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.


Where the Street Sees Value

On paper, we are 10 months into a new bull market—a time when value stocks traditionally outperform. But, a few short bursts aside, that hasn’t been the case this time around. Since the low on March 23, 2020, growth stocks—those that plow profits back into the business and strive for long-term expansion—have beaten value, which tends to rely on the economic cycle to boost earnings and returns more profits to shareholders. This is a well-known discrepancy, and many pundits have identified a potential reason: Value-heavy sectors were most affected by lockdowns, while the Tech and Tech-like companies that were most resilient (and benefited from the big switch to working from home and shopping online) are growth-heavy. Once the world is vaccinated and businesses reopen, the popular narrative holds that it will be value’s time to shine.

We see a glaring problem here. Yes, value usually does best early in a bull market. But that is generally because after it gets pounded during a long, brutal bear market, no one wants to own it—that is where the, well, value comes from. It is also the great irony surrounding value investing: Value’s nice long-term returns (prior to the last decade or so) cluster in big bursts that happen when value is also least loved.

Today value is hardly unloved. With precious few exceptions, it is getting heaps of attention and affection today. You can see it in press coverage salivating over the prospect of outsized returns in Financials, Energy and other value-heavy sectors as normalcy returns later this year. You can also see it in Wall Street forecasts, which heavily favor value stocks and non-US markets (which are generally more value-heavy). Following are several snippets we rounded up—not to cast aspersions or quibble, but to illustrate just how common expectations of value leadership are this year in the investment community.

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Weaker Data, Warmer Sentiment

With COVID caseloads spiking in the US and UK, authorities have tightened lockdowns, and the impact is starting to show in economic data. But similar to the widespread reaction to stumbling US employment data earlier this month, observers are largely taking a longer-term, rosier view than they likely would have earlier. Instead of seeing a looming second shoe to drop, they envision vaccinations and a nearby return to normalcy. To us, this is another indication sentiment has warmed considerably in recent months, which should boost stocks as the year unfolds.

The latest US and UK economic data show lockdowns affecting activity, with service-related industries (predictably) taking a harder hit than manufacturing. UK monthly GDP fell -2.6% m/m in November as the country re-entered lockdown.[i] Services output fell -3.4% m/m, but industrial production dipped only -0.1% and construction rose 1.9%. Factories’ remaining open helped cushion GDP’s decline relative to both consensus expectations for a -5.8% m/m drop and last spring’s sharp plunge, as manufacturing output rose 0.7%.[ii] While America doesn’t report monthly GDP, a similar disconnect is evident in other US data. Led lower by food services, December retail sales fell -0.7% m/m, missing expectations for a 0.1% rise.[iii] But industrial production rose 1.6% m/m in December.[iv] It has now risen in seven of the last eight months.

While the specific numbers above may have topped or missed expectations somewhat, none of them provide anything really surprising, in our view. For one, purchasing managers’ index surveys have hinted at these numbers for weeks. Two, perhaps the most common fear after lockdowns began lifting last spring was a wintertime second wave. Virtually every expert in the field said one was likely, requiring a return to lockdowns. Markets are efficient, discounting common views, opinions and forecasts about how the next 3 – 30 months may look. They price those views in advance—and in this case, that included renewed lockdowns.

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An Inaugural Reminder

Editors’ Note: MarketMinder favors no politician nor any political party. We analyze political developments and news solely to weigh the potential impact on markets.

Just before noon Eastern Standard Time Wednesday, Joe Biden took the oath of office on the Capitol steps and became America’s 46th president. The backdrop was certainly unusual, with security extra-high and thousands of flags standing in for the throngs of people that ordinarily attend inaugurations. But nevertheless, power transferred amid some, if diminished, pomp and circumstance. To us, it is also a time to remember: Though the American president may be the world’s single most powerful person, they rarely impact stocks as much as some believe. This is a point we think is worth recalling as President Biden begins his term.

Around any election, talk of this-or-that candidate being “good” or “bad” for stocks is common. This time, many pundits cast Biden as the anti-market candidate while Donald Trump was supposedly bullish—a near total reversal of how he was cast in 2016, when most analysts presumed a Trump victory would doom markets. The doom failed to materialize in both cases.

