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.


About That Gangbusters UK Retail Sales Report

UK retail sales had a bangish March, jumping 1.1% m/m and a whopping 6.7% y/y, according to the Office for National Statistics. Headlines had a field day, marveling at shoppers’ ability to “ignore Brexit chaos,” “defy Brexit turmoil” and hit the shops “unfazed by Brexit.”[i] This does seem like a testament to Brits’ legendary stiff upper lip and history of keeping calm and carrying on through uncertain times. However, while we don’t share the widespread view of Brexit (particularly a no-deal Brexit) as automatic doom, we do wonder if March’s sales jump is really a case of shoppers defying conventional wisdom—or if it is instead another instance of Brits prepping for a no-deal Brexit that didn’t end up happening.

Put yourself in the mind of a UK shopper, if you will. It is mid-March, politicians are nowhere close to a Brexit deal, and the 29th of the month looms as the date your country will supposedly crash out of the EU. Headlines have warned you for months you could lose access to your favorite continental European products, not to mention necessities like medicine. So, what do you do? Stock up, of course! Time to hit the high street and nab what you can.

This is just one speculative interpretation, of course, but it wouldn’t be the only instance of stockpiling. For months, IHS Markit’s Purchasing Managers’ Indexes (PMIs) for the UK showed soaring inventories. March’s manufacturing PMI release opened thusly: “The impact of Brexit preparations remained a prominent feature at manufacturers in March. Efforts to build safety stocks led to survey-record increases in inventories of both purchases and finished products. Trends in output and employment also strengthened as stockpiling operations at clients led to improved inflows of new work.”[ii] In other words, pre-Brexit scrambling and hoarding deserved nearly all the credit for the manufacturing PMI hitting a 13-month high.

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Small Stock Markets, Big Skew—Israel Edition

Editors' Note: MarketMinder does not recommend individual securities. The below merely represent a broader theme we wish to highlight. Likewise, we favor no party nor any politician and assess politics solely for their potential market impact.

It seems a truth universally acknowledged that a fast-growing country with strong property rights and a vibrant startup culture must be a grand investment destination.[i] While we don’t necessarily disagree, we think investors should carefully consider the nuances of investing in smaller countries with few publicly traded firms. Unlike in huge economies—like the US’s, with its broad, deep, capital markets—factors like stock market structure and individual company concentration may drive returns much more than the country’s political or economic backdrop. A great example was in the news lately: Israel.

With the final vote tally in from last week’s election, incumbent Benjamin Netanyahu appears on track to start his fifth term as Prime Minister. However, his Likud party isn’t close to a majority of seats in the Knesset—Israel’s parliament—and will likely have to partner with at least four small parties with widely differing priorities in order to form a government. Meanwhile, Netanyahu faces potential indictment on corruption allegations—likely a distraction from legislating. Parliamentary division and distraction lower the probability of major laws passing—typically a tailwind for stocks, which dislike the uncertainty an active government brings. Israel’s strong economy is another ostensibly bullish force: GDP growth has averaged 3.4% y/y in a stretch of nearly uninterrupted expansion since Q1 2009.[ii] For comparison, OECD nations’ average GDP growth over that timespan is 1.6% y/y.[iii] Israel also boasts record-low unemployment, record-high incomes, a modest government deficit, a highly educated workforce and a thriving Tech startup scene.

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Finding the Green Shoots in China

China released a spate of economic data over the past week, including everyone’s favorite stat: GDP. Less noticed but more relevant for forward-looking markets and investors, in our view: recent credit data. March’s numbers are early evidence the government’s stimulus efforts may be starting to bear fruit—a positive development for global growth. 

On the headline front, Q1 GDP expanded 6.4% y/y, repeating Q4’s growth rate and slightly beating forecasts of 6.3% (and, predictably, triggering a round of speculation over the data’s accuracy). Other figures released Wednesday topped estimates, too. March retail sales rose 8.7% y/y (consensus: 8.4%), while industrial production jumped 8.5% y/y (consensus: 6.0%). These numbers suggest China’s economy may be starting to stabilize after last year’s sharper-than-expected slowdown, although it will take a few months longer to confirm a trend.

