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.

China Tariffs: Big Overtime for Lobbyists, Small Share of Total Imports

Editors’ note: Our political commentary is non-partisan by design. We assess politics solely for its potential market or economic impact, and we believe political bias blinds investors and raises the risk of error.

President Trump generated a bunch of overtime for lobbyists and Treasury officials on Thursday, announcing plans to levy tariffs on around $60 billion (or $50 billion, according to White House aides) worth of imports from China and adopt new restrictions on Chinese investment in the US. Ostensibly, the move is retaliation for what the administration describes as “unfair” trading practices, including China’s subsidizing key domestic industries, putting byzantine restrictions on inbound foreign investment and forcing firms to hand over trade secrets in order to do business there. But reducing the allegedly “out of control” trade deficit also seems to be a primary aim. Now that Trump has signed the relevant executive order, we enter a 15-day public comment period, during which businesses can weigh in on which of the 1,300 product categories under consideration for tariffs should be on the final list. Meanwhile, the Treasury gets 60 days to figure out those investment restrictions. For its part, China is pledging both to speed up market liberalization, potentially addressing many of Trump’s concerns, and retaliate with tariffs of its own. So there is much trade-war chatter, with many blaming Thursday’s market volatility on these tariffs. Yet in our view, it is premature to draw firm conclusions. Given the number of moving parts and broad opposition to these tariffs from many US businesses, congressmen and administration officials, it is entirely possible these tariffs could end up as watered-down as the steel and aluminum tariffs. Also, when put in proper scale, these tariffs are actually very small. Patience, as always, is key for investors.

At the risk of delving into sociology and triggering people’s political biases, we think it is worth noting that the Trump administration has a tendency to start negotiations with bombastic threats, then slowly moderate to something resembling a conventional Beltway approach. “I will build a border wall and make Mexico pay for it,”[i] for example, largely morphed into “let’s continue the Bush and Obama administrations’ policies of heightened border security, forget adding fencing in illogical places like impassible mountain ranges, respect private property rights, and have Congress appropriate federal funding for security as needed, consistent with standard procedures.” “Repeal and replace the Affordable Care Act” largely turned into “patch it where needed if Congress can agree on it, and if they can’t, oh well.” Yuuuuuuuuuuuuuuuuge tax cuts turned into watered-down tax tweaks and added tax code complexity. Oh, and those sweeping steel and aluminum tariffs? They are now “tariffs for everyone except Mexico, Canada, Australia and everyone who is presently talking to us about exemptions, which includes the EU, South Korea, Argentina and probably Brazil.” (For those scoring at home, that list includes five of the largest sources of US steel imports.) As others have noted, these all match the negotiating strategy Trump described in that 1980s literary classic, The Art of the Deal.

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A (Way Too Early) Look Ahead at This Year’s Midterms

Midterms likely bring more gridlock, which markets shouldn’t mind. (Photo by adamkaz/iStock by Getty Images.)

Editors’ note: We assess politics and elections solely for their potential market impact. Stocks favor no party or politician. Partisanship and ideology can invite bias, impairing investment decisions.

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About That Brexit Breakthrough

The UK and EU sort of reached an actual Brexit breakthrough Monday, agreeing on the length and terms of the post-Brexit transition period. Through December 2020, the UK will mostly still act like an EU member, following all relevant rules and participating in the single market. Between the official Brexit date and the transition period’s end, Britain won’t have a say on EU rulemaking, but it will get the green light to start signing its own trade deals. Both sides are hailing this as a big achievement, and indeed, progress is progress. So, huzzah! At the same time, what investors seem most concerned with is what happens after December 31, 2020, and progress on that front remains as glacial as ever. Yet it looks increasingly likely that whatever the final arrangement, investors and businesses will be able to begin planning for it well before it takes effect, helping markets gradually price in its eventual plusses and minuses.


According to the official Brexit timeline, UK and EU officials aim to wrap up Brexit talks late this year in order to give member-states sufficient time to ratify the deal by the UK’s March 2019 official departure date. So while the transition period is a bit shorter than UK Prime Minister Theresa May initially sought, simply having an agreement is positive, in our view—it lets the two sides move on and focus on the “end state” agreement that will govern the UK and EU’s relationship from 2021 onward. Haggling over the transition agreement for a few months would have delayed this more crucial process. Having more time will lower the likelihood of their rushing into a half-baked end state agreement.

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Does the Blocked Broadcom/Qualcomm Merger Signal a Policy Shift?

