Daily Commentary

Well, it is Election Day here in the US, so I am going to write about … fashion. And financial writing. And personal finance. And how they all intersected in a fun article that is begging for a friendly correction. Now and then, financial writing intersects with other general interest areas. A few years ago it was baseball cards and collectibles. Early this year, rare books got a turn. And now, clothes are in the spotlight, thanks to upstart wardrobe rental businesses. The business model goes like this: You have nice clothes in your closet, fancy dresses that don’t get much use. You keep them because it is always good to have an event dress on hand so that you don’t need to shop for that wedding or holiday party. But they end up pushed to the back, and their cost-per-wear ratio stays high. Meanwhile, there are other people out there who need a dress for an event and don’t have the means, time or desire to buy something new. Problem, meet solution: wardrobe rental apps! List your wardrobe and rent outfits to people for an evening, like AirBNBing your closet. Your clothes turn into cash flow, people don’t need to waste money buying what they view as single-use outfits, everyone gets to feel sustainable or whatever, win-win-win. Last week, one of the UK fashion pages profiled some ladies who have found great success renting their wardrobes. After getting plenty of hits on the pieces they already owned, they bought new dresses to rent out and now have thriving operations that keep the cash rolling in. So far, so fun. But here is where things go a little far: The profile was full of terms like “invest” and “rate of return,” even comparing the purchasing of new clothes to rent out to investing in stocks and bonds. This is just one example of phrasing I have seen a lot over the years. People occasionally talk of “investing” in a new television. Or a PC. Or, or, or. Friends, it is wrong and could lead you to ...

Last week, a group of disparate developing economies got together in Russia to hold economic talks. Yes, this was another “BRICS Summit,” and like earlier get-togethers, it has some wondering whether its growing ranks challenge the global economic order—and will upend the US’s supposed “dollar hegemony.” We touched on this briefly in Monday’s reader mailbag, but we see no danger of it undermining the greenback in the foreseeable future—it looks like a false fear to us. What are the BRICS nations? The original term, coined by a Wall Street economist, was an acronym for Brazil, Russia, India and China—a grouping of would-be up-and-comers. South Africa joined later, adding the “S.” Yet in recent years, the original BRICS decided to meet more formally and discuss shared economic interests. They even expanded, adding Iran, the United Arab Emirates, Ethiopia and Egypt this year, with some now calling the group BRICS+. They aren’t—and never were—a coherent economic or political bloc, though. There is no overarching BRICS treaty or alliance. Not even a BRIC-bloc free-trade deal. Their economies also vary widely in character, from a manufacturing powerhouse and burgeoning IT-services behemoth to mainly commodity exporters (oil, metals and coffee). Some run open economies. Others are communist. Still others are pariah states sanctioned by much of the West (see Russia and, to a lesser degree, Iran). Politically, their governments run the gamut as well, from democracies like India to authoritarian regimes, a theocracy and a monarchy. And some have unresolved gripes with one another. It is a mostly symbolic grouping. Disparate grievances with the West seem to unite them more than any particular desire for greater financial cooperation or trade integration. Yet they talk up banding together to challenge supranational Western institutions ostensibly governing the globe. So there was lots of chatter ...

One day on from Budget Day, and headlines have near-universally decided Rachel Reeves’s package of higher taxes and public spending was full of tricks for markets, not treats. The evidence, we are told, is UK Gilt yields’ sharp volatility as they continued digesting the news Thursday. Friends, we think this is an epic case of reading too much into volatility. It is easy, too easy, to look at a piece of news—any news—then look at the daily market movement and presume stocks or bonds have made a specific judgment. The technical term here is correlation without causation—that is, presuming that if B followed A, then A caused B. With 10-year Gilt yields up after Reeves’s speech yesterday and again today, headlines globally have decided markets dislike the new fiscal policy and are jeering the rise in planned debt issuance. On the surface, it seems logical. Bond markets move on supply and demand, and yields move opposite prices. So a planned supply increase, all else constant, should make prices fall and yields rise. It is all simple, freshman-level Econ stuff. (If you took freshman Econ and stayed awake, that is.) But it is also incomplete, ignoring the fact that the UK is but one country. The question isn’t just what Gilt yields did, but what they did relative to other countries. French yields also rose Wednesday and Thursday. Were investors in French debt freaking out over higher UK borrowing? What about US Treasury yields, which rose Wednesday and Thursday morning before drifting back lower? Did Uncle Sam’s creditors panic over UK debt when they woke up? What about German, Italian and Spanish yields? Could it be that bond markets are simply global and volatile, and fiscal policy changes in one country aren’t the major driver that people think? We can do the same exercise with stock markets. UK stocks dropped Wednesday, but so did US markets and those across Europe. When both are denominated in US dollars to ...

