Daily Commentary

Providing succinct, entertaining and savvy thinking on global capital markets. Our goal is to provide discerning investors the most essential information and commentary to stay in tune with what's happening in the markets, while providing unique perspectives on essential financial issues. And just as important, Fisher Investments MarketMinder aims to help investors discern between useful information and potentially misleading hype.

Bad Breadth Doesn’t Stop Bull Markets

Across the financial press, a common theme has begun emerging: Fewer and fewer stocks are performing well—so-called narrowing market breadth—which, to proponents, means this bull market is fragile. Don’t buy it—in our view, this is faulty logic. Narrowing breadth is normal as bull markets mature, and there is no preset level indicating the bull market’s end is near. To us, it is just another sign this less-than-two-year-old bull market is acting late stage. However, we think widespread fear of typical bull market behavior is yet another indication stocks have more room to run.

There are several different ways to measure market breadth. Some look at the number of stocks hitting new 52-week lows, which are currently far outpacing new highs. Others track the “advance-decline line”—the ratio of advancing stocks to declining ones. Early this week, some touted the fact daily NYSE and Nasdaq decliners outnumbered advancers by about four to one.[i] Our preferred measure is the percentage of stocks outperforming the index average. For the S&P 500, this jumped to 61% during value’s early 2021 countertrend rally amid optimism over mass vaccine rollouts and global economic reopening. But it has steadily declined since last May, with only 44% now beating the index on a rolling 12-month basis. (Exhibit 1)

Exhibit 1: Narrowing Market Breadth Doesn’t Always Spell Doom

Source: Clarifi, as of 1/13/2022. Percent of S&P 500 stocks beating the trailing 12-month S&P 500 total return, 12/31/1975 – 1/12/2022.

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Nope, Today’s Inflation Doesn’t Call for Gold

In recent weeks, from Internet banner ads to television commercials to radio and podcast spots, we have heard a clarion call: Put your IRA in gold now to protect against inflation! We are told gold is the only insurance policy against a devaluing dollar. That converting your IRA or 401(k) to store physical gold is wise, low-cost and risk-free—seemingly ignoring that the courts have cracked down severely on the process, costing some people hundreds of thousands of dollars.[i] Aside from the potential costs, low liquidity and other fine points, we see a giant problem with this alleged inflation hedge: It just doesn’t work.

As we now know, courtesy of December’s CPI report, US consumer prices rose 7% last year.[ii] For something to work as an inflation hedge, it would have to rise by more than 7%. Global stocks easily fit the bill, returning 21.8% including reinvested dividends. If you are keeping score, that is three times the inflation rate, suggesting real (inflation-adjusted) returns were fine. Gold? Well, gold fell -4.3%. Yes, as the inflation rate hit a 40-year high, gold lost value in absolute terms.

Exhibit 1: Gold and Global Stocks in 2021

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What December’s Jobs Report Says About Sentiment

US economic data have garnered significant attention over the past week, including 2021’s last monthly jobs report, released last Friday. December nonfarm payrolls rose by 199,000 while the headline unemployment rate fell to 3.9%.[i] Both widely watched figures continued their recent trend of bucking the consensus—in conflicting ways. While the number of jobs added in December was well short of the 400,000 estimated—and below 2021’s average monthly job growth of 537,000—the unemployment rate beat expectations of 4.1%.[ii] While the numbers themselves are no doubt interesting, what caught our eye most was onlookers’ general reaction to the data. In our view, that is telling about sentiment—illustrating the prevalent mix of skepticism and optimism near perfectly. 

Many blamed the big jobs miss on Omicron. While past variants led to COVID restrictions that temporarily knocked consumer demand and forced some people out of work, Omicron is driving big absenteeism. Millions of workers are calling in sick, impacting industries from airlines and schools to hospitals and garbage collection. Many think the situation is worse than the data show since the jobs report’s cutoff is mid-month and doesn’t capture Omicron’s late-December surge, which has carried over into January.