MarketMinder doesn’t recommend individual securities; the below are simply part of a broader theme we wish to highlight.

Last week, as investors breathed a sigh of relief over President Trump exempting Canada and Mexico from steel and aluminum tariffs, skeptics warned the levies were a red herring—the real protectionist threat lay in potential measures targeting China. So when the president blocked a potential hostile takeover of Qualcomm by Singapore’s Broadcom, people worried this was the opening salvo in a real trade war. Normally we don’t dive into security-specific matters in this space, but people are drawing pretty sweeping conclusions. Tensions are running high, with observers warning the move increases protectionism and regulatory risks for Tech firms. However, there are some extenuating circumstances that, in our view, render these worries premature.

Our story starts last November, when chipmaker Broadcom made an unsolicited, $103 billion hostile bid for rival Qualcomm, which it sweetened after the board rejected the original. Qualcomm hemmed and hawed over the revised offer, warning any deal would be subject to extreme regulatory scrutiny and could be shot down. In turn, Broadcom hoped to take its increased offer directly to shareholders at a March 6 meeting by proposing the election of board candidates who favored the deal. Meanwhile, however, Qualcomm sought and obtained a review of the proposed deal by the Committee on Foreign Investment in the United States—CFIUS, a body that reviews potential investments in America for potential national security issues. Unusually, CFIUS kicked off its review even though no deal was complete.

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Some US Banks Might Face Fewer Rules, and That’s Ok

(Editor's Note: MarketMinder does NOT recommend individual securities; companies referenced herein are merely cited as examples of a broader theme we wish to highlight.)

Ever since Dodd-Frank’s 2010 passage, politicians have fought over what size bank ought to be labeled a “systemically important financial institution” (SIFI) and therefore subject to stricter rules and oversight. Today the Senate approved a bill moving that threshold from $50 billion in assets to $250 billion, reducing the number of SIFIs from 38 to 12. Proponents argue this will free smaller banks from unnecessary, burdensome requirements inhibiting growth, lending and competition. Others are, in our view, more forcefully arguing less oversight will encourage excessive risk-taking among smaller but still “too big to fail” financial firms, potentially inviting another financial crisis. We believe these concerns are overwrought and misdiagnose the crisis’s causes.

The bill—which still must clear the House[i]—contains a number of regulatory tweaks. It would exempt the 26 ex-SIFIs from having to submit annual “living wills”[ii] and give them relief from the Liquidity Coverage Ratio, which requires banks to hold enough high-quality liquid assets to cover expected short-term cash obligations. Additionally, banks with less than $100 billion in assets would no longer face onerous annual “stress tests” intended to gauge their resilience to adverse scenarios. Failing a test can result in arbitrary capital surcharges and restrictions on buybacks and dividends.

Many banks in the $50 billion – $250 billion range received taxpayer funds under the Troubled Asset Relief Program (TARP) in 2008—to some, proof they were big enough to threaten the financial system and would have failed had the government not stepped in. But TARP recipients weren’t necessarily going to collapse without it. Rather, the Treasury foisted the funds on healthy banks of all sizes and types in an effort to destigmatize it. If TARP aid was restricted to the very worst off, officials worried, investors and depositors might see it as a sign of impending doom and panic—and the resulting deposit flight would compound banks’ issues. So the Treasury said only “healthy institutions” were eligible. No surprise, then, that plenty such institutions participated.

For example, Regions—an Alabama-based bank—bowed to Treasury pressure and took $3.5 billion in TARP funds. Or consider M&T Bank, which initially received $600 million despite skating through the crisis mostly unscathed—even acquiring some struggling banks along the way. (They weren’t the only one.) As M&T’s finance chief said in 2012: “We didn't want [TARP money], we didn't think we needed it. … But at the height of the crisis, there was a lot of pressure on banks to prove that they were strong enough to receive it.” The same logic applied to many banks, regardless of size.

Profits played a role for others. Banks got TARP funds by selling the Treasury preferred stock with a 5% dividend though 2013.[iii] For many at the time, this was cheaper than other available financing. Even healthy banks had an incentive to take it. Meanwhile, midsized regional bank IndyMac wasn’t bailed out. Yet its highly publicized failure didn’t cause a chain reaction. The FDIC assumed control and eventually sold it to investors, protecting all insured deposits. This undercuts claims TARP money was necessary to prevent bank failures from rippling through the financial system.

