Daily Commentary

MarketMinder’s View: This article drives home a simple but critical point for long-term investors: Avoiding stocks because of their short-term volatility can leave you with a retirement savings shortfall. The article illustrates this with a hypothetical, illustrative example showing the power of compound growth. “For example, if you’d have invested $10,000 in the S&P 500 in 2006, by 2026, your portfolio would be worth around $88,000. Because of inflation, you would need $16,600 today to have as much buying power as $10,000 in 2006, which shows how far ahead you’d be with that stock portfolio, despite the market plummeting several times during that 20-year span. Given that typical savings account rates were near-zero for the bulk of that period, the same sum of money put into a savings account would not be able to match inflation.” The challenge for those with near-term cashflow requirements is making sure those are covered in the meantime. We agree estimating spending needs is key for money management, and keeping money you need in the near future out of more volatile securities may be sensible for some folks, depending on their overall situation. But we don’t think one-size-fits-all rules like keeping five years’ worth of planned withdrawals in cash are necessarily wise for everyone given the opportunity costs and other financial considerations. A better way: Maintain an asset allocation (mix of stocks, bonds and cash) that suits your financial goals and cash flow needs for your time horizon and comfort with volatility. Some bond exposure, for instance, may fit your circumstances more, dampening stocks’ short-term volatility while providing greater total returns (over inflation) than cash. Given everyone’s unique situation, cookie-cutter solutions are rarely optimal.

MarketMinder’s View: “Middle East oil flows, including shipments through Hormuz and alternative routes across the region, averaged more than 24 million barrels a day in the week through Oct. 18, surpassing prewar levels of 23.3 million, according to ship tracker Kpler.” Click through for more details on the workarounds—and costs of—restoring Gulf oil flows. They range from businesses finding alternative routes to shipowners willing to take on the risk of crossing Hormuz. “Compared with before the war, traders can earn $20 a barrel more reselling Iraqi oil, or about $40 million on cargo from a supertanker, estimated Homayoun Falakshahi, Kpler’s head of crude oil analysis. Three such voyages could repay the $100 million cost of a secondhand tanker.” The profit motive is a powerful force. For investors, Hormuz has become much less of a “chokepoint” than most feared at the conflict’s onset, revealing a better-than-perceived—and bullish—reality.

MarketMinder’s View: Two things predictably follow rising long-term bond yields. One is that fear over the climb will almost inevitably jump, with headlines claiming everything from fiscal fears to inflation or politics are behind them. The other is that demand for bonds tends to improve. Japan is no exception to this, as yields have jumped across the entire sovereign yield curve—part of rates’ return toward normal as the Bank of Japan undoes decades of bizarre monetary experimentation. Lo and behold, the feared bond market calamity hasn’t followed. Instead, “Japan’s 20-year government bond auction Tuesday saw the strongest demand on record, a signal that elevated yields are starting to lure domestic investors back into the market. The bid-to-cover ratio was 5.84, compared with 4.01 at the previous sale, and a 12-month average of 3.73. In reaction, the yield for the tenor fell as much as 6 basis points to 3.710% after the results, while the 30-year yield dropped as much as 5 basis points.” A bid-to-cover ratio of 5.84 means there were nearly six bids for every bond sold. And the article notes it isn’t a one-off. “Japanese investors’ net purchases of domestic government bonds climbed to the highest in 17 years in the six months ended Sept. 30, according to data released by the Japan Securities Dealers Association on Tuesday that was compiled by Bloomberg.” Amazing what a return to more normal rates can do!