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.


Investors Needn’t Reach for Yield

Lately, we have noticed several headlines lamenting bonds’ paltry yields, leaving individual mom-and-pop retirement investors and ginormous institutional pension funds alike scratching their heads. In this ultra-low interest rate world, what is there to meet their cash flow needs? Fortunately, we think there is an often overlooked but ready solution in retirement investors’ toolkits: what we call homegrown dividends.

With interest rates super low on virtually every type of bond imaginable, many see difficulty generating sufficient cash flow from a portfolio. They presume adequate, regular and dependable withdrawals require alternative, illiquid avenues like private investments—non-publicly traded assets with less reporting and disclosure requirements than ones that trade on regulated exchanges, potentially including things like non-traded REITs.

But there are a couple problems going this route as we see it. First, such hard-to-sell assets often carry high fees and may not match your financial goals and investment time horizon—how long you need your accumulated savings to support your endeavors. The illiquidity may also make them exceedingly hard to exit if you expect a market downturn. Second, the notion that you have to reach for exotic investments to get high yield plays into the myth that portfolio income is synonymous with cash flow.

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The Ebb in Inflation Fears

What a difference a month makes. Back in mid-May, most of the financial world seemed convinced runaway inflation was at hand. Spiking prices in lumber and other raw materials were just a foretaste, they said, and jumping long-term interest rates merely hinted at the pain to come as the economy overheated and prices skyrocketed. (Never mind that interest rates were already off their peak a bit by then.) But now the script has flipped. As noted in several outlets over the past week, lumber prices are now down nearly -50% from their early-May peak as supply has jumped to meet demand. Steel producers similarly ramped up output, and Treasury yields are down. All have seemingly defanged inflation dread, which we think speaks to the danger of reacting to whatever big story is circulating at any given time.

Now, as we wrote at the time, we never bought into the notion that soaring raw materials prices were a leading inflation indicator. They stemmed from temporary shortages colliding with strong demand as economies reopened and easing COVID restrictions enabled builders to ramp back up. It was only a matter of time, we argued, before high prices incentivized sawmills, miners and blast furnaces to turn up the dial so they could capitalize.

That seems to be happening now. A recent New York Times piece highlighted a flood of investment pouring into sawmills throughout the southern US, with idled plants going back online and operational plants adding shifts.[i] On the steel front, the World Steel Association reported Tuesday that global steel production jumped 16.5% y/y last month even as Chinese output eased a bit, thanks to soaring production in the US, Japan and India.[ii] Accordingly, steel prices have flattened out. Overall, it looks like those who thought runaway resources prices would be a lasting inflation trigger may have lost their argument’s underpinning.

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The Real Significance of Local Elections for Investors

Editors’ Note: Our political commentary is intentionally non-partisan. We favor no party nor any candidate in any country and assess political developments for their economic and market impact only.

Apparently we published our midyear overseas political update a mite too early, as the last five days have been rather busy in European politics. Today brought the collapse of Sweden’s minority coalition government, which lost a no-confidence vote in Parliament, giving Prime Minister Stefan Löfven a week to decide whether to resign and let other leaders try to form a new coalition—or call a snap election. That doesn’t change a lot, considering gridlock reigned before today, and that trend isn’t likely to change regardless of Löfven’s next move. This may be why headlines have paid much more attention to developments in England and France. In the former, Prime Minister Boris Johnson’s Conservative Party lost a by-election last Thursday in a seat it won by 29 points in 2019. Then, in France’s regional elections, President Emmanuel Macron’s La Republique en Marche (LREM) party got trounced on Sunday, with the center-right Republicans strengthening their grip in most regions and Marine Le Pen’s National Rally taking Provence. Pundits globally are reading into these contests as bellwethers for each country’s next national election—next year in France and May 2024 in the UK (pending a potential change to election laws). We don’t think that is a productive use of energy, considering these contests aren’t terribly predictive. But they do point to further gridlock in the run-up to these national elections, extending political tailwinds for stocks.

In hindsight, pundits can always find a by-election or local election that predicted a change of leadership at the next national contest. But if you look at the full range, they just aren’t that telling. In most UK by-elections over the past decade, contested seats didn’t change hands. When they did, only a smattering predicted the next national vote. In one example, two Tory Members of Parliament (MPs) changed their allegiance to the United Kingdom Independence Party and won their seats anew in late-2014—just over a year and a half before the Brexit vote. But Tory seats flipping to the Liberal Democrats in 2016 and 2019 didn’t lead to Lib Dem national wins in 2017 or 2019, respectively. Similarly, in France, 2015’s regional elections correctly presaged a shift away from the Socialist Party under then-President François Hollande, but they showed momentum shifting to the Republicans. Yet their general election campaign floundered, and Macron, whose movement didn’t even exist during those regional elections, won the presidency in 2017.