We don’t dismiss Omicron’s economic headwinds or personal inconveniences, and we won’t be shocked if January’s jobs data show a bigger effect. Perhaps this spills into other, output-related data series, too. But there is a big difference between the economic impact of absenteeism and lockdowns. Consider airlines. United Airlines just announced more than 4% of its workforce tested positive for COVID and the majority isn’t working, forcing the airline to cut flights.[iii] But delays and cancellations don’t cause travel to cease: Over the past month, the average number of travelers passing through TSA checkpoints per day was about 1.8 million.[iv] Compare that to the average of 213,153 travelers per day in the month following March 17, 2020—the day when strict shelter-in-place orders started taking effect in California’s Bay Area, followed by similar measures nationwide in subsequent weeks.[v] Now, TSA checkpoint numbers aren’t seasonally adjusted, so comparing a traditionally busy holiday travel period to a late-winter stretch isn’t apples to apples. But in our view, the raw numbers reveal absenteeism’s challenges are a far cry from lockdowns’.

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The Rise and Fall of UK Political Uncertainty in 2022

Editors’ Note: MarketMinder favors no political party nor any politician. We assess political developments for their potential economic and market impact only.

While the latest filibuster chatter and November’s midterm elections are hogging most political headlines in the US, there is no shortage of theater abroad—and no shortage of uncertainty. Some of it is electoral, with contests looming in France and Australia. Some relates to shaky coalition building, which may soon be reality in Italy if Prime Minister Mario Draghi gets tapped as president later this month. And some is just good old fashioned scandal and parliamentary revolt, which happens to be the situation in the UK. Yes, Prime Minister (PM) Boris Johnson is—once again—facing calls to resign over some Downing Street socializing during 2020’s lockdowns. There is even speculation a police investigation could lead to formal charges for violating lockdown rules. We won’t hazard a guess on whether Johnson’s days are numbered, but we do think this is a textbook example of how high uncertainty early in the year is likely to fade gradually into gridlock—which should be a bullish tailwind later this year.

Until this week, Johnson somehow managed to maintain plausible deniability about his knowledge of gatherings that broke the rules. Even when a picture emerged last month of him enjoying wine and cheese with staffers in the Downing Street garden in May 2020, rumbling about a “work event” held the wolves at bay. But that was before someone leaked the email from one of his senior aides inviting over 100 staffers to “make the most of the lovely weather” and “bring your own booze” on May 20, 2020, a time when normal Brits weren’t allowed to gather in groups larger than two—even outdoors. As you might expect, people are now posting videos of police breaking up gatherings the same day, along with pictures of dying relatives they weren’t allowed to visit. Labour leader Keir Starmer (who was previously caught having a tipple indoors with staffers despite a ban on indoor gatherings) is urging Johnson to resign, which isn’t new—but Scottish Conservative leader Doug Ross is also calling for his head, which is. So are several backbench Members of Parliament (MPs), a broad swath of the public and some Conservative-leaning columnists.

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On Inflation, Trust the Market

Ouch. That about sums up the collective reaction to the news that December’s US CPI inflation rate hit 7.0% y/y—the fastest rate since 1982.[i] Considering the inflation rate a year prior was just 1.4%, the sharp acceleration has jarred many households and businesses, which are wrestling with higher costs.[ii] But if you were invested in stocks over the past year, it is worth noting your investments probably provided a nice hedge, as global markets rose much faster than consumer prices. In our view, this is critical to remember as inflation continues topping the list of investors’ fears in 2022.

US inflation has morphed into a hot button political issue in recent months, with people on both sides of the aisle trying to spin it to their advantage. Even the discussion of its causes has become hotly politicized. So please understand that when we discuss inflation and its stock market implications, we aren’t making ideological or political statements. This isn’t even about whether faster inflation is good or bad—obviously, if prices rise 7% in a year and make it harder for people and small businesses to make ends meet, that isn’t good. Yet at times like this, it is crucial to think about events and risks as markets do. Stocks don’t view things in terms of “good” or “bad” in the absolute sense. That debate is squarely in the human, societal realm. For stocks, the question is at once more simple and more complex: Is there any material trouble left that markets haven’t already priced in? Is there any negative surprise power left? A strong likelihood of a bad outcome that investors haven’t already considered?