Editors’ Note: MarketMinder prefers no political party nor any politician. We assess developments for their potential economic and market impact only. At last, after weeks of speculating, UK Chancellor of the Exchequer Rachel Reeves has stepped out of 11 Downing Street with the customary red Budget box and revealed its contents: An estimated £70 billion in new annual spending, £40 billion in new taxes and £32 billion in extra annual borrowing. The takes on this are many and varied—and largely sociological. For investors, we think there is a very simple takeaway: Uncertainty, elevated as the government floated numerous policy trial balloons, is at last dropping. Whatever your opinion of the new fiscal measures, stocks should benefit from simply having clarity, not to mention the tax hikes being smaller than feared. In pounds, UK stocks entered Wednesday pretty much flat since July’s election. We wouldn’t read a ton in this, as European stocks are also flattish, but we haven’t seen the rally we would generally expect from falling political uncertainty. Why is harder to discern than what, but the fiscal policy guessing game is a likely culprit. Since the campaign, Reeves and Prime Minister Keir Starmer have signaled taxes would rise. It wasn’t a flagship campaign pledge—VOTE FOR US AND WE WILL RAISE YOUR TAXES isn’t exactly a winning banner—but it was implicit. They pledged to raise public investment, spending and wages, and they paid lip service to requisite deficit reduction. Given the money for new spending and investment would have to come from somewhere, higher taxes seemed a foregone conclusion. But society didn’t know which taxes would rise or how much. Campaign materials pledged not to raise taxes on “working people,” which meant not raising VAT, national insurance contributions or income tax rates (presumably on the lower income bands). This left capital gains taxes, ...

Undercutting lingering recession fears that seem to continue haunting some investors—and the spirit of the season—US Q3 GDP was decidedly un-spooky. The data, released Wednesday, show the world’s largest economy grew 2.8% annualized in the quarter.[i] It is a slight slowdown from Q2’s 3.0% and missed analysts’ 3.2% estimate.[ii] But the big picture here is what matters most, in our view: The trends powering growth in recent quarters largely continue. Backward-looking as these data are, they are another step toward driving a stake into undead recession worries’ heart. Forgive the Halloween wordplay, but the data did drop a day before kids stalk the sidewalks in search of sweets. And, looking deeper than the headline slowdown, the report featured plenty of treats. Real personal consumption expenditures—long feared at risk from high prices—jumped 3.7% annualized, the fastest growth since Q1 2023.[iii] Business investment, a typical swing factor for growth, also rose 3.3% annualized, powered by 11.1% growth in equipment spending—the second-straight strong quarter after Q2’s 9.8%.[iv] Taken together, we see stronger-than-feared household consumption and businesses’ continuing to shift to offense. This is the backdrop we think stocks have been pre-pricing for some time. Real estate investment—both residential (-5.1% annualized) and private business investment in structures (-4.0%)—was among the detractors.[v] While rate-sensitive residential real estate has frequently detracted since mortgage rates started climbing a couple years ago, the business side’s decline is new this quarter. A deeper dive into the data show this was largely a result of cooler factory investment (from 21.7% annualized in Q2 to 2.2% in Q3).[vi] Fast growth in private factory investment has long buoyed the category overall. To our read, this largely looks like businesses adjusting after a widely known period of weak ...