In our view, any stabilization will depend on private firms’ ability to access credit as officials continue trying to ease the pain of last year’s crackdown on the shadow banking sector. In China, large, state-owned banks dominate the financial sector. They have historically preferred lending to state-owned enterprises, leaving small-to-medium-sized private businesses (SMEs) out in the cold. In the recent past, regulators encouraged private lenders to fill this need—causing the shadow banking industry to balloon. However, off-balance-sheet debt also skyrocketed, stirring fears of economic instability. As Research Analyst Scott Botterman wrote last year in his analysis, “Scaling a Wallop Potential: Chinese Shadow Banking”:

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More IPOs Shouldn’t Slow Stocks

After years of relative calm, the IPO scene seems to be heating up. As several big-name firms—frequently Tech-related and referred to as mythical beasts[i]—go public, some investors see great buying opportunities. Many more, though, seemingly see threats—like new share supply overwhelming demand and knocking stock prices. Others fret high valuations for not-yet-profitable companies signal frothy markets—drawing comparisons to the late 1990s’ Tech bubble. In our view, these concerns lack support. Despite some high-profile IPOs, stock supply doesn’t seem set to surge—and present IPO activity is no bubble-like frenzy.

Digging into (and scaling!) the numbers helps illustrate this. IPO analysis firm Renaissance Capital estimates 234 companies may go public this year—good for $100 billion in new shares, a post-2000 record.[ii] While this sounds like a lot, measured against US stocks’ overall market capitalization, new IPO issuance is tiny. (Exhibit 1) Even with this year’s larger expected influx of new shares, IPOs would represent just a few drops in the bucket—far too minor to impact prices, in our view.

Exhibit 1: US IPO Share Issuance, Scaled

Source: FactSet and Bloomberg, as of 3/13/2019. US share issuance via IPOs and MSCI USA Investable Market Index (IMI) market capitalization, Q1 1998 – Q4 2018. MSCI USA IMI used in lieu of the Wilshire 5000 due to data availability, though the difference is negligible, as the former represents 99% of total US market cap. 

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Anatomy of a Bubble: Bitcoin Edition

Don Ho once sang tiny bubbles made him happy.[i] I humbly offer this investing corollary: Euphoric investors can make assets bubbly. Our case study today: the bitcoin bubble. We are more than a year removed from bitcoin’s peak, giving us a nice snapshot of what bubble behavior looks like. Bitcoin (and its ilk) went from the Next Big Thing with the potential to solve global poverty to being dropped from CBOE futures trading recently because so few people cared anymore. Its story holds several lessons for long-term investors.

The Anatomy of a Bubble

Financial media use the term “bubble” liberally, but rising prices alone do not a bubble make. In a global bull market, different sectors and countries lead (and trail), and certain segments can get frothy. Think biotech back in 2014 or mainland Chinese stocks in 2015. However, the broad market generally rises overall and over time during a global bull.

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March’s Jobs Jump Is Noise for Investors

After February’s lousy jobs report, many awaited last Friday’s March release with bated breath. When it hit—and hiring rebounded—that bated breath turned into a sigh of relief. Some claim this report was just what stocks needed—a bullish fillip. In our view, this is off. Cheer the figures if you like, but jobs data, good or bad, are backward-looking and reveal nothing about where forward-looking stocks go from here.

The attention-grabbing figure from March’s “Employment Situation Summary”: Nonfarm payrolls rose 196,000, beating expectations for 173,000. That was a big rebound from February’s originally announced 20,000 (revised up to 33,000 in March). Elsewhere, the widely watched unemployment rate (also called the U3 rate) was 3.8%, unchanged from February. Private sector wage growth slowed a tad from 3.4% y/y to 3.2% y/y. Overall, the latest numbers were fine—neither spectacular nor awful.

Exhibit 1: The US Continues Adding Jobs

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A Look at Sentiment—Then and Now

Nineteen years ago March 24, the Tech-led bull market reached its zenith, preceding a nasty, two-plus-year long bear market that wiped about 50% off the S&P 500.[i] Today, an even longer bull market is running—with many fearing it will soon meet a similar fate. But comparing sentiment in March 2000 to today highlights how different the two periods are. Investors aren’t currently close to euphoria—one sign this bull market likely has further to run.