That last question is the linchpin, in our view. It is almost cliché to say markets are efficient and forward-looking, so please don’t get annoyed with us for going there. But overwhelmingly, we have found that in any sufficiently liquid market, be it stocks, bonds or what have you, prices reflect all widely known information at any given time. “Information” includes facts, figures and data. It also includes interpretations of those facts, figures and data, and the hopes and fears that emerge from that analysis. And it includes forecasts, which are really just opinions on how said facts, figures and data will evolve in the future—and, perhaps, what that evolution will mean for asset prices.

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No, Dollar Strength Doesn’t Mean Weak Stocks

Market volatility may not be predictable, but the behavioral quirks it spawns usually are. Take, for instance, headlines’ tendency to tout new fears to either explain the dip or argue there is much worse to come. We have seen the latter in recent days, as the dollar has returned to the fore. This time, some pundits argue a stronger dollar will hit US stocks’ earnings—particularly US Tech’s earnings—as overseas sales lose value, storing up trouble for the S&P 500. That may seem plausible enough on the surface, but a quick run through basic economics and market history shows it doesn’t hold true.

Now, we aren’t so sure the dollar will soar from there. Arguments that it will rest on the presumption that Fed rate hikes will drive long-term Treasury yields higher, causing overseas investors to flock to Uncle Sam’s IOUs. Those inbound currency flows, allegedly, will drive the greenback skyward. Problem is, this isn’t how markets work—they look forward, pricing in widely expected events well in advance. Rate hike chatter is widely known, as is America’s elevated inflation rate. If either of these were a material forward-looking driver for long rates, yields would already reflect it. Yet 10-year Treasury yields, while up about a quarter of a percentage point since late December, are basically flat since mid-March 2021.[i] Arguing pending rate hikes create material upside in long-term yields from here is tantamount to arguing markets aren’t efficient at all. In our experience, that is usually the losing side of the debate. With that said, range-bound long-term rates might still attract overseas capital, but here, too, currency markets are extremely liquid and efficient—and Treasury yields’ premium over their European and Japanese counterparts is also well known and likely priced in. That doesn’t preclude short-term swings, but we think it argues against a sustained move higher.

And if we are wrong? That still doesn’t mean earnings gloom awaits. Yes, all else equal, when the dollar strengthens, if US-based multinationals don’t raise prices overseas, it reduces the value of overseas sales. This is just plain currency math—pounds, euros, yen and all the rest convert to fewer dollars when the buck strengthens. Yet this same currency math also reduces US-based companies’ overseas costs—crucial, given the volume of labor and resources sourced abroad. Very, very few goods are 100% sourced and produced in the US (or any other major country)—especially Tech hardware. The effect may not be perfectly zero-sum for all companies or even in aggregate, but it often means earnings hold up much better than expected. Stocks move not on absolute reality, but on the gap between reality and expectations. While dollar uncertainty might weigh on sentiment in the short term, eventually a positive earnings surprise would likely bring big relief to stocks.

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Look Beyond 2022’s Rocky Start

Editors’ Note: Our commentary is politically agnostic, as we prefer neither party nor any politician. We assess political trends for their potential economic and market impact only.

Less than one week in, and 2022 probably feels a lot different from 2021. After finishing last year on a massive upswing, stocks have stumbled in the young New Year. Where stocks entered 2021 in a blaze of optimism, sentiment is now more muted, with fears seemingly lurking around every corner. Our advice: Take a deep breath. For while we think this bull market is very likely to continue and deliver solid full-year returns, the bulk of those returns probably come later in the year, with much more of a grind early on. For long-term growth investors needing market-like returns to meet their goals, we suspect patience is the watchword.

Note: This doesn’t mean the early part of the year is destined to be bad, or that the recent sentiment-driven swings are indicative of how it will play out. As we will show you shortly, midterm election years are routinely back-end-loaded, averaging small positive returns early, with more variability, before a second-half surge.

