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.

A Sketch to Illustrate What Stocks See Ahead

COVID case counts continue to rise, with the US adding 230,000 cases Wednesday—a surge paralleled in Europe and Asia. Deaths, tragically, are also ticking higher. Politically, a contentious US election year gave way to perhaps an even more tense lame-duck period—including a riot at the Capitol and the National Guard’s deployment ahead of President-elect Joe Biden’s inauguration next week. Economic data, reflecting renewed lockdowns to deter COVID’s spread, show slowing in the developed world’s dominant services industry—even contraction in some European nations. Analysts expect S&P 500 corporate earnings to decline -8.8% y/y in Q4 2020, per FactSet. Individuals in many locales worldwide are isolated from friends and family. The world surrounding us today looks, in some very significant ways, rather bleak.

Despite this backdrop, stocks continue churning higher, leaving many lingering skeptics aghast at the perceived “disconnect.” But when you consider where stocks are looking—3 – 30 months ahead, in our view—the disconnect fades. Here we will attempt to paint a loose picture of what stocks are likely looking to—and how that can influence the evolution of sentiment over the course of 2021.

While few would question 2020’s awfulness on a societal level—or 2021’s start, for that matter—stocks are looking beyond this, in our view. At the shortest end, we think they are looking roughly three months out. That would be around April. By then, the inauguration and tumult that followed 2020’s election should be well behind us. President-elect Biden’s first 100 days—often when a new president’s policy aims take shape—will be almost complete, giving investors more clarity about his agenda. Two of 2021’s few elections—Holland’s and Israel’s—will be over. If recent history and polling are any indication, they will likely be squabbling over how to form fractious coalitions that accomplish little when in office. Vaccine rollouts will assuredly be further advanced, if not significantly so, which has major implications for the services economy. In part due to Q1 2020’s low base, analysts expect S&P 500 earnings to resume growing in Q1 2021—at 16.5% y/y, per FactSet—with reports on this emerging right around three months from now.[i]

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Lessons From Italy’s Latest Political Drama

Editors’ note: Our political commentary is intentionally non-partisan. We favor no politician nor any political party globally and assess political developments solely for their potential economic and market impact.

In all of last year’s chaos and mayhem, one thing was noticeably absent: Italian political theatrics. But it is absent no more, as former Prime Minister Matteo Renzi pulled his upstart Italia Viva party from the governing coalition Wednesday, threatening its survival. We don’t think this is a terribly momentous event for Italian stocks, which are very, very familiar with unstable governments. Long-term interest rates don’t seem bothered either. But the story does highlight the degree of gridlock entrenched in Italy—keeping legislative uncertainty low even as political squabbling spikes—and holds a key lesson for investors fearing radical legislation in the US.

The now-splintering coalition has been in place since late-2019, when Matteo Salvini, leader of the nationalist party known as The League, pulled his party from a coalition with the anti-establishment Five Star Movement (M5S). At the time, Salvini was fresh off a much-photographed beach tour (those were a thing then) and riding a wave of popularity (pun intended). He sought to capitalize by forcing snap elections, thinking he may win an outright majority, eliminating the need to coalesce with a party that wasn’t very aligned with his. But Renzi, then influential with the center-left Democratic Party (PD), opened coalition talks with M5S, and they eventually yielded a left-leaning multiparty coalition. Shortly after that, Renzi and some of his supporters left the PD and formed the small, centrist Italia Viva, which remained part of the coalition. But pandemic-related squabbling nibbled away at the parties’ unity, and a disagreement on how to spend €36 billion of EU aid prompted Renzi’s exit.

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What Reactions to the Jobs Report Say About Sentiment

Last Friday, the Bureau of Labor Statistics (BLS) reported nonfarm payrolls declined in December for the first time in seven months, and a curious thing happened: People didn’t freak out. Sure, there was some pessimism about the very near term in light of renewed lockdowns in several states, but the tone was largely positive, with many focused on the longer term—a rather abnormal reaction so soon after an economic contraction’s (potential) trough. In our view, this is the latest example of how rapidly sentiment has shifted from pessimism to optimism over the past few months, which we think is telling about where we are in the market and economic cycle.

