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.


PMIs, Supply Hiccups and Stocks

Is the party ending? That is the question pundits asked as manufacturing purchasing managers’ indexes (PMIs) rolled in Monday. They showed continued growth on both sides of the Atlantic, with some nations even accelerating a tick. But they also showed the strain of severe supply shortages, prompting pundits to warn the economic recoveries from lockdowns are about to hit a harsh speedbump—particularly in Britain and manufacturing powerhouse Germany. We don’t doubt some businesses will have problems fulfilling orders in the near future, and that will weigh on output. But derailing the recovery seems a stretch, and markets have already signaled as much, in our view.

Overall, July PMIs were strong. As Exhibit 1 shows, the headline results clustered around 60—well above 50, the line between growth and contraction. New orders also grew at a fast clip, based on the commentary in IHS Markit’s press releases. That is ordinarily a great sign, as today’s orders are tomorrow’s production. But these days, rip-roaring new orders can be a headache. Supplier deliveries are on par with lockdown-era disruptions, complicating manufacturers’ ability to keep up with demand. Many are hoarding resources and components, fearing even greater supply disruptions later, and instead fulfilling orders by drawing down stockpiles of finished goods. Even so, order backlogs are growing at or near record rates in most major nations.

Exhibit 1: Dissecting July’s PMIs

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The Resiliency of US-China Trade Ties

Our political analysis is intentionally nonpartisan. We favor no politician nor any party and assess developments solely for their market and economic impact.

China dominated financial headlines last week, especially on the regulatory front, which has drawn many investors’ focus. But if you can look past this, another story involving America and China is quietly emerging—one that undercuts the longstanding fear of a trade war upending global growth. Those concerns still lurk with the chilly relations between the two economic superpowers—see recent high-level talks to discuss “guardrails” for the US-China relationship—occasionally stirring fear anew. However, for all the damage the US-China trade spat was supposed to inflict, reality wasn’t as dire as projected. Trade relationships proved more durable than many feared.

Despite some post-election expectations of a more dovish tone towards China, President Joe Biden’s approach has looked a lot like former President Donald Trump’s. In early June, the Biden administration expanded on Trump’s executive order prohibiting Americans from investing in certain Chinese companies with Chinese military ties (perhaps most notably, Huawei). A couple weeks later, the administration banned the import of raw materials used in solar panels—a move tied to human rights concerns in Xinjiang. It then closed the month by opening trade talks with Taiwan—which Chinese views as a breakaway province—for the first time since 2016. The primary difference between the Trump and Biden administrations’ approaches: The latter has tried building a consensus among allies to pressure China on a range of geopolitical and sociological issues.

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The Hints About Stock Leadership From Q2 US GDP

Thursday, the Bureau of Economic Analysis (BEA) reported US Q2 GDP growth accelerated to 6.5% annualized, putting output 0.8% above Q4 2019’s pre-pandemic high.[i] Yes, the US economy, by this measure, is officially out of the recovery phase and into expansion. Most coverage honed in on the disappointing headline figure (expectations ran north of 8% annualized) and whopping 11.8% growth in consumer spending (the second-fastest rate in nearly seven decades, trailing only Q3 2020’s 41.4% pop). While all this is backward looking—and the details therefore not of major importance to forward-looking stocks—we think the report does hint at the trends that likely lie ahead.

The sources of headline disappointment aren’t too concerning, in our view. Private inventory depletion knocked -1.1 percentage points off annualized GDP growth, residential real estate investment subtracted half a points, trade detracted -0.4 points and declining government expenditures took it down another -0.3 points.[ii] Let us take each in turn. First, businesses’ drawing down stockpiles shouldn’t be surprising. Well-known supply chain bottlenecks make stocking warehouses challenging, but firms globally are working to fix—or adapt to—them. This is a case where inventories are falling because demand is up, not because companies are cutting back. Lack of housing inventory may be holding back new home sales, but again, that seems mostly temporary. It may take a while for builders to ramp up due to the aforementioned supply chain issues, but the demand is there—as evidenced by soaring prices. We suspect the supply to meet it will follow.