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The Euro at 20

Twenty years ago last weekend, people across Continental Europe started handing euro notes to shopkeepers and café servers—and a new physical currency was born. An experiment thus began playing out in real time: How could low-inflation northern European countries share a currency and monetary policy with higher-inflation southern Europe, especially if the bloc wasn’t a fiscal transfer union? Warnings about this north-south divide have dogged the currency ever since—and still hog headlines today, despite the euro surviving a trial by fire in the past decade’s regional debt crisis. Yet since the regional bear market that accompanied said crisis, this existential question—and the long-running, slow-moving efforts to solve it—have largely faded into the background, with little sway over stocks for good or ill. In our view, this is helpful to keep in mind as some once again warn the euro could split and send markets reeling. Stocks are very familiar with the euro’s structural issues, and there is little surprise power left.

The threat many still see: The north-south divide is too wide to surmount. At the heart of the debate is whether one monetary policy—the ECB’s—fits all, especially with German CPI inflation hitting a 30-year high in December. Pundits claim the ECB’s winding down its pandemic-spurred emergency monetary policy programs will prove too early for many countries still struggling (southern Europe). Or too late, risking overheating and runaway inflation in others (northern Europe).

This isn’t exactly a theoretical fear. The collapse of the European Exchange Rate Mechanism (ERM) in the early 1990s—and the subsequent European recession—illustrates the risks. Back then, Germany’s Bundesbank was keeping rates high to quell inflation after reunification, forcing all other participants in the regional currency peg to do the same. That didn’t work well for southern European nations, which needed lower rates to support the recovery from their economic contractions in 1990 – 1991. As countries first defended, then discarded the currency peg, it brought monetary chaos and a true double-dip recession.

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Amid Early-Year Fed Fretting, Stay Cool

The new year is off to something of a rocky start, particularly for Tech stocks, with many wagging an accusatory finger at the Fed. No sooner had the world finished digesting the central bank’s plans to double the pace of “tapering” its quantitative easing (QE) asset purchases, then minutes from the December meeting suggested monetary policymakers determined the economy has largely met their self-imposed criteria for hiking rates. Moreover, they said “it may become warranted to increase the federal funds sooner or at a faster pace than participants had earlier anticipated.”[i] Now Fed watchers think the first rate hike could come in March, when QE is scheduled to end, and they are pinning the blame for the S&P 500’s -1.9% drop Wednesday on this development.[ii] Perhaps—negativity can strike for any or no reason, and Fed pronouncements always get undue attention. But don’t dwell on short-term reactions. Over more meaningful stretches, there is no evidence rate hikes automatically hurt stocks.

Exhibit 1 shows the history of S&P 500 returns surrounding the first rate hike in all Fed tightening cycles since 1971. As you will see, returns were positive in the first year after the rate hike 7 out of 10 times. Returns over the next two years were negative just once. Nothing here screams that rate hikes are auto-bearish.

Exhibit 1: S&P 500 Returns Surrounding Initial Rate Hikes

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Your 2021 Stock Market Scorecard

Editors’ Note: MarketMinder is politically agnostic. We prefer no politician nor any political party and assess political developments for their potential economic and market impact only. Additionally, MarketMinder does not make individual security recommendations. The below merely represent a broader theme we wish to highlight.

Ah, another year over, a new one just begun.[i] We will publish our stock market expectations for 2022 in due time, but first things first: With the final results in, let us take a look back at the year that was. Which categories within the MSCI World Index did best and worst in 2021, and what lessons can investors learn?

Best Sector: Energy. Yes, headlines are preoccupied with the biggest Tech and Tech-like stocks, which also did quite well last year. But Energy outpaced the competition with its 40.1% return, well ahead of second-place Tech’s 29.8%.[ii] Energy stocks tend to move with oil prices, as oil producers’ earnings depend more on the price of crude than on production volumes. After getting hit hard in 2020’s lockdowns, oil prices bounced back sharply in 2021. Crude surpassed its pre-pandemic price in March and continued rising for much of the year. Autumn’s Europe-led natural gas crunch added more fuel to the fire, as it spurred demand for alternate energy sources, including oil. This all drove a smashing recovery for Energy companies’ earnings, which were abysmal in 2020. But don’t let this give you fear of missing out if you didn’t have a huge Energy weighting in your portfolio last year. Energy began the year as just 2.7% of MSCI World Index market capitalization, so anyone making great fortunes on the sector last year may not have been adequately diversified.[iii] Taking big sector risks might look nice when they pay off, but they can also be severe setbacks when things don’t go as you anticipated.

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