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.
To put it lightly, this has been a tough year. The global bear market has tested investors’ patience since February, and perhaps especially as a summertime rally gave way to new October lows. There is no shortage of things to fret, market-related or otherwise, and I don’t dismiss any of today’s problems or issues. But this week is a reminder, in my opinion, that things aren’t all bleak—there are some developments to be grateful for this Thanksgiving. Here are a few that leap to mind.
Europe’s Adaptation to the Feared Energy Crunch
After Russia’s invasion of Ukraine in February, many warned Western sanctions and Russian retaliation would drive oil prices to $200 a barrel—or even as high as $380 under a “worst-case” scenario—ensuring a eurozone recession in either case.[i] Yet after registering a year-to-date high of $133 on March 8, Brent crude prices have retreated (currently around $88) while eurozone GDP has grown through Q3.[ii]
Dear readers, it is nearly time for that great November sporting event. No, not the Buffalo Bills at the Detroit Lions. Nor the New York Giants taking on the Dallas Cowboys or the New England Patriots suiting up against the Minnesota Vikings. Nor are we referring to the “other” football’s World Cup or international Test cricket. No, we are talking about the most competitive of all: Black Friday shopping. Every year, the advertised discounts flood our inboxes. And every year, some local news station grabs fresh footage of shoppers trampling each other for “doorbusters.” And every year, headlines hype it as the biggest, most telling test of America’s consumer-driven economy, and they parse the final tallies for clues. We have never been fans of this practice and have long encouraged people to downplay Black Friday. This year, we suspect it is even less useful than usual as an economic barometer.
Our typical reasons for not reading into Black Friday still stand. Though headline-grabbing, it is but 1 day of one of 12 months in a year. It has also morphed more into a season than a day: In years past, we have started seeing holiday deals early in October. That front-running has waned somewhat this year, but many discounts have still been running for over a week now, likely inspiring many folks to buy early to avoid the dreaded “sold out” placards. Discounting also runs well into December, and we have it on good authority that plenty of holiday shopping happens during that month, often with even deeper discounts than the markdowns Black Friday is reputed to feature. So if you like using the holiday season as an economic check-in, you probably have to wait for December’s retail sales figures to hit the wires in January. Perhaps that is useful in a backward-looking sense, but it will be no help in forecasting the economy, never mind forward-looking stocks. Whatever holiday demand is now, it will largely be a function of the economic conditions already in place—it will likely tell us little about how those conditions change in the future. Besides, spending on physical goods is just over one-third of consumer spending. Holiday sales won’t tell you about spending on services, which is the vast majority.
This year, holiday sales watchers will have to deal with another question: What constitutes a “good” result? Ordinarily, a modest increase over the prior year gets high marks. But the annual inflation rate is still running rather high, notching 7.7% y/y in October.[i] Does year-over-year holiday sales growth have to top that to avoid a failing grade? Or, what about the fact toy prices are up only 3.1% over the past year while televisions are down -16.5% and book prices are flat?[ii] Holiday shoppers may have a lot more wiggle room than headline inflation suggests.
Editors’ Note: MarketMinder prefers no politician nor any political party, and neither do stocks. We assess developments for their potential economic and market impact only.
Falling uncertainty and gridlock. These are the twin political forces we think are likely to help lift stocks over the period ahead—not just in the US, with midterms splitting Congressional control by the slimmest of margins, but across the developed world. In countries with divided coalition governments, like Sweden and Germany, this is probably self-evident. But in nations with—on paper—single-party governments with strong majorities, it is stealthier. Case in point: the UK, where political uncertainty is down bigtime after two leadership changes this fall. That has helped UK stocks jump more than 18% since late September, beating the MSCI World Index by several percentage points over this stretch.[i] Now the secondary tailwind—gridlock—is taking shape, as divisions within the ruling Conservative Party become clear to all.
The internal strife, as ever, centers on two fronts: fiscal policy and—sigh—Brexit. Starting with the latter, over the weekend, the ever-reliable unnamed senior government sources told The Sunday Times that the UK would embark on a path to sign a Swiss-style deal with the EU within the next decade. For those unfamiliar with the intricacies of EU treaties—and if that is you, we envy you—this would entail the UK having free access to the EU’s single market. But, in exchange, it would have to sign on to all EU laws and regulations, including basically all the things the British people voted to get away from when they chose Brexit in 2016. As you might imagine, this did not sit well with a lot of people, including many in the current cabinet and the Conservative Party in general. Prime Minister Rishi Sunak leapt to damage control, vowing this wasn’t under consideration, while Chancellor of the Exchequer Jeremy Hunt said that, while he will seek freer trade with the EU, it won’t include signing on to the bloc’s diktats. Other cabinet ministers and government spokespeople joined the fray, declaring the report categorically untrue.
Editors’ Note: MarketMinder favors no politician nor any political party, assessing developments solely for their potential market and economic impact.
