3 Things You Need to Know This Week | Global PMIs, US PCE Inflation, Annuities

Transcript

Alexander Leiken:

Hello and welcome to 3 Things You Need to Know This Week, our regular series designed to help you sift through the noise across financial media and understand what really matters for markets. To stay up to date with our latest market insights, subscribe to our YouTube channel or visit FisherInvestments.com. And with that, here are three things you need to know this week.

First, June flash PMIs.

This week, financial data provider S&P Global will publish June's Purchasing Managers' Index, also known as PMI data for the US, UK, eurozone and Japan. These are surveys sent to private companies that help measure business activity. A reading above 50 generally signals growth, while a reading below 50 generally suggests contraction. The picture was mixed in May. Composite PMIs in the UK and eurozone both signaled contraction, with commentary indicating higher energy prices weighed on services demand, while the US and Japan showed ongoing growth. It's important to remember that a reading below 50 doesn't necessarily tell the full story. PMIs measure the share of businesses experiencing growth, not the magnitude of that growth overall. In other words, the economy can still expand with a PMI below 50 if the biggest companies are among those still growing. And for stocks, what matters most is the difference between expectations and reality. With expectations toward Europe still low, tied to elevated energy prices, we believe there's still ample room for positive surprise. Regardless of what June's figures show us, remember that during an economic expansion, monthly data will vary and it's normal to have some pockets of weakness. Headlines may focus on geopolitical tensions, oil prices and supply chain disruption, but we believe these are classic bricks in the wall of worry stocks love to climb. That means for the market to continue rising, reality just needs to be a little bit better than expectations.

Next, US PCE inflation.

On Thursday, we will get the latest reading of the Personal Consumption Expenditures Index, or PCE, the Federal Reserve's preferred inflation gauge. The report should add another useful data point on inflation and the state of the US economy. Most recently, data for the Consumer Price Index, or CPI, showed headline inflation rising from 3.8% in April to 4.2% in May, with core inflation, which excludes volatile food and energy prices, at a more reasonable 2.9%. Headline inflation back above 4% may sound alarming to some, but May's CPI data closely matched expectations, which tells us that the markets were not caught off guard. We know rising everyday expenses create real stress for families, especially when some of the most visible items in the household budget suddenly get more expensive. But to us, regardless of which measure investors focus on, a larger or longer spike in inflation still seems unlikely. Moderate money supply growth, along with the historically short-lived effect that regional conflicts like the war in Iran tend to have on energy prices, suggest inflation may moderate sooner than most expect. That leaves room for positive surprise. While headlines warn that inflation is likely to broaden out from here, we are skeptical. That generally doesn't happen without some combination of major fiscal stimulus, supply chain disruptions or meaningful acceleration in money supply growth.

Finally, annuities.

Recently, some retirement account custodians announced plans to let employees buy annuities inside their 401(k)s. The appeal here is understandable. After a bear market or stretch of unsettling headlines, the promise of guaranteed income can feel like a safe harbor. But to us, annuities aren't the prudent choice many investors assume. Annuities are complex insurance contracts. Many annuities carry several layers of charges that can quietly compound, reducing your returns over time. And once you buy one, it can be costly and difficult to reverse your decision. If your needs change, your annuity doesn't, and surrender fees can lock you in. The trade off many investors fail to grasp is between predictability and growth. We believe the mix of stocks, bonds, cash and other securities in your portfolio is the single greatest determinant of whether you reach your retirement goals. Many investors instinctively reach for the safe option, but they often get it backwards. Historically, stocks have returned roughly 10% a year, far outpacing inflation. For retirement that could span 20 or 30 years, sacrificing market participation for short-term comfort can put your long-term lifestyle at risk. So the question isn't whether steady income sounds reassuring, it's whether trading the long-term growth potential of a diversified, globally-invested portfolio for that predictability truly serves your goals. For many long-term investors, we believe it doesn't. Predictability has a price, and you owe it to yourself to understand exactly what you're paying before you sign on.

And that's it for this episode of 3 Things You Need to Know This Week.

For more of our thoughts on markets, check out This Week in Review, released every Friday. You can also visit FisherInvestments.com. Thanks for tuning in, and don't forget to hit like and subscribe.