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.
With EU elections this week expected to yield a fragmented parliament, the UK oh-so-slowly exiting the Union and a recent survey allegedly showing a majority of EU residents doubt it will survive the next 20 years, the EU’s future may seem dim. We think this view is likely too pessimistic—a snapshot of dour sentiment towards Europe today. In our view, this raises the likelihood of positive surprise as the EU—and its economy—prove more resilient than thought.
First, the seemingly bad news: According to a YouGov survey released last week, over half of Europeans believe there is a “realistic possibility” the EU “will fall apart in 10 to 20 years.”[i] In a more perturbing result, “28 percent of EU voters now see a war between EU member states as a realistic possibility” within a decade.[ii]
While this doesn’t sound great, we must quibble with how some pundits portrayed the findings. For the question, “Do you think it is likely the EU will fall apart in 10 to 20 years,” the response options were “realistic,” “not realistic” and “don’t know.” If respondents understood “not realistic” to mean “not a chance—not even in the realm of possibility,” and “realistic” to mean “probably shouldn’t rule it out, because you never know”—reasonable interpretations, in our view—then a majority of respondents shrugging and saying “maybe, I guess” doesn’t seem all that shocking. 20 years is a long time, and the future is tough to predict. Possible outcomes aren’t necessarily probable. Yet headlines like, “Majority of Europeans ‘Expect the End of EU Within 20 Years,’” and “Majority of Europeans Think the EU Will Fall Apart Within 20 Years, Study Finds” assumed the surveys were statements of high probability, rather than mere possibility.[iii] That seems like a leap.
Some seemingly weak economic data released last week grabbed headlines in America and abroad, causing many to fret global growth is waning—a risk for markets. However, an overall mixed bag of data is right in line with the recent trend—which has still resulted in broad growth.
Monthly US Data Can Be Volatile
US industrial production (IP) and retail sales both fell in April, but under the hood, things don’t look uniformly weak. IP fell -0.5% m/m,[i] led lower by machinery, electrical equipment, motor vehicles and aircraft. The latter probably stemmed from one prominent aerospace manufacturer’s production cuts due to the grounding of its newest single-aisle, twin-engine jet after two recent fatal crashes. Utility weakness from warmer-than-normal weather also contributed to the decline, according to the Fed. This was IP’s third decline in four months, leading some to suggest trade woes are biting. But considering IP had a longer, weaker stretch in 2015 and early 2016, long before tariffs entered the conversation, this seems more like normal monthly data variability. That longer stretch also didn’t forestall broad economic growth.
Editors’ Note: Our political analysis is nonpartisan by design. We favor no party nor any candidate in any country and believe partisan bias is the road to investment error.
Surprising pollsters and political pundits globally, Australia’s incumbent Liberal-National Coalition, led by Prime Minister Scott Morrison, eked out a win at Sunday’s election. The count isn’t quite finished yet, but present tallies award them at least 76 seats, the exact number they would need for a majority. Almost everyone sees the result as a shocker. Depending on the political slant of the coverage you read, you might have heard that this was a victory of right-wing populism over a climate change agenda—or a victory of sensible economic policy over left-wing populism. That, to us, is merely a statement about the hyper-politicized nature of our world and the need to cut through bias when assessing political events. Best as we can tell, this is a story of how loss aversion—humans’ tendency to feel potential losses more acutely than potential gains—can hold big sway at the ballot box, as well as a lesson in the risk of leaning too much on polling numbers when considering politics’ impact on your investments.
Most pundits are couching Australia’s election as an epic showdown between the left and right—educated urban liberals in one corner and rural conservatives in the other. Green city-dwellers versus people whose towns and counties depend on mining income. Idealistic young people in favor of redistribution to tackle inequality, versus folks who favor tax cuts and job creation. We can understand the temptation to cling to these narratives, given the well-documented urban/rural political divide in America, the UK and much of Europe. That has been THE political story since non-urban voters swung 2016’s Brexit referendum. There may be something to all of those claims. Yet when you cut through the noise, it appears the most contentious issue was a provision known as “dividend franking,” where investors get a tax credit on dividends that are paid with companies’ after-tax profits. This system not only prevents double-taxation of corporate profits, but it helps individual investors reduce their tax burden, making life easier on retirees living off their investments.
Buckle up! This week, voters in EU member-states will select the next European Parliament, and—predictably—populist parties’ ascent in the polls is fueling fears. While no one expects populists to control Parliament lock, stock and barrel, the prospect of populist groups getting more clout in the chamber has raised fears of discord and roadblocks toward further EU reform and integration. Cut through the noise, however, and we think the picture looks far better. As in individual nations, populists’ rise at the EU level likely pancakes the European Parliament further into gridlock, reducing legislative risk and extending the long history of positive post-election stock returns in Continental Europe.
