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.

Why the Next Bull Market Doesn't Hinge on Buybacks

With the economy ground to a halt and earnings season just around the corner, companies are battening down the hatches. Several have canceled dividends and planned stock buybacks in recent weeks, leaving headlines globally asking: Where will a recovery come from if companies aren’t buying their own stock? Conventional wisdom correlates rising stock buybacks with markets’ rise during the bull market that ran from March 2009 to late February, flagging them as stocks’ main source of demand. Without them, many fear there won’t be enough buyers to cement a recovery and eventually return stocks to new highs. In our view, this misreads buybacks’ market impact. They weren’t the last bull’s driving force, and the next bull can get underway with or without them.

One extreme analysis, based on the Fed’s quarterly Flow of Funds reports, argues buybacks were the sole source of net positive demand during the last bull. As a Wall Street Journal summary explained: “Since the beginning of 2009, [the analyst] estimates, buybacks have added a net $4 trillion to the stock market. Contributions from all other sources—including exchange-traded funds, foreign buyers, insurers, mutual funds, broker dealers, pensions, hedge funds and households—netted out to roughly zero, he concluded, based on the Federal Reserve’s quarterly flow of funds reports.”[i] In our view, some simple math is all it takes to poke holes into this line of reasoning. At the end of 2008, the S&P 500’s market cap was about $7.85 trillion.[ii] When 2019 ended, it was $26.76 trillion.[iii] If the index’s market value rose by nearly $20 trillion, but corporations contributed only $4 trillion, then clearly other forces must be pushing up prices.

Exhibit 1 pokes even more holes, overlaying annual executed S&P 500 buybacks and annual S&P 500 returns. As you will see, 2018 had the second-highest dollar volume of buybacks. Stocks fell that year. In 2009 and 2010, when buybacks were at their lowest, the S&P 500 jumped 26.5% and 15.1%, respectively (including 2009’s 62.1% jump from the bear’s March 9 low through yearend).[iv] In the index’s best year of the last decade, 2013, buybacks were middling.

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A Ray of Light From Austria and Denmark?

Between UK Prime Minister Boris Johnson’s admission to an intensive care unit and grim forecasts for a sharp acceleration in US COVID-19 deaths this week, good news was in short supply on Monday. Yet stocks jumped globally, seemingly seeing through the bad news and zeroing in on reports that some European nations may begin easing lockdowns in the coming weeks. As always, it is important not to read hugely into any one day’s market movement, and short-term moves are unpredictable. So is government policy. But we think taking note of somewhat positive developments is important for investors—if not everyone—right now. If nothing else, maybe talk of plans to loosen restrictions is a reminder that there is an eventual endgame to the current crisis. It may even be starting to take shape.

The “good” news was minor by most standards. A few days after Denmark announced loose plans to begin easing the restrictions on movement and commerce aimed at slowing COVID-19’s infection rate and easing the strain on hospitals, Austria did the same. Over the past week, infection rates have slowed, even in hard-hit Spain and Italy. That seems to have helped policymakers see some light at the end of the tunnel and start rethinking their approach to containment.

In Austria, if all goes as hoped, small shops, home improvement stores and garden centers will be free to begin reopening on April 14, provided patrons wear masks and adhere to social distancing guidelines. Hair salons and other businesses necessitating closer personal contact will get the green light on May 1, and public gatherings may return in July. Yet travel may remain restricted, with international travel potentially banned until a vaccine for the novel coronavirus is available.

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What to Make of the March Jobs Report

The US Bureau of Labor Statistics announced March jobs numbers today, and as expected, they were bad. Yet after two weeks in which about 10 million Americans filed for unemployment assistance, many were likely also shocked nonfarm payrolls fell by just 701,000 jobs in March, pushing the unemployment rate up to 4.4%. There are some technical reasons for this, and those reasons are why many pundits expect the worst data are yet to come—and that general sentiment is almost certainly correct. In our view, though, the March jobs figures also highlight how late-lagging unemployment data are and why they shouldn’t guide your views about forward-looking stocks—especially now.

Wherever you want to start, the numbers were bad. Payrolls’ 701,000 drop was the biggest monthly decline since March 2009, ending the US’s record-long streak of 113 straight months of job growth.

Exhibit 1: Total Nonfarm Employees, Month-Over-Month Change

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How Bleak March Data Help Markets Anticipate the Future

Back on March 24, we pointed out the steep drops in March preliminary purchasing managers’ indexes (PMIs, surveys tallying the breadth of growth) as early signs of the economic fallout from society’s COVID-19 response. Friday, the more detailed, final figures emerged—and they were even uglier. When we covered the preliminary gauges, we noted the importance of remembering stocks tend to move before the economy—and this, of course, remains a crucial point now. But the broad reaction to the final figures also illustrates how stocks pre-price data, a point we think is worth considering.