Last Thursday, the UK’s fiscal drama took another turn as Chancellor of the Exchequer Jeremy Hunt delivered the widely watched Autumn Statement. After the recent fireworks when former Prime Minister Liz Truss’s chancellor, Kwasi Kwarteng, announced a plan including allegedly irresponsible “unfunded” tax cuts and a plan to aid households struggling with high energy bills, Hunt had promised to take tough “austere” actions aiming to fill a hole forecasted to hit the UK government’s finances in the coming years. Still, some expected market fallout, but they got very, very little. That predictably led to claims he had successfully assuaged markets, but we think that is personality politics, not analysis. In our view, the answer is much simpler: Hunt’s plan can best be described as a package of rather meager tax hikes and the usual not-so-austere slower pace of spending growth. It seems more likely to us the market’s big collective yawn was related to the sheer lack of anything surprising in this budget. We think the more telling thing about this plan—and the analysis around it—is just what it shows about sentiment toward the UK economy today.
First, here are the particulars of the new fiscal plan, which replaced the mini-budget, which amended the budget, all in a matter of a few months.
Recent US inflation readings have slowed some, offering investors a modicum of relief. But worry still abounds. Many fear that high inflation won’t subside anytime soon, with October’s readings a false dawn. Pundits say it is “too soon to celebrate” and argue the Fed has more work to do.[i] Perhaps. Monthly inflation data variability is unpredictable. However, we see growing evidence inflation is likely to slow—and defang one of the bear market’s biggest fears this year.
From the headline consumer price index (CPI) and “core” CPI excluding food and energy to producer prices and import prices, inflation has come off the boil since the summer. Yet many argue other measures—like the median CPI or the “sticky price” CPI (a gauge of less-volatile prices)—continue to rise.[ii] While we agree about not reading too much into short-term wiggles, we don’t think various inflation measures—or subsets of them—are any more telling than others. For example, as we showed in February, producer prices don’t reliably lead CPI. They are coincident, rising and falling together. Instead of poring over backward-looking inflation data—past prices, which never predict—we think it is more helpful to take cues from forward-looking measures, which indicate inflation is likely to subside over the coming year.
Exhibits 1 through 3 show a few leading inflation indicators. Now, as the charts also show, these aren’t super-precise gauges. Their lead times to CPI can vary—sometimes by a lot. They won’t pinpoint inflation’s peak, but together, we think the preponderance of evidence they provide gives a good sense of CPI’s likely general direction ahead.
Thanksgiving is just around the corner, and if you are at all like us, the rest of this year will be a blur—a mad-dash of decorating, prepping holiday feasts, braving the busy travel season, tracking down that perfect present and more. At times like this, essential housekeeping items can easily get back-burnered and forgotten, which can be problematic when it comes to your personal finances—as you may have some important tasks with yearend deadlines. Here, for your convenience, is a short checklist of things to make time for before the clock runs out.
Take your RMD.
Yes, for those age 72 and older with qualified retirement accounts—including traditional IRAs and 401(k)s—you must withdraw a predetermined amount each year and pay income taxes on it. If you fail to complete this required minimum distribution (RMD) by yearend, you will face an additional penalty of 50% of the RMD amount not taken in time.[i] So, if you haven’t taken yours, this would be a good time to get on it.
Shall we talk about FTX? This now-bankrupt cryptocurrency exchange, whose failure has apparently made billions of dollars’ worth of its customers’ assets disappear, has hogged headlines globally for over a week now. As the saga continues unfolding and investigators swoop in, questions abound: Did the company illegally lend customers’ assets to its sister firm? Were there misrepresentations to clients and investors? Will anyone be made whole? Could better regulation have protected investors? Was the entire firm a front for money laundering? Where do all of the firm’s political donations and international connections fit in? Investigative reporters and federal investigators from several jurisdictions will pursue all of these, and we have no doubt it will be fascinating. For now, though, we think it is most helpful for investors to back-burner these juicy details, tune out the politics (which, as always, we are neutral on) and consider this saga from a personal finance standpoint. Namely: Is there anything FTX’s customers could have done to avoid getting caught in the mess and losing everything? After reviewing the situation, we see some warning signs that all investors benefit from understanding.
First, understand: We aren’t calling FTX a scam or Ponzi scheme. Nor are we alleging founder Sam Bankman-Fried has committed any crimes. It will take time for the authorities to sort through everything and determine whether criminal activity was committed. Similarly, we aren’t taking a position on any of the allegations unearthed by reporters over the past week. Nor does any of this seem to carry much impact on non-crypto assets, considering the lack of linkage between FTX and stocks or bonds. The rally we have seen in those markets has occurred while FTX was falling apart, which illustrates that point pretty clearly.
Yet with all that said, it does seem that customers—as it stands—have lost vast sums of money. And after reading a wealth of reporting from the fine folks at Financial Times, The Wall Street Journal, The New York Times and Bloomberg—not to mention scrutinizing FTX’s terms of service and fee schedule—we think the company had many of the common threads we have observed in sketchy situations investors are best off running from. If you have read Fisher Investments founder and Executive Chairman Ken Fisher’s book How to Smell a Rat, which illuminated the tricks used by Bernie Madoff and other financial pirates, these will look especially familiar to you. (And if you haven’t read it, what are you waiting for, it is a classic!) Again, not that we are calling anyone involved here a crook—but warning signs of trouble are warning signs of trouble, whether the situation turns out to be criminal or not.