So where are we in the lifecycle of a bull? We think bull markets end in two ways: atop the wall of worry or sideswiped by a wallop. Legendary investor Sir John Templeton’s famous maxim encapsulates the wall of worry: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” At bull beginnings—typically deep into a recession—almost no one wants to own stocks. As markets and the economy improve, worries gradually fade, enticing more previously timid investors into the market. These lingering fears are the proverbial wall of worry. While they exist, they help keep expectations low, creating room for reality to positively surprise. When worries run out and reality can’t possibly match expectations, the stage may be set for negative surprise and a bear market.

Wallops—huge, unforeseen shocks ending global growth—also kill bulls. Examples of this are the approach of World War II and 2008, when the one-two punch of a (still) little-noticed accounting rule exaggerated banks’ loan losses to a ridiculous extent, inciting a schizophrenic government response. Wallops are always possible, and we are on the lookout, but we don’t see anything looming presently.

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A Way Too Early 2020 Field Guide

Editors’ Note: MarketMinder favors no political party or candidate, and our commentary is non-partisan by design. We assess politics solely to analyze the potential economic or stock market impact and believe political bias invites investing errors.

The 2020 field got a new member Thursday, with Ohio Rep. Tim Ryan becoming the 17th Democrat to throw their hat in the ring. Number 18 doesn’t look far behind, as California Rep. Eric Swalwell’s camp leaked that he plans to announce his candidacy next week. With former Vice President Joe Biden still fence-sitting and a few other challengers rumored to be waiting in the wings, there is a very real chance we could get to 20 for 2020™! Here is an early look at who’s in, who may join the fray and—most importantly—why it is way too early for investors to get hung up on proposals they love or loathe.

Here, in alphabetical order, are the 18 folks who have officially declared their Democratic candidacy or strongly signaled imminent plans to. 

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Looking Past Small Shifts in Numbers

How many angels can dance on a pin? Maybe we ought to pose this classic medieval question to economic commentators. In recent weeks, a minute inversion of the US yield curve spawned a biblical flood of recession-fearing headlines. Similarly, in recent months the prophets at the IMF, World Trade Organization and OECD all downgraded 2019 growth forecasts—by fractions of a percentage point. Media saw all these as signs trouble loomed over stocks and the economy. But like debating the number of toe-tapping halos, fretting over microscopic movements—and forecasts—is time wasted, in my view. This is a case where the reaction to the alleged news tells you far more than the actual news itself.

Consider, first, late March’s yield curve inversion. The yield curve compares the interest rates of different maturity bonds from the same issuer. Usually, long rates top short rates, largely because borrowers extending funds for long periods have to account for more exposure to risk—and the potential they could have done better deploying the money elsewhere (the time value of money, in finance geekspeak). This is a positively sloped yield curve. Economically, it is beneficial as banks borrow short term to fund long-term loans, with the spread their profit.

Inverted yield curves—when short rates top long—mean lending may be unprofitable. It has historically been a fair indicator of troubled credit markets and a decent predictor of recession as a result. Media are well aware of this last point and have hyperventilated for months over various less-telling parts of America’s yield curve inverting. So it was no surprise that, when the 10-year US Treasury yield fell below the 3-month yield on March 22—inverting perhaps the most commonly watched curve—headlines shrieked of impending weakness.

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A Tax Day Q&A

Taxes! With April 15 right around the corner, this (typically very dry) subject is on many folks' minds. That is perhaps doubly true this year, given this is the first filing season since 2017's Tax Cuts and Jobs Act (TCJA) took effect. Headlines are jam-packed with stories of lower tax refunds (or bills due), unexpected negative surprises and more. While there is little that can be done about 2018 at this point, it isn't too early to think ahead. To that end, we compiled some common questions—and answers—to hopefully help you make future tax days as uneventful as possible.

“It looks like I owe more than anticipated. I thought 2017’s tax reform would lower my taxes—what happened?”

TCJA may indeed have reduced your taxes—but sprinkled the gains throughout the year in the form of bigger paychecks. Here’s how. Under America’s system of automatic tax withholding, employers carve out a chunk of each worker’s paycheck for Uncle Sam. Post-TCJA passage, the Treasury revised its withholding guidelines for employers, aiming to “deliver the benefits of the tax cuts as soon as possible, to as many Americans as possible.”[i] The result: Employers likely withheld less, putting more money in your pocket throughout the year. But also, quite possibly, fewer withholdings means a smaller refund (which may be good news—more on that later) or a tax bill.

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