Daily Commentary

MarketMinder’s View: While new free-trade talks are nice and could bring long-term benefits, they aren’t market drivers. Nor are actual deals, necessarily, and this piece demonstrates why (it also names several companies, so we remind you MarketMinder doesn’t make individual security recommendations and highlights this for the broad discussion only). Japan would indeed benefit from freer access to South America’s Mercosur trade bloc (Brazil, Argentina, Bolivia, Paraguay and Uruguay), which already buys a boatload of Japanese auto parts and electrical equipment. “Additionally, Brazil ranks second only to China in rare earth reserves, and Latin America’s crude oil exports account for about 10% of the global total. Since Japan relies heavily on imports for many resources, the agreement would offer significant benefits. A Japanese government official said an agreement would allow the country to diversify where it procures resources.” But Brazil also exports a lot of beef, and Japanese ranchers are wary of increased competition. The agricultural sector is a key voting bloc for Japan’s ruling Liberal Democratic Party, and as the article notes, the person leading the trade agreement task force wants to exclude agriculture from any deal. This isn’t necessarily a stumbling block, but historically, it has led to trade deals taking over a decade to phase in, leaving their benefits outside the 3 – 30 month stretch markets typically weigh.

MarketMinder’s View: We found this piece mixed, and as it mentions several publicly traded companies, please note MarketMinder doesn’t make individual security recommendations. We generally agree sentiment is warming toward Tech stocks. High valuations, burgeoning IPO activity and more stock-based mergers and secondary offerings can signal rising expectations toward a certain sector, region or category of stocks—and some of these measures have been heating up, particularly for Tech. But critically for investors, none of these metrics are effective market timing tools, nor do their upticks necessarily signal euphoria has arrived. History shows bull markets can climb for a while alongside warming and even euphoric sentiment. The dot-com bubble is one example, as the charts herein show—gauges including deal value, stock valuations and stock-based M&A activity all began rising in the mid-1990s, years before the bull market ended in March 2000. Second, today’s stock prices don’t predict tomorrow’s. They can always get “more expensive” or “cheaper,” which even the article cedes. “Worse, the baseline for what counts as expensive can change over time as the structure of companies or accounting standards shift. In the case of book value, it now needs so many adjustments as to be virtually useless. One example: The S&P 500’s ratio of price to forecast earnings currently stands just below 20, well down from the 23 times reached both in 2020 and last year, and the record 24.5 times in the dot-com bubble.” On top of this, most widely watched valuation methods rely on backward-looking data, rendering them useless in predicting markets’ direction. So while we generally agree moods are sunnier toward big Tech and Tech-like companies, that doesn’t mean a downturn is around the corner.

MarketMinder’s View: According to the research outfit cited here, one solution to Social Security’s eroding revenue base is to eliminate the annual earnings payroll tax cap ($184,500), which has supposedly caused the program to lose out on faster income growth among top earners. “The share of total wages subject to Social Security taxes has fallen from almost 87% in 1984 to roughly 83% today, largely because high earners' pay has grown much faster than everyone else's, lifting more of their income above the tax cap, the report found.” Perhaps that doesn’t sound huge, but according to some of the estimates discussed here, “Removing or phasing out the tax cap could close between 22% and 67% of the program's funding gap, according to the Social Security Administration's scoring of these proposals.” Now, we don’t think reality is as smooth as the projections here make it out to be, e.g., top earners can find other ways to mitigate tax hits. But sociological discussion about income inequality aside, this proposal inadvertently highlights a separate truth: There are different ways for Congress to patch together Social Security funding if benefits were in jeopardy. For more, see last week’s commentary, “The Politics and Practicalities of the Social Security Trust Fund.”