Final PMIs are just a more complete look at the data that underpin Markit Economics’ preliminary version, including more granular looks at individual countries. Hence, we can now see the stark influence of Italy’s lockdown—and how hard-hit Spain has been affected. But we also now have the Institute for Supply Management’s (ISM) US PMI, offering a second look at America. Exhibit 1 shows the final PMIs across a range of major Western nations over the past three months. In all these cases, readings below 50 mean more firms reported contracting activity than expanding (and vice versa).

Exhibit 1: Major Manufacturing and Services PMIs

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Here Come the Downgrades

Now that major developed nations have signed off on trillions of dollars’ worth of COVID-19 economic response packages, they are starting to ratchet up bond issuance in order to pay for all of it. We have started seeing concerns about massive government debt increases trickle through the financial news arena, and over the weekend, one associated milestone occurred: Fitch downgraded the UK’s sovereign credit rating to AA-, citing the pending bond blitz. If recent history is a reliable guide, this will be only the beginning—not the end—of downgrade chatter. Hence, we thought it would help to highlight how markets have responded to sovereign credit downgrades over the past decade.

The standard fear when debt issuers get downgraded is that investors’ perceptions of their creditworthiness will also degrade, causing interest rates to rise and making debt more difficult to issue and service—a self-fulfilling prophecy. Yet as Exhibit 1 shows, this hasn’t historically been the case. Several nations, including the US, have lost their top credit ratings over the years. Some received multiple downgrades. Yet none of their interest rates soared. In many cases, long-term yields fell.

Exhibit 1: A Brief History of Sovereign Downgrades

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Separate Your Stock Market Views

Following the worst Q1 in history, stocks started Q2 on a rocky note as investors seemingly reckoned with the White House’s grim COVID-19 projections. Even as fresh data showed infection rates slowing in badly hit Italy and Spain, the large numbers of forecasted deaths in America may have understandably hit sentiment. We will leave it to the epidemiologists to assess whether these projections are likely to prove accurate as social distancing protocols remain in place for another month. As ever, our concern is capital markets and our readers’ financial futures. To that end, we offer a simple piece of advice: To navigate markets at this juncture, it is vital to mentally separate the disease, containment efforts’ economic impact, and stocks. The three are unlikely to move in lockstep, in our view, with stocks likely to improve before the other two.

Because this bear market materialized with record-breaking speed, it can be hard to see that markets actually worked as they usually do, pricing in the near future before the facts on the ground confirmed it. World stocks peaked on February 12. At the time, there were a handful of confirmed cases in America and Europe. No developed nations were officially on lockdown yet, but on that date the Mobile World Congress in Barcelona became the first major event to get canceled. One month later, the MSCI World Index officially crossed into bear market territory. By then, Italy was mostly locked down, while America and most other nations were curbing mass gatherings. Concerts, festivals, sporting events and other major gatherings were canceled, but businesses were still open and shelter-in-place orders had yet to take effect. Those came fast and furious the following week, starting in California on St. Patrick’s Day and then eventually spreading to the East Coast. But the first data confirming a deep economic contraction didn’t come until IHS Markit’s Flash Purchasing Managers’ Indexes for March arrived on March 24. That happens to be the day after the MSCI World Index notched its year-to-date low. Now, we have no idea if this low will hold. But that isn't our point. Rather, we think this stocks' downdraft preceding any confirming data proves stocks' strong tendency to move before data.

This is why we think it is critical, if challenging, to separate medical statistics and projections out of your stock market analysis. The big numbers in the White House’s projections on Wednesday morning have floated around the medical community and mainstream news outlets for the past couple weeks. They may be new to an official government PowerPoint presentation, but they are not new to investors. People have been buying and selling for several days with knowledge of these numbers, registering their opinions about them. Hence, we suspect they are already reflected in stock prices, alongside the initial sharp economic contraction stemming from the efforts to contain them.

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From Lows to New Highs: Historical Stock Market Recovery Times

When stocks endure a rough stretch, sometimes one of the biggest sources of discouragement for investors isn’t what they see in headlines. Often, it is simple math: However much stocks fell in percentage terms in a bear, they must achieve a much greater return on the way up in order to break even. Thus far, this bear market’s biggest drawdown was -34.0% for global stocks, notched in just five and a half weeks.[i] To simply get back to breakeven, world stocks would have to rise 51.6% from the low and 29.7% from Monday’s close—and that presumes there isn’t another downdraft, which is utterly unknowable.[ii] Compound that uncertainty with the fact that global stocks have historically achieved an 8.8% annualized return since the MSCI World Index’s inception, and the future can seem daunting.[iii] But it needn’t be. Not only are average bull market returns far above stocks’ overall long-term average, but much of the gain typically comes early. Don’t discount the strong potential for stocks to be back at new highs sooner than anyone thinks possible.