Nonfarm payrolls declined -140,000 in December, much worse than the 100,000 gain economists expected.[i] Normally, a dreary jobs report so close to a recession’s depths has many ringing alarm bells. In the expansion that began June 2009, nonfarm payrolls didn’t start rising until March 2010.[ii] Sentiment was uniformly pessimistic through these three quarters, sparking talk of a “jobless recovery” and a “double dip” inviting extended recession. Payrolls’ initial bounce was swift, with a 952,000 rise in 3 months. But then it took a step back, with payrolls dropping a bit for four straight months. In this stretch, coverage included statements like: “Even without a full-blown double dip in the economy, the recovery thus far has been so anemic that the job picture seems likely to stagnate, and perhaps even get worse, in the near future.”[iii] Economists projected a permanent plateau of “9-plus percent unemployment even through the next presidential election” (which, at the time, was over two years away).[iv] About the best financial commentators could muster around then: “Consumer Sentiment: No Longer Selling Kidneys.”[v]

By the time payrolls broke even in May 2014, sentiment had warmed from deep pessimism to mild skepticism. Pundits acknowledged the milestone, but many still pointed to the stubbornly low labor force participation rate and anemic wage growth to argue the real unemployment rate was far higher than reported and whatever jobs we created weren’t “good jobs.” They alleged the economy continued to suffer from “secular stagnation,” a “skills gap” and “malaise.” Not until the end of 2014 did headlines begin looking at the bright side: “The Jobs Report Is Even Better Than It Looks,” to note one.[vi] Apparently, the recovery was finally “gaining steam” and the labor market outlook was “sunnier.” By 2017 or 2018, more people were pointing to the historically low unemployment rates and growing chipper about the improvement. Even in January 2020, the labor market was considered a bright spot in the US economy. From the end of the last recession, it took years for sentiment towards jobs to cycle from pessimism to skepticism to optimism. But even over the next several years, we never really hit a point where pundits were positively salivating over potential gains to come over the next several months or beyond.

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Life After Brexit, Day 7

What a difference a week makes! After closing out 2020 as the MSCI World Index’s worst-performing constituent country, UK stocks jumped out of the gate in 2021, leaving the global market in the dust after the first calendar week. Now, far be it from us to read into a few days’ market movement, but we think it is noteworthy that this rally arrived just as widely expected post-Brexit chaos failed to materialize. Yes, there were a few speedbumps, but things seem to be going fine overall, and forward-looking stocks appear to be getting on with it.

One big problem Brexit was supposedly going to cause was chaos at UK ports as truck drivers got used to new paperwork requirements and—as all humans would—made some errors here and there. The massive truck backlogs that amassed when France closed the border over COVID concerns last month, allegedly, foreshadowed Brexit mayhem. So far, though, things have gone much better than most expected. In one anecdotal example, Eurotunnel tweeted that all trucks crossing from Britain to France via the Channel tunnel’s shuttle train in Brexit’s first 8 hours—about 200 trucks—had their paperwork in order. Now, the Welsh port of Holyhead has reported a reduction in EU-based trucks using the UK as a stopover between Ireland and the Continent, while there is an uptick in trucks taking ferries directly from Rosslare in Ireland to Cherbourg in Northern France—a longer trip. But ports operators are skeptical that this is permanent. For one, rumors of chaos in Britain may have inspired truckers to make the longer drive. Once it becomes clear things are running overall smoothly, activity could easily return to normal. Two, Brexit dread pulled a lot of demand forward, so this could be a natural hangover. Either way, the massive delays and disruptions so many expected didn’t arrive.

The other big, widely expected Brexit consequence basically did come true: A big chunk of euro-denominated stock trading left London stock exchanges as businesses shifted gears to comply with EU rules. On 2021’s first trading day, according to Refinitiv, roughly €6 billion of stock trades shifted out of London—about half the activity normally seen. That is a hit, but only a small one, as stock trading is not exactly a big revenue-generator these days. Here, too, markets seem largely unfazed, as UK Financials are performing in line with their global counterparts year to date. Banks have also expected—and prepared for—this for years. A small negative with no surprise power just isn’t likely to prove a major market mover.

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A Look at Recent Oil Market Rumblings

Saudi Arabia made headlines earlier this week after announcing a surprise oil production cut—right after OPEC+ (OPEC plus 10 partner countries including Russia) agreed to keep output flat. As oil prices rallied, analysts debated whether a shift was underway in global oil markets. However, we think the drivers for oil prices remain little changed: Supply remains plentiful given weak demand tied to COVID restrictions. In our view, this balance doesn’t look likely to change materially for the foreseeable future—important to keep in mind for those seeking opportunities in the Energy sector.

To understand why, start by considering what OPEC and friends have been up to over the past year. At 2020’s start, OPEC+ produced about 42 million barrels of oil per day (bpd).[i] After a price war between Saudi Arabia and Russia erupted in March, OPEC+ reached a US-brokered détente in April. Per the agreement, the group would decrease output by 9.7 million bpd—approximately 13% of global production—in May and June, then gradually taper those cuts. After June, the 9.7 million barrel cut would drop to 7.7 million through the rest of 2020—and then fall to 5.8 million through 2021 until April 2022, when the deal ended.[ii] In other words, they would cut a lot at first, then gradually ramp up production a tad—but nowhere close to the starting point.

