Daily Commentary

MarketMinder’s View: First and foremost, our hearts go out to all those affected by this tragedy, whose toll we know extends far beyond the physical damage. But setting aside emotion, this article shows the difficulty of tallying any natural disaster’s economic impact. Is it the collective value of all the destroyed property? The cost to insurers, presently estimated at $20 billion? The combination of destroyed property and subsequent economic activity lost due to business closures both temporary and permanent, which estimates peg at $150 billion? For investors, we think there are a couple of things to keep in mind. One, the stock market impact likely centers on Insurers, and markets deal with these things very efficiently. Two, the economic effect probably doesn’t factor into national growth for good or ill. Property destruction doesn’t show up in GDP—it deletes existing physical capital, not the flow of economic activity. GDP will register lost commerce because of destroyed and closed businesses, but local things like this tend to fade in national data, as past disasters showed. Three, which is tangential to this article but always worth mentioning, rebuilding isn’t stimulus. Replacing destroyed property redirects investment rather than creating it, and given officials’ belief that arson was responsible for at least one of the blazes, residents and business owners are probably staring at years of insurance and legal red tape before they can break ground. Many homeowners and business owners may not have the capital or cash flow to wait it out. This isn’t a stock market driver, but too often we see unwarranted optimism about rebuilding after disasters being an economic boost. It isn’t.

MarketMinder’s View: This piece is overtly political, which we think you should look past—we are politically agnostic, preferring no party nor any politician. We assess developments for their economic and market implications only, which is our focus here. This piece argues the UK government’s spending plans, unveiled in last Halloween’s Budget, are responsible for the rise in long-term bond yields, which are raising the UK’s debt interest payments and thus risk forcing more tax hikes to cover spending plans (which the article then recaps in great detail). It casts the whole thing as a fiscal crisis, as if UK public finances are on the brink of disaster. We think this is all rather overwrought. As the article notes—and dismisses—long-term interest rates’ rise is global. US 10-year Treasury yields’ rise since mid-September roughly matches 10-year Gilts’. If the UK’s situation were so dire, its yields probably wouldn’t have matched the world’s “risk-free” benchmark. Yes, Chancellor of the Exchequer Rachel Reeves might have benefited from leaving more than £9.9 billion between her proposed spending and the maximum allowed under the government’s self-imposed deficit rules, but those rules were always arbitrary and based on the Office for Budget Responsibility’s equally arbitrary and imprecise forecasts. That rule renders the supposed “need” for new tax hikes more of a political issue than something actually dictated by economic conditions. Lastly, this all assumes rates rise and stay there. That is possible, but this could also be a short-term move. Bond markets are volatile too, after all.

MarketMinder’s View: This is a tour de force in overthinking volatility. It argues that when bond yields first rose after the election, stocks were happy because bonds were pricing in pro-growth policy changes both happening and having a near-term economic effect. But now, it claims, because yields indicate the US economy is overheating and about to stagnate, stocks are unhappy. Perhaps. But as Ben Graham preached, markets are voting machines in the short term. Over the medium and longer term they weigh fundamentals. But in the near term they swing up and down on sentiment. This article basically concedes as much without realizing it, noting that opinions seem to be affecting returns rather than any actual fundamental shifts. Whenever sharp volatility arises, we don’t think the best move is to immediately shift your market outlook. Rather, remember bear markets usually start with a whimper, not a bang, and take time to assess the fundamental landscape. The last thing you want to do is get out too early and then get whipsawed.