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What to Make of the American Rescue Plan

Editors’ Note: MarketMinder’s commentary is intentionally nonpartisan. We favor no politician nor any political party and assess political developments exclusively for their potential economic and market impact.

Last Thursday, now-President Joe Biden introduced his COVID relief package, the American Rescue Plan (ARP). The $1.9 trillion price tag grabbed eyeballs, as did some of the provisions (e.g., raising the federal minimum wage). Many cheered the proposal, but it is just that—a pitch, with nothing set in stone. In our view, while coronavirus aid isn’t the most partisan issue by any stretch, Biden’s relief plan will likely still provide investors a look at the gridlock we expect to grip the Beltway this year, keeping radical legislation at bay.

Here are some of the ARP’s headline items:

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A Sketch to Illustrate What Stocks See Ahead

COVID case counts continue to rise, with the US adding 230,000 cases Wednesday—a surge paralleled in Europe and Asia. Deaths, tragically, are also ticking higher. Politically, a contentious US election year gave way to perhaps an even more tense lame-duck period—including a riot at the Capitol and the National Guard’s deployment ahead of President-elect Joe Biden’s inauguration next week. Economic data, reflecting renewed lockdowns to deter COVID’s spread, show slowing in the developed world’s dominant services industry—even contraction in some European nations. Analysts expect S&P 500 corporate earnings to decline -8.8% y/y in Q4 2020, per FactSet. Individuals in many locales worldwide are isolated from friends and family. The world surrounding us today looks, in some very significant ways, rather bleak.

Despite this backdrop, stocks continue churning higher, leaving many lingering skeptics aghast at the perceived “disconnect.” But when you consider where stocks are looking—3 – 30 months ahead, in our view—the disconnect fades. Here we will attempt to paint a loose picture of what stocks are likely looking to—and how that can influence the evolution of sentiment over the course of 2021.

While few would question 2020’s awfulness on a societal level—or 2021’s start, for that matter—stocks are looking beyond this, in our view. At the shortest end, we think they are looking roughly three months out. That would be around April. By then, the inauguration and tumult that followed 2020’s election should be well behind us. President-elect Biden’s first 100 days—often when a new president’s policy aims take shape—will be almost complete, giving investors more clarity about his agenda. Two of 2021’s few elections—Holland’s and Israel’s—will be over. If recent history and polling are any indication, they will likely be squabbling over how to form fractious coalitions that accomplish little when in office. Vaccine rollouts will assuredly be further advanced, if not significantly so, which has major implications for the services economy. In part due to Q1 2020’s low base, analysts expect S&P 500 earnings to resume growing in Q1 2021—at 16.5% y/y, per FactSet—with reports on this emerging right around three months from now.[i]

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Lessons From Italy’s Latest Political Drama

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

In all of last year’s chaos and mayhem, one thing was noticeably absent: Italian political theatrics. But it is absent no more, as former Prime Minister Matteo Renzi pulled his upstart Italia Viva party from the governing coalition Wednesday, threatening its survival. We don’t think this is a terribly momentous event for Italian stocks, which are very, very familiar with unstable governments. Long-term interest rates don’t seem bothered either. But the story does highlight the degree of gridlock entrenched in Italy—keeping legislative uncertainty low even as political squabbling spikes—and holds a key lesson for investors fearing radical legislation in the US.

The now-splintering coalition has been in place since late-2019, when Matteo Salvini, leader of the nationalist party known as The League, pulled his party from a coalition with the anti-establishment Five Star Movement (M5S). At the time, Salvini was fresh off a much-photographed beach tour (those were a thing then) and riding a wave of popularity (pun intended). He sought to capitalize by forcing snap elections, thinking he may win an outright majority, eliminating the need to coalesce with a party that wasn’t very aligned with his. But Renzi, then influential with the center-left Democratic Party (PD), opened coalition talks with M5S, and they eventually yielded a left-leaning multiparty coalition. Shortly after that, Renzi and some of his supporters left the PD and formed the small, centrist Italia Viva, which remained part of the coalition. But pandemic-related squabbling nibbled away at the parties’ unity, and a disagreement on how to spend €36 billion of EU aid prompted Renzi’s exit.

