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: Some positive news on the global trade front: “The EU and several Southeast Asian nations are nearing the finish line on bilateral trade deals, and if the current deadlines hold, the European bloc will have agreements in place with six out of 11 ASEAN states by the middle of next year. … EU-Southeast Asia goods trade reached €274.9 billion ($313.7 billion) last year, up around 6% from the previous year and more than 50% from the €177.9 billion recorded in 2016, according to EU data. The Association of Southeast Asian Nations (ASEAN) is now the EU's third-largest goods trading partner outside Europe, behind only the United States and China.” Now, as the back half of the article notes, reaching a broader, more comprehensive EU-ASEAN trade framework would likely take a long time—and may never come to fruition. The EU and ASEAN launched talks for a region-to-region pact in 2007, but differences across ASEAN economies made it difficult. “The main difficulty preservers to this day, as ASEAN includes Singapore, one of the world's wealthiest economies, alongside developing and least-developed members, making it difficult to agree on common commitments acceptable to Brussels.” But as the EU reaches bilateral deals with various ASEAN members, global commerce is becoming a tad freer—another example of global trade’s reality exceeding expectations.