However, not all has gone according to plan, and the group has struggled to hit their original targets. Though OPEC+ allowed 2 million bpd to return to the market in August, they have refrained from further easing, citing concerns of a still-fragile oil market. As of January 2021, OPEC+ output is still 7.2 million bpd below year-ago levels—nearly 2 million bpd more than the agreement’s initial aim.[iii]

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The Dangers of Partisan Bias Now

Editors’ Note: MarketMinder’s commentary is intentionally nonpartisan. We favor no politician nor any political party and assess political developments exclusively for their potential impact on investments and markets.

Ever since America’s historically close election on November 3, emotions have run high over the outcome. Those emotions hit a crescendo Wednesday, after Georgia’s Senate runoff elections seemingly concluded and rioters interrupted Congressional proceedings to certify Joe Biden as President-elect in the Capitol. There is a lot to say about all these developments themselves, of course, but little that hasn’t been said in virtually every media outlet nationally. Instead, we think developments since the election—and especially yesterday—highlight a key point: It is critical to set your political views aside when assessing investments. Despite widespread fears the election’s outcome and/or related instability would hurt markets, stocks are echoing that very message now.

Throughout 2020’s election cycle, we heard pundits of both political persuasions warn of a market rout if their side didn’t win. But Election Day was 72 days ago—10 full weeks plus two days. There are only 13 days until Inauguration Day, when this election’s news cycle should conclude. In those 72 days, America’s S&P 500 Index is up 13.6%.[i] Sure, that is behind the MSCI World’s 16.5% over this span.[ii] Maybe political angst explains some of that lag. (Although we would note it likely has more to do with November’s value countertrend rally.) Even Wednesday, as the news was breaking in the Capitol, stocks rose—and S&P 500 futures climbed after trading concluded.[iii] Markets opened up sharply Thursday morning, too. While we would never draw big conclusions from one day and definitely not from one after-hours session, they merely add to the preceding 10 weeks’ evidence.

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Lessons From PMIs and Other Goodies

Investors got 2021’s first US economic data release Tuesday, when the Institute for Supply Management (ISM) announced its manufacturing purchasing managers’ index (PMI) for December jumped to 60.7 from November’s 57.5, beating expectations for a mild slowdown.[i] (As with all PMIs, readings over 50 indicate expansion.) Forward-looking new orders hit an astounding 67.9, and output rose to 64.8.[ii] Surprising many, this expansion happened even as several states and metro areas were tightening lockdowns. Meanwhile, ISM’s services PMI doesn’t hit until tomorrow, but IHS Markit’s version ticked lower, signaling a slowdown. This divergence is unusual for a recession, and it isn’t the only thing making 2020’s economic contraction unique—a factor that holds a few takeaways for investors, in our view.

History will remember last year’s economic decline as a recession. The official arbiters, the National Bureau of Economic Research, already declared it one. But from a qualitative standpoint, we think the decline’s nature matters, too. Last year’s downturn had a well-known, unique cause: In hopes of slowing COVID-19’s spread, governments nationwide (and worldwide) ordered the closure of most face-to-face businesses. When the first wave of lockdowns happened in March, that included a lot of manufacturing facilities as well as shops, restaurants and personal services. But by the time the late-year virus surge triggered a new wave of lockdowns, officials seemed to realize factories could stay online provided employees maintained social distance and had adequate personal protective equipment. They were allowed to remain open—unlike restaurants, hair salons and a host of others. Online shopping also supported demand for physical goods as people adapted to stay-at-home life. So we ended up with a forced decline in services activity, while manufacturing fared ok after an initial drop.

More traditional recessions don’t materialize as suddenly or sharply. The typical recipe: As an expansion rolls on and the world gets more optimistic, businesses tend to build up excess as their expectations get too high. They launch big new projects, ramp up output, add headcount and all the rest as they see only sunlit uplands and can’t fathom bad times arriving in the near future. Meanwhile, in an effort to contain that froth, central bankers often overshoot, jacking short rates above long rates and inverting the yield curve. That starts a reset in which funding dries up, forcing businesses to get lean and mean to make it through. They slash investment and production and work through big inventories, with the goal of being able to do more with less once everyone has worked off their collective bloat. You can see this in the steady decline in inventories and capacity utilization over the entirety of a recession. Both usually bottom out alongside GDP. This time, inventories and capacity utilization took an immediate hit before beginning a sharp recovery. Neither is back at breakeven yet, but both have rebounded far faster than if this were a traditional recession, as Exhibits 1 and 2 show.