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A Half-Year Update in 2021 Global Politics

Editors’ Note: MarketMinder doesn’t favor any politician or political party in any country. We assess political developments solely for their potential market or economic impact.

Three months ago, the Netherlands held a general election … and the country still doesn’t have a government. That isn’t anywhere near the record, but it does illustrate the political gridlock entrenched across the developed world, which lowers legislative risk—beneficial for stocks, in our view. Here is a look at some of the latest developments on this front.

Netherlands’ Parliament Finds Going Dutch Is Difficult

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UK GDP Tells a Well-Known Story

UK GDP just registered its fastest monthly growth rate since July 2020. Yet the island nation’s recovery still trails many major developed economies, according to the Organisation for Economic Co-operation and Development (OECD)—and the outfit also warned domestic developments (e.g., Brexit) may hurt future growth. While the latest GDP figures and projections will grab eyeballs, they are all old hat to markets—a point investors benefit from keeping in mind, in our view.

GDP rose 2.3% m/m in April thanks to the services sector’s 3.4% growth.[i] COVID restrictions eased throughout the month, and the data confirm as much, as consumer-facing services (e.g., retail trade, travel and transport, and entertainment and recreation) jumped 12.7% m/m. Other people-facing services categories surged, including accommodations (68.6% m/m), food and beverages (39.0%) and other personal service activities, which include hairdressing (63.5%).[ii] Education—the second-biggest contributor to growth behind wholesale and retail trade—rose 11.2% m/m and added 0.72 percentage point to GDP growth as more students returned to the classroom in person.[iii]

Services is nearly 80% of UK GDP, so strong growth there was more than enough to offset contractions in the other two major sectors, production (which includes manufacturing as well as mining and oil drilling) and construction. They contracted -1.3% m/m and -2.0%, respectively.[iv] Yet that weakness appears to be temporary, as mining’s -15.0% m/m decline stemmed from planned temporary maintenance closures at oil production sites.[v] Services’ rebound is good news, in our view—but also ancient history to markets.

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Retail Down, Services Up?

Pop quiz: When is it good news that US retail sales fell -1.3% in a given month?[i] Answer: When that drop happens in May 2021 because more businesses have reopened nationally. Now, if you haven’t come across the wide range of solid news coverage of this report (some of which we highlighted in today’s What We’re Reading), it might seem counterintuitive that sales would drop as businesses reopen—common sense suggests it should be the opposite, presuming people have pent-up demand to unleash and savings aplenty. But the businesses that feed into the retail sales report were already pretty much fully open, albeit with some lingering capacity constraints. In May, reopening’s fruits spread to the broader services sector, and people shifted spending accordingly. Now, all of this is old news to stocks, which have anticipated the long reopening journey for well over a year now. But a quick look at US consumer spending’s breakdown can help investors put the latest news in context.

As its official name (Monthly Sales for Retail Trade and Food Services) suggests, the retail sales report includes household spending at stores and restaurants. “Stores” includes all of the usual suspects: grocery stores, department stores, boutiques, sporting goods stores, clothing shops, e-commerce, auto dealers, auto parts stores, gas stations, furniture stores—basically, anywhere you can walk in (or click to) and buy physical goods. Altogether, these accounted for 31.9% of pre-pandemic household spending.[ii] Food services accounted for another 7.1%.[iii] That means just over 60% of consumer spending isn’t captured in the retail sales report.

That 60-plus percent is what got a lift from vaccines and eased restrictions on travel and leisure in May. You can see hints of this in the retail sales report, which shows sales at restaurants and bars up 1.8% m/m.[iv] Sales at clothing stores rose 3.0% as people finally had places to go.[v] That all points to improvement in travel- and event-related spending, which should boost services categories, including accommodations, transportation and recreation. Broader services’ reopening also points to a recovery in elective and non-emergency medical care, which is a good-sized chunk of overall services spending.

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The Keystone XL Pipeline Was Never Key for Stocks

Editors’ Note: MarketMinder favors no politician nor any political party and assesses issues solely for their potential impact on markets and personal finance. Furthermore, MarketMinder doesn’t make individual security recommendations. Any reference to a publicly traded firm is intended solely to help illustrate a broader point.

Politics often stokes big emotions, captures significant public attention and preoccupies investors—frequently, in our experience, to their portfolios’ detriment. It is just very hard to tune down biases amid a bevy of headlines that would have you believe the story du jour must be huge for markets. But there are several problems with this. For one, all the attention paid to big, divisive issues allows markets to efficiently pre-price them, mitigating any impact. But others times, political issues—even ones that may seem very market-or-economy related—get blown out of proportion relative to markets. One such long-running issue was back in headlines last week: The death of the Keystone XL pipeline.

