Daily Commentary

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.

MarketMinder’s View: Is the latest “sick man of Europe” on the mend? “Sentiment among German businesses rose for a fifth straight month in September to its highest level since May 2023, as the country’s tentative economic recovery holds. The Ifo Institute said Thursday that its closely watched business-climate index, based on around 9,000 monthly responses from businesses, increased to 89.9 in September from 88.8 in August. That was a little better than consensus expectations of 89.0 by economists polled by The Wall Street Journal.” The article also points out some major research institutes have upgraded their GDP outlooks for Germany, predicting GDP will grow 1.3% this year instead of the 0.7% forecast in March. Doubts still linger, including concerns about low water levels slowing economic activity in Germany’s chemical industry, but more experts recognize Germany isn’t in the dire straits many feared—and that improving sentiment is bullish. Hilariously, this news also comes as Chancellor Friedrich Merz encounters more and more political turmoil and headwinds in local elections, calling his leadership into doubt—which many would have cast as economically negative mere months ago. Sentiment can turn on a dime, folks. For more, see our July commentary, “Can Germany Engineer Faster Growth at Last?”