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Checking In on Global Growth

Based on their name, you would think buzzwords would be, well, buzzy. Someone forgot to tell the powers that be in global economics, because according to Quartz, economists’ buzzword for 2018 is “synchronous.” As in, synchronous economic growth—a jargony and, in our view, weird euphemism for “lots of countries are growing.” It isn’t wholly accurate, as not every country on Earth is enjoying rising GDP, and it isn’t as unique for growth to be widespread as the buzziness suggests. Still, for investors, it is quite nice that GDP is growing in Emerging Markets as well as developed. Recently released data show large EM nations like India and Brazil contributing to global growth, but they aren’t the only ones. Plenty of other smaller emerging economies are joining in. This doesn’t make them great investments necessarily—stocks and GDP often diverge—but it does show global demand is strong, which benefits developed-world firms, too.

India’s Q4 GDP grew 7.2% y/y—the fastest among the world’s major economies—accelerating from Q3’s 6.5% and Q2’s 5.7% growth trough.[i] On the production front, manufacturing growth sped to 8.1% y/y from Q3’s 6.9%, while services—India’s largest sector—accelerated to 7.2% from Q3’s 5.6%.[ii] From an expenditure perspective, consumer spending growth slowed to 5.6% y/y from Q3’s 6.6%. While moderating over the last year, growth remains on a healthy trend near its five-year average.[iii] Indian businesses are also bustling. Gross fixed capital formation surged 12.0% y/y in Q4, accelerating from Q3’s 6.9% and continuing a rebound from Q1 2017’s dip.[iv] While this figure includes government investment as well as business investment, plenty of other private sector indicators suggest businesses have been expanding swiftly.

Policy uncertainty from late 2016’s demonetization and mid-2017’s tax overhaul temporarily stalled investment activity, but those headwinds appear to be past. While the goods and services tax (GST) rollout involved substantial changes to business operations for compliance, money supply has now recovered from the demonetization shock. After dipping to mid-single-digits in 2017, bank loan growth bounced back to 10.7% y/y in the two weeks ending February 16 and M3 money supply growth to 10.3%—both rates that prevailed before structural reforms and signaling India’s economy is back on track.[v]

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Nine Years Ago, a Bull Was Born

Nine years ago today, a bull market was born. Perhaps history will show it turned nine years old today. Or perhaps we are already one and a half months into a bear market that began on January 26. We don’t think so, but given US and world stocks are about 5% below record highs, there is no way to know without the benefit of hindsight.[i] So while we aren’t going to jinx things by declaring this article a bull market birthday card, it isn’t an epitaph, either. We simply think this is a good time to reflect on a basic market principle: Bull markets have always followed bear markets—and shouldn’t stop doing so.

The reverse is also true, of course: Bear markets—long, fundamentally driven declines exceeding -20%—have always followed bull markets. That probably won’t stop, either. This is why, any time markets take a quick tumble, investors can feel a powerful urge to run for the hills. But since 1926, the S&P 500 has endured only 13 bear markets. Most tumbles weren’t bears, but corrections—short, sharp, sentiment driven declines of roughly -10% to -20%—or just normal, fleeting, short-term negativity. That is why we aren’t lamenting this bull market’s failure to turn nine years old. The pullback that began in late January has all the hallmarks of a short-term thing—a sentiment-driven correction. It was super-fast, with the (as of this writing) peak-to-trough move spanning just nine trading days. Bear markets usually begin gradually, with gentle rolling tops that lull investors into complacency. Those don’t usually become apparent for at least three months or so, which means investors might be in a state of “is it or isn’t it” for several weeks more. While we realize this is probably an unsatisfying statement, sometimes markets just like teaching the “have patience” lesson.

Again, we think this is a correction. Short-term volatility is impossible to predict, so there is no way to know whether new highs are close or another downdraft lurks. Investors have seemingly forgotten about one big fear, inflation, but now tariffs are rattling sentiment. The near-term evolution is unknowable.

But set that all aside. Whenever this bull market’s peak may be, it has already demonstrated some critical points. Not only do bull markets follow bear markets, but overall and on average, they are much bigger and longer than the bears. Exhibit 1 shows the S&P 500 since 1928, plotted on a logarithmic scale so that the long-term effects of compounding don’t hide the first several bears. Most bull markets notched new highs before rolling over—often dozens of them, sometimes hundreds. Hence, despite some very painful bear markets, stocks’ longer-term trajectory is up and to the right.