Last Wednesday, Canadian oil storage and transport firm TC Energy announced the Keystone XL pipeline—a project that has served as an American political football almost long enough to celebrate its bar or bat mitzvah—won’t happen. The pipeline, which would have moved ~800,000 barrels of Canadian crude oil per day from Alberta to Nebraska, where it linked with another pipeline, is dead.

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Fast Inflation Still Looks Fleeting to Us

Headlines are once again in a tizzy over inflation after May’s faster-than-expected US consumer price index (CPI) reading. But, just like April, we think there is little sign of lasting faster inflation in these data, which markets seemingly see. In our view, investors should follow their lead.

Headline CPI rose 5.0% y/y in May, accelerating from April’s 4.2% and logging the biggest uptick in 13 years, a fact the Bureau of Labor Statistics (BLS)—and seemingly everyone else—pointed out.[i] But like last month, that big year-over-year gain from deflationary lockdown levels is largely a garbage stat. Month-over-month data are somewhat more informative. In May, CPI rose 0.6% m/m, decelerating from April’s 0.8%. Even on this basis, though, we see plenty of signs the uptick is temporary—the effect of reopening and related supply chain issues.

Hence, in our view, the Treasury market’s telling “meh” reaction. Inflation and inflation expectations heavily influence longer-term Treasury yields. Why? While yields fluctuate in the open market, every given Treasury bond pays a fixed rate over time. The more inflation you get, the less buying power those fixed rates are delivering you. Hence, investors expecting hotter inflation typically demand higher yields.

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Some FAQs on 2021’s Top-Returning Sector to Date: Energy

Three weeks shy of 2021’s half birthday, Energy is still the MSCI World Index’s top-performing sector year to date. Its 35.6% return through Monday’s close is beating global stocks’ 12.4% by a country mile as investors continue rewarding oil prices’ rise.[i] We have written before of our belief that this phenomenon will probably prove temporary, and our opinion hasn’t changed. But setting all that aside, this seems like a good time to answer a couple of frequently asked questions about the sector.

1. Why isn’t Energy having a bigger impact on global returns? Should I own more to get some extra oomph?

The answer to the first half of this two-parter explains why the answer to the second is “no”: Energy is only 3.25% of global market capitalization as of Monday’s close.[ii] That is down from 10.17% on Halloween 2007, the day global stocks peaked ahead of 2007 – 2009’s financial crisis. Not coincidentally, even with this year’s rally, global Energy stocks are still down -16.3% since then.[iii] The shale boom may have lifted US oil output to generational highs and added big economic tailwinds for oil-rich regions in the 2010s, but it tanked oil prices, which hit Energy companies’ earnings hard worldwide. That hammered returns and the sector’s global market clout. Last year made it even worse when the pandemic wrecked demand for jet fuel, gasoline and other oil-intensive goods and services. So what we are seeing now is a fledgling rebound off of a very, very low base.

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The UK Is Lining Up Trade Deals

UK trade negotiators have been busy. Last week, they finalized a hard-fought fishing rights accord with the EU and a trade deal with Norway, Iceland and Liechtenstein. Next up: a UK-Australia trade agreement set for mid-June. Talks are also in progress with New Zealand, most of the Pacific Rim, India and America. Note: We still don’t know if all or any of these deals will happen—the EU fishing and the Norway (et al) deals still need ratification, for example. But the symbolism is noteworthy: Post-Brexit Britain doesn’t seem to be retreating from the world, confounding a popular view of Brexit as a protectionist, isolationist move. That is a good lesson, we think, in not taking political rhetoric at face value.

Five years ago this summer, in the wake of Britain’s referendum to leave the EU, many pundits proclaimed the vote meant the UK was turning its back on the world and global trade. Others went further, suggesting it was a sign globalization was in retreat. Meanwhile, the negative thinking went, the UK was shooting itself in the foot, there was no upside to severing EU ties and calamity would result. We always thought such sentiment was a weeee bit overstated, considering leaving the EU freed Britain up to pursue new deals of its own. Now that seems to be happening in full swing, and we suspect those still waiting for protectionist disaster may be disappointed.

The UK has been making every effort to embrace trade with the rest of the world. Even before Brexit took effect, there was the main EU trade agreement struck Christmas Eve and deals with 67 countries to preserve the trade agreements Britain was party to as an EU member-state. Then there was the UK-Japan trade deal reached last September and signed the next month. But now activity is really picking up speed. Last Thursday, the UK agreed on fishing rights for the next year with the EU, a point of contention they punted on in last year’s broader trade deal. Then on Friday, it announced a trade deal with Norway, Iceland and Liechtenstein—the non-EU members of the European Economic Area (EEA), which allows them to participate in the EU’s single market.

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