Daily Commentary

MarketMinder’s View: It took 25 years of talks, but the EU finally has a free-trade deal with South America’s “Mercosur” bloc (Brazil, Argentina, Paraguay and Uruguay). It isn’t quite over the finish line, as it needs parliamentary ratification, but European Commission President Ursula von der Leyen secured the ok from a majority of EU heads of state, clearing the way for her to sign the pact next week. Like all trade deals, we don’t expect this to be an immediate boon for either side. Trade pacts take effect slowly, with gradual phase-in periods, which saps surprise power and delays the economic effects. To us, this one is significant more for what it shows: The US’s tariffs are motivating the rest of the world to push for freer trade among themselves—not retaliation and protectionist actions. The article details some of this (which reminds us, MarketMinder is politically agnostic, preferring no politician nor any party and assessing developments for their economic and market implications only), showing how reality on the trade front has shaped up far better than most expected when President Donald Trump announced sweeping tariffs last April. US trade may have more costs and friction, but trade getting freer elsewhere is a long-term positive and perhaps a near-term sentiment booster as positive surprise continues.

MarketMinder’s View: In happy—if backward-looking—economic news, Japan’s consumer spending rose unexpectedly in November, with a 2.9% y/y burst defying expectations for a -0.9% drop. The month-over-month print was even better, with spending up 6.2% (yes that is a seasonally adjusted figure), beating expectations for 2.7%. Now, this isn’t necessarily the start of a hot trend, as “an internal affairs ministry official said one-off, volatile categories, including automobile-related expenses, contributed to the November upside surprise.” But spending in core categories was healthy too, perhaps indicating Japanese domestic demand is recovering from its Q3 slump. Markets are looking well beyond that to the next 3 – 30 months, of course, but confirmation of a recovery can help sentiment and show stocks haven’t been pricing in hot air.

MarketMinder’s View: This piece quite obviously references individual stocks and funds, so as a friendly reminder, MarketMinder doesn’t make individual security recommendations. We are here for the broader discussion only. Here, the discussion is a very good look at so called factor funds, which group holdings by “a set of characteristics, shared by large numbers of companies, that shape risk and return—for example, value or momentum.” You might think this means similar-sounding funds across a range of providers have similar holdings, but you would be wrong, since these factors’ definitions and criteria are often in the eye of the beholder. “The value factor, for instance, focuses on cheap stocks. But a fund manager can define ‘cheap’ as having lower multiples of earnings, sales, assets or cash flow—or still other measures or combinations of measures. The potential variations are almost endless.” As a result, a fund’s actual holdings might not square with why you want to own that fund. The article illustrates the point with the titular auto company, which features in some value funds an investor might use to diversify a portfolio that includes a sizable position in said auto company, which many consider a growth stock. You can’t know if a fund will actually do what you want it to do unless you look at the holdings. That is the first lesson here. The second: “Any given factor, no matter how well it has done in the past, can underperform the overall stock market—not just for years, but decades. Or it can generate superior long-term returns from remarkably short bursts of outperformance.” So if you are attracted to something that just did well because of its recent returns, give yourself a reality check. Lastly, many of these funds can end up being concentrated plays on a small segment of the market, which reduces diversification. Do your due diligence, remember your goals, think holistically, and tread lightly.