm elections. ‘We’re in this impasse in which there are so many imperatives to spend on, no one wants to increase taxes … every politician is seeking a way to manoeuvre,’ [Allianz economist Ludovic Subran] said. ‘Donald Trump promises $5,000 cheques. In France we’re promising to cancel debt.’” But talk is cheap. For more, see our September 4 commentary, “About Those ‘Spiking’ French Yields.”

MarketMinder’s View: To dive into that titular history, “The S&P 500 has logged a 2.6% decline, on a median basis, three months following the first hike in a cycle, according to data from LPL Financial, which examined six cycles since the Fed began announcing outcomes of its meetings in 1994. … In five of the cycles, declines from S&P 500 peak levels ranged from 8% to 14%, with the lows occurring from one month to three and a half months after the hike, RBC said.” We have a lot of questions about the methodology here, including the apparent use of high-water benchmarking that may or may not coincide with the actual hike date. But set all that aside and consider something else the article notes: The S&P 500 was positive 12 months after the initial rate hike in 5 of 6 instances (the exception being 2022, which coincided with a shallow, recession-less bear market), a record of frequent positivity that stretches back decades prior when you use a different methodology, as we have. With that knowledge, what does it matter what wiggles stocks might take within three months of the first hike? Short-term volatility strikes any time, for any or no reason, and what matters is that rate hikes aren’t auto-negative over any meaningful timeframe. We suggest investors refrain from making short-term moves in reaction to any event, whether it is a Fed rate hike, an upcoming election, war, disaster, the return of pumpkin-spiced lattes or other seemingly negative policy announcement. Successful long-term investing doesn’t rely on jumping in and out of a bull market—it is more about riding out the negative volatility whenever it arrives and keeping your eye on the longer-term prize.