To see how populists’ rise brings gridlock, it is important to understand how European Parliament parties work. “Parties” in Parliament are broad groupings of national political parties with overlapping ideologies. The European People’s Party (EPP), the main center-right party, includes German Chancellor Angela Merkel’s Christian Democratic Union, Italy’s Forza Italia and Spain’s Popular Party. Yet it also includes Hungary’s euroskeptic, populist Fidesz, whose policies clash with much of the EPP’s mainstream. The Progressive Alliance of Socialists and Democrats (S&D), the main center-left party, includes Germany’s Social Democratic Party, which is in Germany’s ruling coalition, as well as France’s Socialist Party and Italy’s Democratic Party. The Alliance of Liberals and Democrats for Europe (ALDE), a centrist grouping, includes French President Emmanuel Macron’s En Marche, The Netherlands’ Democrats 66 and Spain’s Ciudadanos. The other main grouping founded by traditional centrist parties is Alliance of Conservatives and Reformists in Europe (ACRE). It was started by former UK Prime Minister David Cameron in 2009 and still includes the UK’s Conservative Party, as well as Poland’s ruling Law and Justice Party, which is more populist than centrist.
Then there are the outsiders, including the two main “populist” coalitions. One populist group is The European Freedom & Direct Democracy Party (EFDD), which was formed in February by Luigi Di Maio, Italy’s Deputy Prime Minister and head of the anti-establishment Five-Star Movement. It includes the UK’s new Brexit Party, headed by former UKIP maestro Nigel Farage. Euroskepticism aside, members have little ideological common ground. The other populist group is the European Alliance of People and Nations (EAPN), which includes Italy’s League, France’s National Rally (formerly National Front) and other far-right parties like Alternative for Germany, Finland’s Finns Party and the Danish People’s Party. Rounding out the pack are The Greens/European Free Alliance (Greens-EFA) and the European United Left/Nordic Green Left (GUE/NGL).
A number of stories have dominated headlines over the past week, from the US-China trade tango and Middle East tensions to the prospect of an all-English Champions League final and the afterglow surrounding Royal Baby Archie. Lost in the hubbub: The ONS confirmed Q1 UK GDP expanded. In our view, this is yet another example of how stocks move ahead of economic data and discount widely expected events—crucial for investors to keep in mind.
Q1 UK GDP grew 0.5% q/q (2.0% annualized), with the services sector, which comprises nearly 80% of UK GDP, up 0.3% q/q. However, the industrial sector’s pickup—led by manufacturing’s 2.2% growth—got a lot of attention. As the ONS highlighted, “The strong growth in manufacturing is consistent with an increase in activity ahead of the UK’s originally intended departure date from the European Union, but we were unable to quantify the effect of this.” Said more directly: Businesses seem to have been front-running the original March 29 Brexit date, boosting activity. That is consistent with other recent data. For example, IHS Markit/CIPS manufacturing purchasing managers’ index (PMI) has ticked up recently due to businesses’ building up inventory ahead of a potential no-deal Brexit—which didn’t happen.
Other GDP components pointed to Brexit-influenced activity, too. Household consumption rose 0.7% q/q, the fastest pace since Q1 2017. This broader measure of consumer spending supports our musing last month that March’s retail sales pop perhaps reflected UK shoppers’ stocking up on goods ahead of March 29. Q1 imports rose a brisk 6.8% q/q, while exports were flat. Underpinning imports’ rise: an 11.0% increase in goods, impacted by the volatile “unspecified goods” category in January—perhaps also capturing UK businesses and individuals acting before the then-Brexit date.
Editors’ Note: Our political commentary is intentionally non-partisan and analyzes politics solely for its potential stock market impact. We favor no politician or party and believe political bias is a dangerous investing error.
Health Care stocks have seemingly taken it on the chin this year: The S&P 500’s worst-performing sector has gained just 2.1% compared to high-flying Tech’s 22.0%.[i] A primary culprit: growing fear a Democratic presidential candidate advocating “Medicare for All” wins the election, potentially paving the way for an overhaul of the US healthcare system. In our view, however, it is far too early to gauge the likelihood this or any campaign proposal becomes law. Too much can change between now and Election Day—and history shows a wide gulf between candidates’ ideas and their actions and accomplishments once in office. Hence, we think investors would benefit from staying cool and not letting campaign rhetoric drive their investment decisions.
Most Medicare for All blueprints would largely or entirely replace private health insurance with a “single-payer” system of taxpayer-funded and government-administered coverage. Independent Senator and Democratic presidential candidate Bernie Sanders is the idea’s public face—partly because he has long championed it and partly because he is well known, given he finished second in 2016’s Democratic primaries and currently ranks second (behind erstwhile veep Joe Biden) in most Democratic primary polls. When Sanders introduced Medicare for All legislation in the Senate last month, co-sponsors included four other Democratic candidates—and several other presidential hopefuls have voiced support for the general idea.