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The Sentiment Overshoot That Spurred Stocks in 2020

As we reflect on 2020 in its waning hours, it is easy to think of many ways this year will be remembered as one of history’s worst: the pandemic’s vast public health impact and the related tragedies many families endured; the sudden, sharp hit to employment and small businesses; the dislocations from social distancing and school closures. As much as this is the undeniable reality of the year, though, there is another thing to consider: How much better than feared the economic reality has been since the lockdown-induced contraction in the spring. While we don’t diminish the year’s general awfulness, we think it is worth acknowledging that this better-than-feared reality likely contributed mightily to the swift bull market that began in March.

In the early, hugely uncertain days after Western nations began locking down in an effort to slow COVID’s spread, pundits pretty much everywhere agreed the hit would be severe. Comparisons to the Great Depression were front-page news in many major outlets worldwide. Yet expectations from the crisis’s pessimistic depths for everything from annual GDP growth to earnings and unemployment have proven overly negative.

Consider GDP. In the lockdowns’ immediate wake, everyone was sure the damage would be severe—and it was. In Q1 and Q2 2020, US GDP fell -5.0% and -33.1% annualized, respectively.[i] Now, that doesn’t mean output actually fell that much in each quarter. As we took pains to explain at the time, annualized rates are the full-year rate that would result from the quarter-over-quarter growth rate repeating all four quarters. Using the actual quarter-over-quarter rates, GDP fell by -10.1% from Q4 2019’s high through Q2 2020. That is the worst two-quarter contraction in terms of magnitude since quarterly data begin in 1947. But it isn’t on the Depression’s level. Across that three-plus-year downturn, economists estimate GDP fell by roughly a third—nearly three times 2020’s decline, including one year (1932) in which GDP fell -12.9%.[ii]

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Some Dos and Don’ts for a 2020 Portfolio Review

With 2020 about to wrap up, annual reflections and reviews are common[i]—including of investment portfolios. There is nothing special about a calendar year, and reviewing such things in 12-month chunks has always struck us as rather arbitrary. But if you choose to conduct a year-end portfolio performance review, we think these dos and don’ts should be front of mind.

Do: Assess returns against a comparable market index (or mix of indexes).

Global equities are up 15.7% for the year.[ii] Depending on your asset allocation—your portfolio’s mix of stocks, bonds and other securities—that may not be the best reference point for your entire portfolio. If you have a good chunk of your assets in bonds, comparing the totality of your portfolio to stocks alone would be inaccurate. Instead, measure each portion against the most relevant benchmark. For example, you might measure your bonds against a broad bond index, like the ICE BofA 7-10 Year Corporate-Government Bond Index. For stocks, if you are invested globally, measure that portion of your portfolio against the MSCI World Index, not the US-focused S&P 500 index. For instructions on how to access these indexes on publicly available sites, here you go.

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The Major Lesson From a Wild, Tumultuous Year in Markets

With two trading days left in the year, the S&P 500 is up 17.5% year to date.[i] The MSCI World Index is right on its heels at 15.5%.[ii] If you were locked in a sound-proof chamber devoid of any interaction, online or otherwise, with the outside world all year and got only this information, you might think 2020 was just a nice, ordinary, modestly above-average year. Obviously, it wasn’t. February and March saw history’s fastest bear market, turning the year into a wild rollercoaster most would rather forget (not to mention the pandemic, natural disasters, social upheaval, a contentious election and all the other events this year threw at us). To those who hung on through the tumult to capture the rebound and subsequent gains, whether intentionally or because terror froze you into inactivity, never forget how your patience paid off—that lesson will serve you well the next time stocks encounter such sharp volatility. To those who missed some of this year’s returns, take heart: One year won’t make or break anyone’s long-term returns. For everyone out there, success doesn’t depend on how you did in 2020 alone. But what you have learned this year could be vital to future success.

There are plenty of lessons to learn from this year—and plenty of other articles listing them out. So here we will just offer a simple one: If you are investing in stocks for long-term growth, there are generally only two valid reasons to exit the market. First, if sentiment is so rollickingly euphoric that investors’ expectations have become almost comically high and impossible for reality to beat in any realistic universe. Second, if you see something big, bad and unnoticed—something no one else thinks could wipe a few trillion dollars or more off of global GDP. Those are the two things that generally cause bear markets, and identifying them early on can help you see a bear market just after it begins, giving you plenty of time to get out before the worst hits.

When stocks peaked in mid-to-late February, euphoria was absent. The COVID lockdown fell into the second category, which we call a wallop, and stocks started pricing those lockdowns’ economic fallout in weeks before they became official. Markets bottomed on March 23, the very day the UK became the last major nation to enter lockdown—and the day before IHS Markit’s flash purchasing managers’ indexes for March offered the first look at how much lockdowns were harming global economic output.

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