Meanwhile, although net trade subtracted from GDP growth, that is because imports rose more than exports. Rising imports signify higher demand, which is why we think it is more helpful to look at total trade. It rose, signaling broad economic strength. As for dwindling government spending, stocks care mostly about the private economy—whether federal outlays rise or fall doesn’t really impact them much.

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Fact Check: Was 2013’s ‘Taper Tantrum’ Actually So Tumultuous?

Every now and then, pundits repeat an offhand, unsourced remark so often that it becomes accepted as fact. Then it takes on a life of its own, becoming the generally accepted version of events. Everyone echoes it, no one checks it and, in some circumstances, it can actually affect people’s actions and expectations in the here and now. This happens a lot with general statements about market data, and we have seen a big one lately: the widespread perception that the market volatility surrounding the Fed’s chatter about “tapering” quantitative easing (QE) bond purchases in 2013 was huge, and policymakers must avoid a repeat at all costs. But actually, reality was benign, as we will show, another reason a taper isn’t worth fearing today.

We aren’t calling anyone malicious here. Rather, we think it illustrates the problems with using figurative language to describe market volatility. We enjoy calling a big drop a “plunge” and a big rise a “jump” as much as anyone—colorful synonyms punch up writing and can make the dry topic of market movement easier to read. But in 2013, when markets got a bit rocky after then-Fed head Ben Bernanke first alluded to tapering in May, some clever wordsmith with a fondness for alliteration coined a new term: taper tantrum. It was snappy. It spread globally. We used it a few times, mostly with scare quotes and always with numbers putting it in perspective. But many pundits disregarded the context, didn’t reference actual return figures, and just used “taper tantrum” as if the entire nuanced meaning were self-evident. It has since taken on a life of its own, fueling the belief that “tantrum” must mean some catastrophic drop in stock and bond prices. Anyone who has ever been around a toddler knows a tantrum is a lot worse than a short cranky outburst—basically one notch short of meltdown. So that logic, applicable in human behavior, influences assumptions about how much the market dropped. Hence, the metaphor morphs to generally accepted “fact” in public consciousness.

So let us drop the flowery prose and look at the cold hard facts, starting with stock returns. Exhibit 1 shows the S&P 500 in 2013. Bernanke alluded to tapering during Congressional testimony on May 22, during market hours. That day is when the volatility began. As you will see, it wasn’t huge. It was a -5.6% pullback over just a bit longer than a month.[i] It wasn’t even big enough to qualify as a correction, which is a sentiment-driven drop of about -10% to -20%. It certainly wasn’t a bear market, which is a deep, typically lasting, fundamentally driven decline of -20% or worse. It was just standard short-term volatility. Moreover, stocks rebounded quickly, hitting new highs by mid-July. The year as a whole was one of the S&P 500’s best on record, a 32.4% rise.[ii] Who wouldn’t want a repeat?

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Clearing the Air in ESG Investing

Is how a company makes money—and not just how much it makes—important to you? If so, you may be interested in “environmental, social and governance” (ESG) investing. But as more people invest on the theory ESG investing adds value, they debate if companies simply ticking the right ESG boxes will deliver superior returns—and, naturally, confusion abounds. (Not least the confusion inherent in the incorrect presumption any one factor or set of factors outperforms permanently.) To clear things up, here are some tips to help navigate the muddy waters.

Since ESG’s inception, a big question has loomed: how to measure and compare companies’ progress outside traditional metrics like profits, revenues, gross profit margins and market cap. In stepped research firms and index providers, who introduced a series of ESG scores, which rate firms across a series of different criteria. These scores can be useful to help you avoid business activities you object to, but it is important to note they are chiefly measures of operational risk. Ratings don’t—and aren’t intended to—signal which firms will perform better in share-price terms. They are simply one input of many in that regard.

Furthermore, as investors—and increasingly regulators—bemoan, there is no consistent standard, as ESG factors are largely qualitative. For any given company, ESG rating firms can give wildly different scores, which we think highlights rankings’ inherent subjectivity. Even if two raters used the exact same information, they could award different scores based on the methodology they use. For example, when it comes to numerically assigning a “social” score—ranging from a corporation’s leadership diversity to its child or slave labor exposure—which one do they think is more important? (Presuming the company’s reporting on the latter is even accurate, given the complexity of multilayered overseas supply chains and the notorious lack of transparency.) Even when an issue is theoretically possible to measure, say the carbon emissions a corporation is responsible for, in practice, raters can only estimate that figure—another data limitation rendering comparison more art than science. Patchwork disclosure and hard-to-quantify variables mean ESG ratings are, quite often, essentially a judgment call.