With US-China trade tensions taking center stage, we guess it was only a matter of time before headlines started pouncing on a corollary: the potential for China to start dumping its holdings of US Treasury bonds as part of its efforts. Not necessarily to hit Uncle Sam where it (supposedly) hurts, but to offset tariffs’ impact on the yuan, which is unofficially pegged to the dollar. Conventional wisdom says tariffs will weaken the yuan and strengthen the dollar—markets’ way of easing the tariffs’ impact on US consumers—potentially goading Chinese counteraction. Accordingly, headlines are starting to warn about the risk of China’s sales making US Treasury markets go haywire—an age-old false fear.
We have written about this numerous times and so won’t belabor the point here—you can check out our past analysis if you prefer more elegant prose. The numbers may be different today, but the reasoning still applies. Here, let us just tackle the issue in handy Q&A bites.
How likely is China to sell all its US Treasury bonds?
In the press conference following early May’s Fed meeting, Fed head Jerome Powell said, “We suspect transitory factors may be at work,” regarding today’s low inflation. Pundits wasted little time seizing onto his “transitory” remark, extrapolating that meant we should no longer expect rate cuts. Accordingly, some think a pillar of the market’s 2019 rally just fell away, presuming stocks have done well because a rate cut appeared to be coming. But hold that thought. Rewind the tape six weeks earlier, when Powell described low inflation as “one of the major challenges of our time,” implying America risked turning Japanese. In our view, the problem for investors isn’t what the Fed thinks. Rather, it is that many take Fed statements as gospel. Whether the Fed characterizes low inflation as “transitory” or “persistent” doesn’t etch future monetary policy in stone.
The Fed’s words are just that—not actions—and its words are squishy. Two other words many Fed observers love to cite as gospel: “data dependent.” As in, the Fed’s monetary policy will be “data dependent.” When the “facts” (really their interpretation thereof) change, Fed members can change their minds, too. It all seems so science-y! Economists dispassionately viewing data and sizing up proper policy as a result. Hold on though. For all their supposed data dependence, they seem awfully prone to dismiss economic data that don’t conform to their forecasts, calling them “transitory.”
Editors’ Note: MarketMinder favors neither party nor any politician. Our discussion of politics herein is limited to assessing the potential market impact of policy change.
Eight days ago, US President Donald Trump took to Twitter to tell the world trade talks with China weren’t moving fast enough, leading him to threaten to jack up tariffs on $200 billion in Chinese imports to 25%. He followed through on this threat Friday. Predictably, China responded with tariffs of its own Monday morning, as Chinese officials announced they would jack tariffs up on a range of about 5,000 US goods worth $60 billion from 5% ̶ 10% to 25%. Many now fear the tit-for-tat will continue, with Trump targeting the remaining $325 billion in Chinese imports. Already, the US Trade Representative’s Office has filed preliminary paperwork to that effect. Pundits are apoplectic—and markets are rocky, with US stocks dropping about 2% in early trading Monday. But in our view, this reaction is too hasty. We think now is a time to stay above the fray and remain calm. In our view, these new tariffs—even including threats— likely lack the necessary scale to derail the bull. While recent swings haven’t been fun, they aren’t atypical for markets—even in terrific years.
Exhibit 1 details the tariffs, showing the amount of goods targeted, the old and new tariff rates, and the resulting impact. In the last week, tariffs have increased by a total of $42 billion. (That is the sum of Friday’s US increase and Monday’s Chinese response.) If—and this is just an “if” at this point—the US enacts 25% tariffs on the remaining untaxed $325 billion in imports, tariffs would rise $81 billion more. Presumably, China would respond to this as well, although they haven’t given any specifics about what this may entail. We can’t scale that response as a result.
At last year’s close, negative market volatility knocked sentiment and drove recession forecasts. Since then, global economic recession worries have given way to others, including eurozone country recessions, an industrial recession and even a US earnings recession. Couple those with concerns of slowing global economic growth, a Chinese “hard landing” and a US yield curve inversion, and fears have abounded. Yet with more than a third of 2019 in the books and Q1 GDP reports hitting the wire, data suggest early-year worries about the global economy have likely been misplaced. In our view, sentiment hasn’t caught up to this reality yet—with many continuing to fret growth and, this week, tariffs. To us, the positive surprise of persistent expansion is a reason stocks should continue rising this year.
One of the early contenders for 2019’s Fear of the Year™ has been the global industrial slowdown—reflected most notably in eurozone manufacturing purchasing managers’ indexes (PMIs, monthly surveys indicating the percentage of firms expanding or contracting). While we expect this to prove fleeting, it is more noteworthy that less-heralded services PMIs have held up fine. Considering services comprise the majority of eurozone GDP, its steady growth suggests the expansion is faring better than many appreciate.
Exhibit 1: Eurozone PMIs, Services vs. Manufacturing