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What Reactions to the Jobs Report Say About Sentiment

Last Friday, the Bureau of Labor Statistics (BLS) reported nonfarm payrolls declined in December for the first time in seven months, and a curious thing happened: People didn’t freak out. Sure, there was some pessimism about the very near term in light of renewed lockdowns in several states, but the tone was largely positive, with many focused on the longer term—a rather abnormal reaction so soon after an economic contraction’s (potential) trough. In our view, this is the latest example of how rapidly sentiment has shifted from pessimism to optimism over the past few months, which we think is telling about where we are in the market and economic cycle.

Nonfarm payrolls declined -140,000 in December, much worse than the 100,000 gain economists expected.[i] Normally, a dreary jobs report so close to a recession’s depths has many ringing alarm bells. In the expansion that began June 2009, nonfarm payrolls didn’t start rising until March 2010.[ii] Sentiment was uniformly pessimistic through these three quarters, sparking talk of a “jobless recovery” and a “double dip” inviting extended recession. Payrolls’ initial bounce was swift, with a 952,000 rise in 3 months. But then it took a step back, with payrolls dropping a bit for four straight months. In this stretch, coverage included statements like: “Even without a full-blown double dip in the economy, the recovery thus far has been so anemic that the job picture seems likely to stagnate, and perhaps even get worse, in the near future.”[iii] Economists projected a permanent plateau of “9-plus percent unemployment even through the next presidential election” (which, at the time, was over two years away).[iv] About the best financial commentators could muster around then: “Consumer Sentiment: No Longer Selling Kidneys.”[v]

By the time payrolls broke even in May 2014, sentiment had warmed from deep pessimism to mild skepticism. Pundits acknowledged the milestone, but many still pointed to the stubbornly low labor force participation rate and anemic wage growth to argue the real unemployment rate was far higher than reported and whatever jobs we created weren’t “good jobs.” They alleged the economy continued to suffer from “secular stagnation,” a “skills gap” and “malaise.” Not until the end of 2014 did headlines begin looking at the bright side: “The Jobs Report Is Even Better Than It Looks,” to note one.[vi] Apparently, the recovery was finally “gaining steam” and the labor market outlook was “sunnier.” By 2017 or 2018, more people were pointing to the historically low unemployment rates and growing chipper about the improvement. Even in January 2020, the labor market was considered a bright spot in the US economy. From the end of the last recession, it took years for sentiment towards jobs to cycle from pessimism to skepticism to optimism. But even over the next several years, we never really hit a point where pundits were positively salivating over potential gains to come over the next several months or beyond.

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Life After Brexit, Day 7

What a difference a week makes! After closing out 2020 as the MSCI World Index’s worst-performing constituent country, UK stocks jumped out of the gate in 2021, leaving the global market in the dust after the first calendar week. Now, far be it from us to read into a few days’ market movement, but we think it is noteworthy that this rally arrived just as widely expected post-Brexit chaos failed to materialize. Yes, there were a few speedbumps, but things seem to be going fine overall, and forward-looking stocks appear to be getting on with it.

One big problem Brexit was supposedly going to cause was chaos at UK ports as truck drivers got used to new paperwork requirements and—as all humans would—made some errors here and there. The massive truck backlogs that amassed when France closed the border over COVID concerns last month, allegedly, foreshadowed Brexit mayhem. So far, though, things have gone much better than most expected. In one anecdotal example, Eurotunnel tweeted that all trucks crossing from Britain to France via the Channel tunnel’s shuttle train in Brexit’s first 8 hours—about 200 trucks—had their paperwork in order. Now, the Welsh port of Holyhead has reported a reduction in EU-based trucks using the UK as a stopover between Ireland and the Continent, while there is an uptick in trucks taking ferries directly from Rosslare in Ireland to Cherbourg in Northern France—a longer trip. But ports operators are skeptical that this is permanent. For one, rumors of chaos in Britain may have inspired truckers to make the longer drive. Once it becomes clear things are running overall smoothly, activity could easily return to normal. Two, Brexit dread pulled a lot of demand forward, so this could be a natural hangover. Either way, the massive delays and disruptions so many expected didn’t arrive.

