Daily Commentary

MarketMinder’s View: We doubt that if South Korea’s reclassification with index provider MSCI goes through—as described here from Emerging Markets (EM) to developed market status—it will have much impact on markets, which generally look beyond such window dressing. Reclassification tends to move glacially, sapping surprise power, and the decisions are backward-looking confirmation of economic development and market accessibility. This article shows how slow-moving that process can be. “FTSE Russell and S&P Dow Jones Indices already moved Korea to developed status in 2009 and 2001, respectively, citing the size and sophistication of its market. But MSCI’s upgrade is seen as the most important for fund flows because it has the biggest market share in the business. MSCI identifies a developed market based on three main metrics: economic development, the size and liquidity of equity trading and accessibility, according to its website. This can lead to a degree of subjectivity when deciding which countries deserve the prestigious developed label, analysts say.” Moreover, while some experts interviewed here think a South Korean reclassification would boost the country’s markets, the history is mixed. See Israel, which “... became the first country in the Middle East to join MSCI’s list of developed markets in 2010. Expecting a boon to its capital markets, the move instead triggered $2.5 billion in outflows the year after, according to Bank of Israel data. Turnover for the stock benchmark and total market capitalization tumbled more than 40% in the two years after the announcement.” Further, though index designations may have implications for some fund managers, it isn’t as if South Korean stocks are currently inaccessible to global investors, which reminds us: MarketMinder doesn’t make individual security recommendations. As interesting as all this is, don’t overrate reclassification as a market driver. Other factors, including South Korean companies’ earnings looking forward relative to present expectations, have far more influence.

MarketMinder’s View: We agree with the titular sentiment that money and credit flows can provide clues on the economy’s direction. However, we disagree with this article’s broader argument that the latest trends in debt markets and other credit indicators are signaling trouble ahead. The claim: “To be sure, people have been predicting a recession for months, and it hasn’t come. Jobs numbers, which analysts commonly use to gauge economic health, are gangbusters. But warning signs are flashing in the typically more conservative debt market, which moves money from banks and other lenders to businesses and families. A credit crunch that hit commercial real estate this spring might be a leading indicator for the economy as a whole.” The concerns are understandable, and we don’t dismiss certain industries’ struggles, but in our view, it is critical to scale the issues. For one, office woes are only a tiny portion of banks’ commercial real estate portfolios—and they are hardly unanticipated. Then too, loan standards have been tightening, as the article frets, yet it neglects to note bank lending overall continues growing swiftly (per the St. Louis Fed). Another worry: “Corporate bankruptcy filings have hit their highest number since 2010, according to S&P Global Market Intelligence.” But it isn’t far off the average since then—not to mention 2010’s much-higher number of bankruptcies didn’t result in recession. The reason: Bankruptcies are the result of economic weakness—they don’t cause it. The article also overstates consumer debt problems, in our view. As we wrote yesterday, delinquency rates remain historically low. A return to pre-pandemic rates wouldn’t be alarming. In our view, the fear on display here—seeming danger lurking in debt shadows everywhere—shows a large, bullish gap between dour sentiment and a not-horrible reality.

MarketMinder’s View: Please note MarketMinder doesn’t make individual security recommendations. Specific companies mentioned here serve only to highlight a broader theme: concerns about low market breadth, (i.e., how many stocks are participating in the market’s rise). This year, as many articles like this have pointed out, a couple of mega-cap Tech and Tech-like companies have propped up the S&P 500’s rally. The supposed problem: “... seven stocks now account for about 29 per cent of the market capitalisation of the S&P 500 and 60 per cent of the Nasdaq 100. JPMorgan analysts last month said the US equity rally was driven by the narrowest leadership in a rising stock market since the 1990s. As market tides come and go, there will always be periods when stocks or sectors dominate market indices. But the degree of imbalances now adds to the onus on investors, when choosing a passive investment vehicle, to check whether it actually provides diversification or exposure to the sector they are hoping for.” While we agree it is worthwhile for investors (“passive” or otherwise) to be aware of their benchmark indexes’ composition, the article seems overly concerned that narrow breadth creates a distorted view of the market. But market breadth at any given time is inherently backward looking since it reflects past returns, so it won’t tell you where stocks are headed next. More broadly, the perfect index doesn’t exist—they all have their limitations and nuances. Keeping up to date on index revisions is sensible practice, but worries about skewed broad market gauges are overstated to us.