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Breaking the 'Breaking News' Habit

Can you imagine going one day without checking your brokerage account, turning on CNBC or tracking the stock market’s movement? What about turning off the news alerts on your phone? A New York Times tech writer just spent two months ignoring the constantly updated world of online media and deemed the break from real-time information and half-baked news feeds “life changing.” I suspect investors could gain a lot by following his lead. Focusing on short-term events is the root of many investing errors.

Fixating and acting on what is happening right now can make investors worse off. Because breaking news carries a sense of urgency, it can trick you into believing the latest development is the most important, relevant and predictive thing for stocks. Look no further than the sudden obsession with Gary Cohn’s departure from the White House. But the present doesn’t predict the future, and short-term developments usually have little to do with corporate earnings over the next few years. They also rarely relate to investing goals, which are usually longer than a day. If you are investing for retirement, you likely measure the time your money needs to last in years, if not decades. For such time horizons, what happens in the short term usually matters less than you might think. To avoid mistakes inherent in a myopic focus and give yourself the best chance of reaching your investing goals, it is important to understand what drives the tendency to focus on the short term and how that can obscure what really matters.

Like all humans, investors tend to fixate on surprises and negatives—a tendency our culture and the media reinforce. Sensational headlines constantly scream, “Look at me! I am important now!” Media messaging can stir investors’ fear and greed—the two emotions that drive reactionary trading most. Even for investors who avoid emotional reactions, it can be difficult to sift through all the noise to know what is actually important.

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Scaling Tariffs and Reviewing History

Five days after President Trump announced plans to slap global tariffs on steel (25%) and aluminum (10%) imports, trade war fears haven’t quieted. When assessing any policy’s potential market impact, it is important to put the changes in context. Scaling these tariffs and examining the history of the world’s last big trade war shows the forthcoming tariffs, on their own, should lack the size and scope to derail this bull market and economic expansion.

The last trade war occurred when trading partners reacted to the Tariff Act of 1930 (aka Smoot-Hawley). Unlike the steel and aluminum tariffs, Smoot-Hawley didn’t target a few niche industries. Rather, it raised tariffs across the entire US economy. Exhibit 1 shows US duties collected as a share of total US imports for consumption. With Smoot-Hawley, US duties jumped from 13.7% to 19.8%. Today, US duties are 1.5% of total imports for consumption.

Exhibit 1: US Duties Collected Relative to Imports for Consumption

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A Historical Look at Inflation’s Impact on Market Returns

While most focus recently flipped to trade, tariffs and Trump, Treasury yields still garner a lot of attention. Yields have climbed this year, coinciding with worries of higher inflation. After all, inflation expectations play a big role in bond yields, so some experts think fixed income investors are anticipating higher prices to come. An offshoot to this forecast: the fear higher inflation will also end up weighing on future stock market returns. All the hand-wringing seems off, in our view. For one, short-term bond market volatility doesn’t mean yields are destined to keep rising and stay higher. Plus, history shows higher inflation doesn’t crimp stocks—they can do fine in high inflation and low inflation environments alike.

After the BLS released January CPI—which included the fastest month-on-month rise in five months—experts started debating if and when higher inflation would start hurting equity markets. Questions ranged from what will happen if Treasury yields breach 3% to whether stock investors will jump to the “safer” returns of fixed income. Philosophically, we have qualms with these worries. Despite Treasury yields’ recent uptick, we don’t see interest rates jumping higher and staying there this year. While inflation expectations do influence yields—if investors anticipate higher inflation to come, they will demand a higher premium to account for the hit to their purchasing power—inflation still looks benign for the foreseeable future. For one, inflation is still overall low even after the pickup in Treasury yields. The Fed has hiked short rates five times since December 2015, and while forecasting future hikes is a speculative endeavor, rate hikes are anti-inflationary. They tend to give investors the perception the Fed has contained inflation risks—thus limiting premium demand.

Plus, the Fed’s hiking short rates alongside benign long rates leads to a narrower spread between the two. The result: a flatter yield curve, which dampens banks’ eagerness to lend. This weighs on money supply growth, and if there isn’t as much money chasing a limited number of goods and services, inflation generally stays benign. As for the fear investors will leave stocks for slightly higher bond yields? This is a rerun of the “Great Rotation” myth—the notion bond investors pursued stocks in the search of higher yield. However, this fallacy assumes leaving an asset class for another hurts the one being sold. But remember: For every seller, there is a buyer (and vice versa), so money going in and out between different asset classes effectively cancels. Moreover, fund flows mostly contradicted the notion that some Great Rotation ever happened.

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