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A Q&A Ahead of the Debt Ceiling’s Big Comeback on Sunday

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

Look up! Do you see it? Over there? Looming on Sunday? Yep, you guessed it, the debt ceiling is back! Set to return from a two-year sabbatical and bring a whole bunch of misplaced default, downgrade and general debt fears with it. If this is your first potential debt ceiling showdown with us, welcome! In our view, getting informed now can help you keep your head if the political rhetoric gets very hot. So please journey with us through a fact-packed, irreverent Q&A.

What is the debt ceiling?

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Our Perspective on the ‘Rocky Week’ You Might Have Missed

Last Friday, July 16, the S&P 500 Index closed at 4,327.16.[i] If you had made like Rip Van Winkle from that moment through yesterday’s close, you would likely have awakened and surmised you missed a pretty “meh”-yet-up span, with the index finishing Thursday at 4,367.48, a gain of 0.9%.[ii] [Yawn.] But those who weren’t taking an extended snooze may have had a different experience. After Monday’s -1.6% selloff (which was more than -2% intraday), pundits from Australia to Austria and pretty much all points in between argued this represented the Delta variant giving “investors a reality check”—a prelude to worse.[iii] In our view, this is emblematic of 2021’s dominant sentiment feature: myopia. Investors would do well to remember this week the next time one or two volatile days throws commentators for a loop.

First, to be clear, we get it: Rising caseloads tied to the Delta variant aren’t good. This is perhaps most true in the developing world, where vaccines, treatments and overall medical care are scarce. But even in the developed world, caseloads are on the rise, and many fear it will get worse before it gets better.

However, for investors, it is worth remembering: Caseloads alone didn’t bring the downturn we saw in early 2020. Lockdowns, then a major, unprecedented shock that suddenly interrupted economic activity, were behind it, in our view. Even when a vast rise in caseloads led governments to bring lockdowns back last autumn and winter, investors weren’t caught wrong-footed. Why? Efficient markets weigh all manner of opinions. They hear talk of variants, waves, the disappointing “Freedom Day” in Britain and more. They have heard all the similar talk for months. Hence, we don’t think markets ever expected a smooth slope to recovery.

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A Primer on Digital Currencies

With cryptocurrencies increasingly fashionable, it isn’t surprising the Fed, ECB and other central banks would want to get in on the action with so-called “central bank digital currency” (CBDC). While payments have been electronic for decades, what makes CBDCs different and what form might they take? How would they differ from mainstream cryptocurrencies like bitcoin and “stablecoins,” asset-backed cryptos with a fixed value? Although we don’t think this debate intersects much with stock markets, a brief primer on the main players seems in order.

Cryptocurrencies, in general, strive for an electronic equivalent of handing someone cash. Mobile payment apps using dollars may seem to have that ease of use, but they are based in the banking system, using much of the same plumbing as checks, wires and other bank transfers. Payments can still take days to clear and settle through multiple intermediaries. That lunch bill you split with the payment app on your phone ultimately links back to a bank account you authorized to transfer funds—much more complicated than if you had handed your pal a fiver.

Enter bitcoin and its fellow cryptocurrencies, which operate outside the banking system. Once in possession of a token, you can direct it to anyone else who has an address on its blockchain (i.e., the digital ledger tracking transactions and possession). Bitcoin addresses are long alphanumeric keys, not names and other personal data, giving the perception of anonymity—much like physical cash—although that anonymity isn’t guaranteed, and the EU is now pushing to end it altogether. Blockchain settlement is also real-time, final and irreversible. But cryptocurrencies are only as good as what you can exchange them for—no one is legally obligated to accept them outside of El Salvador, and not everyone does. You can’t pay taxes with them—whereas the IRS does tax cryptocurrency transactions.[i]

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Two Points From 2020’s Two-Month Recession

Yesterday, the National Bureau of Economic Research (NBER) announced that the recession accompanying last year’s lockdowns officially came to an end … in April 2020. That means the official arbiters of US recession dates have decided the recession ended two months before they declared it to be underway in June 2020. This illustrates two key—if simple—points for investors to bear in mind now and always. One, recession dating is far too lagging to be of any use when trying to identify bull and bear market turning points. Two, it is yet more evidence last year’s recession was too short and bizarre to qualify as a typical reset of the economic cycle, which we think explains why growth stocks have led during the recovery—and should keep doing so.