To illustrate this, we will explore history using S&P 500 data, as it has the longest available reliable dataset. Exhibit 1 shows the time stocks took to break even in price terms following every market trough since 1926.

Exhibit 1: Stocks’ Recovery Times After Bear

Source: Global Financial Data, Inc. and FactSet, as of 3/31/2020. S&P 500 Price Index, 12/31/1925 – 3/31/2020. Table counts months as 30.5 days and rounds to the nearest full month.

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Would a Short Selling Ban Help—or Hurt?

During this bear market, like the last one, short selling has drawn many folks’ ire, with some arguing it exacerbates daily volatility and deepens markets’ decline. Already, some governments are taking action, with six European countries banning it for selected stocks and South Korea doing so across entire industries. Now some propose a similar ban in America. In our view, however, short selling isn’t driving volatility and it isn’t behind the drop. We think banning it is a solution seeking a problem—a move that could create issues of its own by reducing market liquidity.

Short selling is the practice of borrowing stock, selling it and (later) buying it back. If stocks fall in the meantime, you profit. Usually, this is done by hedge funds, market makers and high-frequency trading firms. Today, as in 2008, many who don’t employ this practice see it almost as profiteering—and blame it for adding to downward pressure on stocks. They claim short sellers flood the market with sell orders, stoking big daily drops fundamentals don’t justify—profiting in the process. Hence the calls to ban it. In the financial crisis, US and other regulators heeded similar calls, temporarily restricting short selling across a variety of Financials stocks. They also permanently eliminated the practice of “naked” short selling, in which traders sell nonexistent shares instead of borrowing real shares up front. So far, US regulators haven’t yet bent to pressure to ban short selling—and that is a good thing, in our view. We think the negative light so many see shorting in doesn’t really reflect reality.

In the ultra-near term, perhaps a rash of short selling could temporarily swing prices a bit. But in the longer run, we are skeptical it has much impact. For one, there is a buyer on the other side of that short sale—one who is taking literally the opposite view, no less. The number of sellers (or buyers), therefore, doesn’t dictate market direction meaningfully. The stock market is an auction marketplace in which buyers and sellers express their views about where prices are headed by bidding for stocks. In our view, treating short sellers as uniquely capable of influencing stock prices presumes their opinion is always right and ignores other market participants’ role in influencing prices.

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Some Basics to Help Keep Would-Be Madoffs at Bay

As investors deal with the challenges of a bear market—already a tall order—they must also be on guard against another threat. This one comes from their fellow humans, unfortunately. While fraudsters are always active, many of their plots come to light and make headlines during bear markets—like Bernie Madoff’s famous 2008 Ponzi scheme, which emerged only after the big bear market led many of his clients to seek withdrawals. But sharp volatility can also sow the seeds of future schemes, as many investors’ frazzled nerves have them clamoring for “safe” investments with good returns and no downside. With that in mind, we think it is worth remembering how these plots generally look—and how you can protect yourself.

Stocks’ historic March plunge has roiled many investors’ portfolios—and their emotions along with it. After global stocks entered a bear market in three weeks, many probably feel the pull of something “safe” and steady—a way to earn equity-like returns with less, or no, downside risk. Yet this is a fantasy. No financial product can provide returns approaching stocks’ without risk, in our view. Yes, some salespeople claim products like indexed annuities, for example, deliver that. But their returns are usually far from equity-like over meaningful time periods, undercutting the claim.

Setting those legal-if-suboptimal (in our view) tools aside, many scammers use similar rhetoric to pitch fancy strategies and tactics featuring relatively high upside and, critically, no downside. Consider: Since 1985, the MSCI World’s average annualized return is 8.4%.[i] A fraudster may say their product delivers a return that is a shade under that average, but, temptingly, without any of the associated negative volatility. Or perhaps they claim their strategy combines a proprietary process with “alternative investments” nobody else is using—allowing them to remove the downside risk. Madoff’s “split/strike conversion” strategy, for example, involved buying and selling options on a portfolio’s stock holdings—and drove high and consistently positive returns. Illuminatingly, nobody could replicate his results, which is probably because they weren’t possible.   

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Around the World in Coronavirus 'Stimulus'

While the US’s $2 trillion stimulus bill is hogging headlines stateside, governments around the world are rolling out their own sweeping rescue packages in an effort to mitigate the economic consequences of COVID-19 containment efforts. Here is a look at some of the major responses we have seen from North America and Europe thus far. This isn’t everything worldwide, and many more provisions may emerge or shift in the coming days. But it should give you a sense of how the globe is responding and what investors should reasonably expect from it.


Britain’s government has rolled out a sequence of measures.

Sources: Bloomberg and The Guardian, as of 3/26/2020.

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