How is the US economy faring? Not too bad, according to most widely watched data. But one typically reliable forward-looking indicator—the Conference Board’s Leading Economic Index (LEI)—flashed red again in September’s report, extending a yearslong trend. Normally, such a trend would precede recession. Yet this time, it hasn’t. LEI’s struggles provide a timely reminder to dig into dashboard indicators to assess the underlying reality before presuming they are assuredly right. US LEI fell -0.5% m/m in September, and of the gauge’s 10 components, only one contributed positively: stock prices (as measured by the S&P 500), which added 0.11 percentage point (ppt).[i] Five were flattish while four detracted—with manufacturing new orders (-0.20 ppt) and the interest rate spread (-0.18 ppt) subtracting the most. Last month’s weakness isn’t new. September’s four detractors have sagged the past six months, led by the Institute for Supply Management’s (ISM’s) New Orders Index’s -1.09 ppts subtraction amid the global manufacturing slump.[ii] Overall, LEI has been falling since December 2021. (Exhibit 1) Exhibit 1: US LEI Over the Past Decade Source: FactSet, as of 10/28/2024. US LEI, October 2014 – September 2024. Generally speaking, LEI does a fine job capturing how the broad economic backdrop is shaping up since it relies on mostly forward-looking data. For example, new orders reflect future production while the yield curve spread represents banks’ future profit margins. The latter influences banks’ willingness to lend capital that households and businesses can spend and invest—fueling growth. That is why an extended, deep LEI decline historically indicates a recession is either imminent or underway. But pandemic-related developments have made LEI less telling right now, in our view. Take September’s two largest detractors: new orders and the interest rate ...

Halloween is nearly here, so in lieu of spooky puns, how about we open the mailbag and see what candy … err questions are on you fine folks’ minds? Are bear markets hard to predict? We would say they are impossible to predict, if we are using the strict definition. That is, there is no strict criteria one can use to say, with confidence, that there is a high likelihood a bear market will start at a specific, future point. We can look around and assess whether the conditions that would typically accompany a market peak are in place, but we also know that euphoria can run for a while. The dot-com world was super sloppy for most of 1999, for example, but stocks kept romping until March 2000. Now, what we do think is possible is identifying a bear market early enough in its lifespan to do something about it. This is not technically a prediction of a bear market. It is the observation that a bear market is quite likely already underway, at a time when there is a high likelihood that there is considerably more downside ahead than behind. This is when we think there can be a rational case to reduce equity exposure. If you are three months into a downturn, the market is down by about -6% and you have well-founded reasons to expect it to continue falling for a protracted period and breach -20%, then it can be beneficial to reduce stock exposure. If you are down -19% and see it probably crossing -20%, then it probably isn’t unless you have a very, very, very good reason to think it might get to -40% or whatever. These numbers aren’t airtight guidelines, mind you, they are illustrations. In our view, one of the biggest risks a long-term growth-seeking investor can take is being out of stocks. If you are on the sidelines and miss bull market returns, it can be a major setback to reaching your goals. Hence, it is important not to get fooled out of stocks by a correction (sharp, sentiment-fueled drop of -10% to -20%). Similarly, you don’t want to ...

Editors’ Note: MarketMinder prefers no party nor any politician. We assess developments for their potential economic and market effects only. Japan’s political fundraising scandal claimed another victim this weekend: the ruling Liberal Democratic Party’s (LDP’s) parliamentary majority. Yes, in the snap election new Prime Minister Shigeru Ishiba called to secure a public mandate, the LDP lost a whopping 56 seats, leaving it and coalition partner Komeito with just 215 of the lower house’s 465 seats, 18 short of a majority. The LDP still holds a plurality, but the opposition took 250 seats, including the Constitutional Democratic Party of Japan’s (CDPJ’s) 148. Headlines trumpeted that Japanese stocks’ political fundamentals changed overnight, but we think the results just bring long-running weakness more into public view. Japanese stocks actually had a pretty good Monday, rising 1.5% in local currency.[i] Most headlines dismissed this, calling it a knee-jerk hope that a hung parliament would inspire the Bank of Japan (BoJ) to halt its rate hike campaign. When this sugar high wears off, they warned, political instability will present new headwinds. We see this differently. For one, political instability isn’t new in Japan. It has been consistent since the late Shinzo Abe stepped down in September 2020. Yoshihide Suga, who replaced him, lasted a little over a year. His replacement, Fumio Kishida, lasted less than two years. If Ishiba were to lose the job now, as many suspect he will regardless of whether the LDP is able to form a government, it wouldn’t be the return of the old revolving door that reigned before Abe. It would be the four-year-old door’s fourth turn. We don’t disagree that this is a headwind, but it isn’t new. But we don’t think looking at this in terms of stability versus instability is necessarily the best framework. After all, gridlock—the likely outcome of any ...

So here is the thing about Germany, whose flash purchasing managers’ indexes (PMIs) for October still registered overall contraction. Its economy remains in less than great shape. There are weak patches, and not just in its beleaguered manufacturing sector. But its economy isn’t its stock market—an often-forgotten principle that applies globally. If you look on a purely headline basis, October’s PMIs seem like an improvement. Manufacturing ticked up from 40.6 to 42.6, a three-month high.[i] Services also hit a three-month high, rising from 50.6 to 51.4, which—being over 50—indicates expansion.[ii] But per S&P Global’s press release, new orders fell in both. By a smaller margin than in September, but a successive drop is not improvement even if the rate of decline eases. And while the decline was most acute in manufacturing—largely tied to the auto industry’s struggles—services businesses cited weak demand from their goods-producing customers. So there is some spillover. All in all, this not-good report was in line with Germany’s longer-term trend of meh. And while PMIs reflect growth’s (or contraction’s) breadth rather than its magnitude, the latest are also in line with Germany’s nearly two-year stretch of up-and-down GDP. And yet, German stocks are up nearly 17% year to date in euros and sit near days-old all-time highs.[iii] How can the economy be so lackluster and stocks so hot? We see a few reasons. One is markets’ efficiency. Germany’s problems, while real, are well-known, and expectations are low. When everyone sees a country as the proverbial Sick Man of EuropeTM, it doesn’t take much for reality to beat expectations.[iv] Another reason is that the economy is only one market driver. Politics also affect stocks, and we think German markets benefit from gridlock there keeping legislative risk low. For all the talk about how Germany supposedly needs fresh ...

Chatter around this month’s upcoming Budget may be dominating British headlines, but calls for a Bank of England (BoE) rate cut are close behind. High hopes for a November cut followed the latest slate of UK monthly data, which left us befuddled. Britain’s recovery from post-pandemic hot inflation and soft economic growth appears on track, rate cuts or no—and the latest data illustrate this well. The latest rate cut chatter erupted when fresh data showed UK wage growth slowed in August. Per the Office for National Statistics, average earnings excluding bonuses grew 4.9% y/y in the three months to August. This met analysts’ expectations but marked a slowdown from May – July’s 5.1% and extended a four-month run of cooling British wage growth.[i] Given the BoE has long (and in our view, wrongly) cited fast wage growth as a risk to slowing inflation, pundits cheered August’s reading as a green light for another cut next month. Ratcheting chatter up further, September CPI slowed to 1.7% y/y, below the BoE’s target.[ii] But in reality, wages follow inflation, so August’s pay-growth cooling just added late-lagging confirmation of inflation’s earlier action. Nobel laureate Milton Friedman showed this back in the 1960s, teaching that businesses compete for new labor using real (inflation-adjusted) wages, not nominal. As inflation slows, nominal wage growth follows because businesses needn’t offer as high a premium. Far from being a driver of future price rises, wage growth’s remaining above the inflation rate shows consumers gradually regaining the purchasing power they lost to rising prices. Exhibit 1 shows how this has unfolded in the UK. Inflation spiked first, then wages started catching up. Now, inflation has continued slowing despite higher wage growth—society is beginning its normal route to overcoming hot inflation. Exhibit 1: UK Wage Growth Follows Inflation   Source: Bank of ...

Just as savers were getting used to 5%-plus yields in deposit accounts, CDs and money-market funds, here come the rate cuts. Now many extrapolate those forward and shed a tear over the lost yield they are sure is coming soon. In our view, though, outside emergency funds and near-term expenses, cash wasn’t and isn’t a good option for most long-term investors, as it has never returned much over inflation. Having some cash in reserve is wise. For emergencies, we find somewhere around six months’ expenses is a good rule of thumb, which may vary depending on your personal situation. The basic principle: Hold enough cash to cover major unexpected expenses—e.g., home repair, medical procedure or job loss—to avoid selling investment assets during a market downturn. The same goes for major expected outlays, like money saved for the near-term purchase of a house or other big expenditure. But these exceptions aside, cash is a drag over the longer term. Many have found cash less of a drag lately than in the 2010s, as three-month T-bill rates—a standard proxy for short-term yields—rose above 5% in 2023 (touching 5.5% last October).[i] But they have since fallen almost a full percentage point, to 4.6% currently. More Fed rate cuts could easily mean lower yields. Additional cuts are widely expected—likely one reason one-year T-bill rates (4.2%) are less than three-month rates.[ii] Markets are pre-pricing lower short-term rates. Compared to near-zero rates in 2009 – 2015 and 2020 – 2021, that still may not seem too shabby. But those who have enjoyed higher yields—and their seeming safety—are starting to grumble. Savers see the Fed taking away their punchbowl. Higher-yielding safe havens have always been illusory, though—they never last. As Fisher Investments founder and Executive Chairman Ken Fisher noted recently, they are pipe dreams. Exhibits 1 and 2 show why. Yields tend to match inflation over time. ...

Stop us if this sounds familiar: Chinese GDP growth cooled and policymakers reiterated their commitment to supporting the economy. That well-worn record played again last Friday after China announced Q3 GDP and officials hyped plans aimed at instilling investor confidence. Most coverage focused on the government’s measures—and whether they are sufficient. But a look under the hood suggests China’s longer-running economic trends remain intact—and for investors, that better-than-appreciated reality is likely enough to exceed dour expectations. First, the numbers: Q3 GDP rose 4.6% y/y, slowing from Q2’s 4.7% but exceeding expectations of 4.5%.[i] On a value-added basis, services grew 4.7% y/y, behind industry (5.4%) and ahead of agriculture (3.4%).[ii] Widely watched monthly retail sales and industrial production delivered some positive figures, too. The former—a proxy for domestic demand and household spending—rose 3.2% y/y (and 3.3% year to date) in September while the latter climbed 5.4% y/y (5.8% year-to-date) after high-tech manufacturing offset construction weakness.[iii] Overall, GDP was up 4.8% year to date versus 2023’s first three quarters, loosely on target to hit the government’s 2024 goal of around 5%.[iv] The general reaction to the data: The latest numbers weren’t horrid, but things could get worse quickly if policymakers didn’t act. Thus, most coverage focused on recent fiscal and monetary support measures—some yet-to-be launched, some now underway. For example, the People’s Bank of China (PBOC) rolled out a program last Friday to support the stock market (by providing credit for share buybacks). China’s central bank also reiterated plans to cut the one-year loan prime rate and further lower the reserve requirement ratio to encourage banks to lend. Outside monetary policy, President Xi Jinping’s comments about science and technology’s role in future growth ...

There aren’t many occasions when “boring” is a compliment, but we swear this is a good and nice thing to say: This year, bonds are boring. After two rough years, they are back to doing what they do best—dampening a blended portfolio’s expected short-term volatility—disproving all those who argued bonds aren’t fit for purpose. In our view, bonds have always been a bit misunderstood. Because of the US Treasury’s minimal default risk, Treasury bonds are widely regarded as “safe.” We get the reasoning, but it risks giving the false impression that bonds are “safe” in an absolute sense. People think they never fall, which isn’t true. Bonds, like all securities, are subject to volatility and the risk of decline. In other camps, bonds have a reputation of offsetting stocks, a kind of insurance policy against a stock bear market. If your stocks aren’t doing well, the reasoning goes, at least your bonds will be. So when bonds fell alongside stocks in 2022, it ruffled many feathers. But it was hardly the first time bonds fell with stocks, and it won’t be the last. The correlation between US stocks and bonds is 0.006, which is about as close as you can get to the two having no directional relationship.[i] (A correlation of 1.00 would mean they always move together and -1.00 would mean perpetual opposite movement.) Bonds’ power lies in their long-term tendency to swing less than stocks. In our view, this makes them a helpful companion to stocks for investors whose goals, needs, time horizon and/or overall comfort with stocks’ fluctuations make it beneficial to have less expected volatility than an all-stock portfolio. This comes at the expense of lower long-term returns, but investing is always about the tradeoffs made to manage risk. So yes, bonds fall. Sometimes the declines are mild, sometimes they are short, but sometimes they are longer. There isn’t really a set bear ...

What do September’s retail sales and industrial production reports have in common? They both offer further evidence the US economy is getting back to normal after years of COVID-related disruptions, underscoring that this bull market’s economic fundamentals are faring fine. Among lockdowns’ many economic consequences, they pulled forward demand for physical goods, leaving a crater in their wake once businesses reopened and demand flipped to services. This had knock-on effects on manufacturing, which hit double trouble from hung-over consumers and the auto industry’s parts shortages (another lockdown effect). Much of the world’s purported economic weakness stemmed from this, as did America’s persistent divide been spending on goods and services. But lately, goods have shown signs of life. We can see this again in September retail sales, which accelerated to 0.4% m/m and notched their third straight positive month.[i] That doesn’t sound like a lot, but it is the longest streak of the year. Better still, the control group—which excludes auto and gas sales and focuses on the categories that feed into the personal consumption expenditures report—sped from 0.3% m/m to 0.7%, the fifth-straight rise.[ii] Among the major categories, only furniture, home furnishings and home electronics was in the red. Everything else—clothing, personal care, department stores, sporting goods, hobby shops—was up. Recovering goods demand now seems to be filtering into industrial production. Yes, we know total industrial production slid -0.3% in September, with manufacturing down -0.4%.[iii] But dig deeper. That decline stemmed from a drop in business equipment, with transit equipment down -14.2% m/m.[iv] We suspect this has a lot to do with labor disruptions at a certain aircraft manufacturer—but that doesn’t reflect economic demand. Meanwhile, production of consumer goods rose 0.2% m/m, extending its choppy recovery ...

No one knew it at the time, but two years ago last Saturday, a bull market was born. While this is mostly a trivial milestone with little actual meaning for long-term investors, looking back at the past two years is a good, timeless lesson in how markets work. Let us take a trip down memory lane. The year was 2022, a challenging one for investors. A sentiment-driven bear market started on January 4 as myriad fears took turns leading headlines. Elevated inflation. Fed rate hikes. Russia’s invasion of Ukraine. Europe’s energy crisis (and concerns soaring costs and potential rationing would drive deep recession in Western Europe). US midterm election uncertainties. Amid the many fears, global markets slipped -0.4% on October 12, leaving the MSCI World down -26.1% from January 4.[i] The next day, the Bureau of Labor Statistics released its September CPI report, which showed that while headline CPI eased to 8.2% y/y from August’s 8.3%, the “core” rate (which excludes food and energy) accelerated to 6.6% y/y, a new multidecade high. Despite opening in the red on Wednesday, October 13, global stocks rebounded and finished that Wednesday up 1.9%.[ii] Boom, there it was. Naturally, at the time, nobody cheered a new bull market’s birthday. Investors remained fixated on inflation, and many observers worried September’s numbers indicated stubborn price pressures—and a possible inflation reacceleration. Most thought the Fed needed to pour on more hikes to get prices under control, and these “tightening” and “higher for longer” rates, according to the conventional wisdom, would sink stocks further. Outside inflation, headlines were preoccupied with the UK’s political crisis over then-Prime Minister Liz Truss’s “mini-budget.” The spate of modest tax cuts, a reversal of planned tax hikes and energy price assistance sparked a sentiment-driven UK Gilt selloff that triggered a crisis at ...