Let us rewind for a moment to last year. Western society started reacting to COVID with voluntary and involuntary limits on event attendance and overall economic activity in mid-to-late February. Stocks began falling at about the same time, peaking on February 12 globally and February 19 in the US. After a steep, weeks-long drop, they bottomed out on March 23. But we didn’t get the first hint of negative economic data until March 24, when flash purchasing managers’ indexes for March showed broad contraction. Over the next several weeks, monthly indicators flashed deep declines for March and April. But NBER didn’t make the recession official until June 8, when they declared activity had peaked in February 2020—something basically every data series in America had already demonstrated. As had stocks, which had endured an entire bear market before economic data began registering lockdowns’ damage.

Eight days after NBER’s press release hit the wires, the US Commerce Department announced retail sales had jumped in May. Other positive indicators began rolling in, showing broad recovery in May and June. But that nascent rebound wasn’t enough to erase all of April’s deep decline, so Q2 GDP still registered a significant contraction. However, the broad, reopening-related recovery started showing in Q3, and growth continued in Q4 and Q1 2021. GDP finished that quarter just -0.9% below Q4 2019’s peak.[i] In a few days, we will see whether Q2 growth was strong enough to eclipse that, technically moving the economy out of recovery and into expansion. In other words, NBER waited until GDP was nearly at breakeven to declare the recession over. That isn’t a knock on NBER, which always deliberates over these things and announces turning points at a delay, once it is crystal clear a new trend is underway. But the fact that stocks began rising about a month and a half before we now know the economy began improving—and nearly three months before that improvement showed up in the data—demonstrates the market’s forward-looking prowess.

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Slower Growth Shouldn’t Sway Stocks

With “stimulus” hopes in doubt and some data coming off the boil of late, pundits are increasingly seeing the recent growth-rate pop as fleeting—and worrying it spells trouble. In the UK, May’s weaker-than-forecast monthly GDP reading caught some experts off guard. In the US, research outfits are already projecting slower-than-average GDP growth—and the possible implications—after government aid elapses. Now, we have long argued the reopening-driven growth surge would fade fast. But we disagree with the worried conclusions. Stocks can do great in a slow-growth economic environment—worthwhile to keep in mind for investors.

When pundits argue a development or trend is good or bad for markets, it is worthwhile to review history. The past may not foretell the future, but it can frame probabilities—and provide data to test claims. Before last year’s pandemic-driven economic contraction, US annual GDP growth averaged 2.5% from 1989 – 2019.[i] Over that period, there were stretches when strong GDP growth coincided with strong US stock returns. For example, from 1996 – 1999, annual GDP growth averaged 4.4%, and the S&P 500 delivered four years of returns above 20%—including 33.4% in 1997. But markets don’t need strong growth to surge. US stocks rose 37.6% in 1995—its best year of the decade. Yet GDP grew 2.7% that year, its weakest reading of the 1990s expansion.

Moreover, periods of weaker-than-average US GDP growth haven’t hurt US stocks, as evidenced by the last bull market. From 2009 – 2019, US annual GDP growth averaged 1.9%—a percentage point below its 2.9% average from the preceding 20 years.[ii] But the S&P 500 spent just one year in the red during that stretch—2018, when GDP grew 3.0%, its second-fastest rate of the period. American stocks’ best year was 2013 when they rose 32.4%. Yet GDP grew just 1.8% that year—its third-weakest during the expansion. More broadly, the S&P 500 was up 351% from 2009 – 2019, far exceeding the non-US developed world. Slower-than-average GDP growth didn’t stop American stocks’ world-leading ascent.[iii]

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