The other big, widely expected Brexit consequence basically did come true: A big chunk of euro-denominated stock trading left London stock exchanges as businesses shifted gears to comply with EU rules. On 2021’s first trading day, according to Refinitiv, roughly €6 billion of stock trades shifted out of London—about half the activity normally seen. That is a hit, but only a small one, as stock trading is not exactly a big revenue-generator these days. Here, too, markets seem largely unfazed, as UK Financials are performing in line with their global counterparts year to date. Banks have also expected—and prepared for—this for years. A small negative with no surprise power just isn’t likely to prove a major market mover.

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A Look at Recent Oil Market Rumblings

Saudi Arabia made headlines earlier this week after announcing a surprise oil production cut—right after OPEC+ (OPEC plus 10 partner countries including Russia) agreed to keep output flat. As oil prices rallied, analysts debated whether a shift was underway in global oil markets. However, we think the drivers for oil prices remain little changed: Supply remains plentiful given weak demand tied to COVID restrictions. In our view, this balance doesn’t look likely to change materially for the foreseeable future—important to keep in mind for those seeking opportunities in the Energy sector.

To understand why, start by considering what OPEC and friends have been up to over the past year. At 2020’s start, OPEC+ produced about 42 million barrels of oil per day (bpd).[i] After a price war between Saudi Arabia and Russia erupted in March, OPEC+ reached a US-brokered détente in April. Per the agreement, the group would decrease output by 9.7 million bpd—approximately 13% of global production—in May and June, then gradually taper those cuts. After June, the 9.7 million barrel cut would drop to 7.7 million through the rest of 2020—and then fall to 5.8 million through 2021 until April 2022, when the deal ended.[ii] In other words, they would cut a lot at first, then gradually ramp up production a tad—but nowhere close to the starting point.

However, not all has gone according to plan, and the group has struggled to hit their original targets. Though OPEC+ allowed 2 million bpd to return to the market in August, they have refrained from further easing, citing concerns of a still-fragile oil market. As of January 2021, OPEC+ output is still 7.2 million bpd below year-ago levels—nearly 2 million bpd more than the agreement’s initial aim.[iii]

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The Dangers of Partisan Bias Now

Editors’ Note: MarketMinder’s commentary is intentionally nonpartisan. We favor no politician nor any political party and assess political developments exclusively for their potential impact on investments and markets.

Ever since America’s historically close election on November 3, emotions have run high over the outcome. Those emotions hit a crescendo Wednesday, after Georgia’s Senate runoff elections seemingly concluded and rioters interrupted Congressional proceedings to certify Joe Biden as President-elect in the Capitol. There is a lot to say about all these developments themselves, of course, but little that hasn’t been said in virtually every media outlet nationally. Instead, we think developments since the election—and especially yesterday—highlight a key point: It is critical to set your political views aside when assessing investments. Despite widespread fears the election’s outcome and/or related instability would hurt markets, stocks are echoing that very message now.

Throughout 2020’s election cycle, we heard pundits of both political persuasions warn of a market rout if their side didn’t win. But Election Day was 72 days ago—10 full weeks plus two days. There are only 13 days until Inauguration Day, when this election’s news cycle should conclude. In those 72 days, America’s S&P 500 Index is up 13.6%.[i] Sure, that is behind the MSCI World’s 16.5% over this span.[ii] Maybe political angst explains some of that lag. (Although we would note it likely has more to do with November’s value countertrend rally.) Even Wednesday, as the news was breaking in the Capitol, stocks rose—and S&P 500 futures climbed after trading concluded.[iii] Markets opened up sharply Thursday morning, too. While we would never draw big conclusions from one day and definitely not from one after-hours session, they merely add to the preceding 10 weeks’ evidence.

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