Recent headlines have touted the Bank of Japan (BoJ) and Japanese insurers selling Treasurys—on top of the Fed’s slowly unwinding its quantitative easing (QE) purchases—and worried about a dearth of buyers drying up liquidity in the critical US Treasury market.[i] Some argue it risks a crisis. But this isn’t the first time such worries have cropped up. And, like in previous times when bond market liquidity fears surfaced, we think they hold relatively little water. Mostly we see the pessimism of disbelief at work here, not rising financial distress.
There is a long-running worry that bond markets might become illiquid—when selling can adversely affect the price, making it hard to exit a position—at the most inconvenient time, sending rates spiking and precipitating a financial crisis. Just when you want to take your money out, you can’t—at least not without a steep haircut. Evaporating demand and thin trading can cause bond prices—which move inversely to yields—to go haywire. When this happened in March 2020, it spurred Fed intervention. Or more recently across the pond, UK government bond volatility motivated the Bank of England to suddenly intervene.
Today, many argue the ground is shifting. The Fed isn’t buying Treasurys anymore—and it is unwinding the portfolio it amassed under its QE bond purchase program as assets mature. Meanwhile, the BoJ is selling down its Treasury reserves to support the yen. Without big central bank buyers to “backstop” the Treasury market, supply is (supposedly) starting to overwhelm demand, risking soaring yields—and plummeting prices.
UK GDP fell -0.2% q/q in Q3—the first major nation to announce a contraction last quarter—and most commentary agrees this is just the start of a long-grueling recession.[i] After all, while September’s monthly GDP may have some artificial downward skew from the late Queen’s funeral bank holiday, cost-of-living pressures ramped up in October. Many presume Chancellor of the Exchequer Jeremy Hunt will dial up the pain with tax hikes and spending cuts at next week’s Autumn Statement, where he will present a raft of fiscal policy proposals. In our view, the UK economy is pretty clearly weakening, and obstacles lie ahead. Yet from an investing standpoint, we see more cause for optimism than gloom. UK recession chatter isn’t new, and its power over stocks seems to be waning. Moreover, with sentiment so low, the potential for positive surprise seems high—reality has a very low bar to clear.
There isn’t much to cheer in either the Q3 or September GDP releases, both of which hit Friday. September’s -0.6% m/m decline may have been milder without the extra bank holiday, which shut most retail and services, but the Office for National Statistics (ONS) warned this explains only half of the service sector’s -0.8% monthly contraction.[ii] The rest stems largely from cost-of-living pressures, which knocked consumer-facing services hard, extending August’s -1.6% m/m drop.[iii] Heavy industry eked out slight monthly growth, but that stemmed primarily from power and other utilities and mining, which includes oil production. Manufacturing, meanwhile, was flat overall, but that was because growth in pharmaceutical products and transport equipment offset declines in high-tech and commodity-heavy industries—more evidence of pressure from rising costs. Meanwhile, for Q3 overall, most positivity came from government spending and investment, while household spending and business investment declined. Net trade added a solid contribution, but imports’ -3.2% q/q drop played a big role in this.[iv] While this adds to GDP, it could represent weakening demand as the weak pound raised costs.
Mind you, we think it is a mistake to extrapolate any of the above forward. GDP reports tell you what just happened in the broad economy, not what will happen. They aren’t predictive, and some variability is normal. Moreover, the ONS initially reported a -0.1% q/q contraction in Q2 GDP before revising their estimate to 0.2% growth.[v] Q3 results could get a similar boost as more data come in. They could also be revised downward, but we are highlighting possibilities here, not assigning probabilities. Fiscal policy is a wildcard for now, but even the rumored “austerity” isn’t necessarily a huge negative. The last time the UK launched an austerity program, total public spending grew by less than originally planned but didn’t contract outright, and much of the effort focused on transfer payments, which aren’t part of the government components of GDP. More tax hikes could squeeze households, but the aspects of former Prime Minister Liz Truss’s mini-budget that have so far survived—including the reversal of a small national insurance tax hike and some assistance for household energy costs—could be a partial offset. This is all very much wait-and-see.
Editors’ Note: MarketMinder favors no party nor any politician, assessing developments solely for their potential market and economic implications.
Two days after the votes were due, much remains unclear about America’s midterm elections. Votes are still being tallied in the Arizona and Nevada Senate races, Georgia is headed for (another!) Senate runoff election on December 6, and quite a few House races are undecided. The party that takes two of those three Senate races will control the body and, although the House seems to be heading for Republican control—which would usher in the bullish gridlock markets typically celebrate after midterms—even that isn’t assured yet. All this is keeping uncertainty high right now, but it should start falling fast before long.
There are really only a couple definitive things one can say now. One, this election went off without much protesting or squabbling over improprieties. Two, it was a very close election—in the House, there was no “red wave.” That is basically what we expected. As Fisher Investments founder and Executive Chairman Ken Fisher explained in his August LinkedIn column, the House’s structure made a wave election highly unlikely:
