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.
For eons now, politicians globally have had a noble dream: a wholesale shift to clean, renewable power. The sources getting most attention from headlines and investors alike are wind and solar, and for the better part of a decade, investors have tried to identify the big winners. Now traditional Energy companies are getting in on the action, with BP the latest to announce a big push toward wind and solar. Meanwhile, California has quietly poked holes in this as a viable long-term strategy, and counterintuitively, Governor Gavin Newsom’s announcement yesterday that all new cars sold in the state must be electric beginning in 2035 might just be the nail in the coffin. The story I am about to tell carries a timeless moral: Long-term visions aren’t a sound investing thesis.
At the most basic level, California’s forthcoming ban on sales of new gas and diesel-powered cars rests on an oversimplified notion of energy and emissions. The goal is to make California’s streets emission-free, which seems logical considering electric vehicles don’t have tailpipes. However, if you think beyond the immediate, you realize electric vehicles do generate emissions—at the power plants that generate the electricity they run on.
Wind and solar have made huge strides in California and now represent the state’s biggest source of electricity at 37.7%.[i] They don’t generate carbon emissions. But they have already proven ill equipped to handle California’s vast electricity needs. The grid operator has warned for years that as wind and solar gain more responsibility, the state will face power shortages due to their intermittent nature. While natural gas and nuclear plants can run 24/7, the wind doesn’t always blow and the sun doesn’t always shine. Due to the abundance of turbines and solar panels in the state, when the weather is sunny and breezy, renewable sources generate plenty of spare power. But the grid lacks storage capacity, so that power doesn’t get saved for a rainy day (pun intended). That forces natural gas-fired plants, which generate 37.4% of the state’s electricity, to fill the shortfall.[ii] That worked for a while, but as the state decommissions natural gas plants, the shortfall intensifies. In August’s heatwave, the grid was reportedly 4,000 megawatts short of power, triggering rolling blackouts.[iii] As more gas-fired plants go offline, the shortage will worsen—and, barring major new developments, when the Diablo Canyon nuclear plant shuts in 2025, it could get really bad.
For most of the past decade, interest rates have hovered near historical lows. To some, namely people who took out loans during this stretch, that has likely been a pretty positive development. But to others, it amounts to “financial repression”—a fancy way to say low rates punish savings by slashing yields well below inflation rates. Today, options to stash your cash are returning less than ever—which we think has many behaving rather oddly. Here is a broad look at various cash options—and some behaviors we think you ought to avoid.
First, to be clear, we think it is a fallacy to argue that people fit into neat and tidy categories like borrowers, savers, investors, consumers, etc. Most people are all those things at once. One trait of good investors, in our view, is that they are disciplined savers, too. They have a cash reserve to tap in case of emergencies—so that they aren’t forced to liquidate any time an unexpected expense arises. Now, this should be within reason—holding too much cash lowers your overall expected return and is a mistake that complicates many folks’ efforts to reach their financial goals. It is also not cash “on the sidelines” that you may look to deploy at some point. But having a right-sized emergency fund is important. Usually between 3 and 12 months’ (in extreme cases) cash flow needs seems sufficient, in our view. There are reasons to hold more cash than that, though. For example, if you are saving for some near-term expected expense—a down payment on a property, perhaps. But we generally think large holdings of cash warrant scrutiny.
Here is why: With interest rates as low as they are now, cash holdings—no matter where they are parked—are likely losing purchasing power to inflation, even at today’s low inflation rates. The US Consumer Price Index (CPI) rose 1.3% y/y in August—1.7% excluding food and fuel. Good luck finding that in a stable-value option like a certificate of deposit (CD), savings account or money market fund.
Is the second lockdown beginning—and truncating a nascent recovery in summertime economic data along with it? That is the question on many folks’ minds as COVID case counts rise anew in Europe and new restrictions begin to materialize. A handful of French and Spanish cities announced new limits on activity over the past week, and UK Prime Minister Boris Johnson announced nationwide measures that will last for six months. While these restrictions aren’t anywhere near as draconian as those implemented globally in March, headlines warn they are just the tip of the iceberg, jeopardizing the recovery from this year’s global recession—and the bull market that began in March. In our view, it is probably fair to presume new restrictions will slow growth in Q4 and perhaps even cause data to wobble somewhat. But for investors, the question is always: Is reality better or worse than what stocks have already anticipated? With pundits warning of a disastrous second lockdown and devastating double-dip recession for months, we think reality thus far is shaping up better than feared. New restrictions can knock sentiment short term, but in our view, there would need to be a massively negative surprise for stocks to slip into a second bear market.
Hard as it can be to remember when bad news arrives, stocks are forward-looking. In our view, they reflect the likely reality over the next 3 – 30 months, based on all information at their disposal—including economic forecasts, headlines, big fears, data and all other news and opinions. For the past six months at least, those headlines and fears have included a potential second wave of the virus. Even as case counts dwindled in the late spring and summer, pundits warned it was a temporary reprieve, and once colder weather forced everyone inside, the virus would flare up exponentially—paralleling the 1918 flu pandemic. With conventional wisdom crediting stay-at-home orders with containing the virus earlier this year, pundits have argued for months that an autumn or winter return to full-fledged lockdowns was a fait accompli. Meanwhile, stocks kept rising, hitting new highs before Tech-related jitters and other issues knocked sentiment this month. In our experience, when stocks rise through widespread fears, they are most likely signaling they have dealt with these fears—and reality is unlikely to be anywhere near as bad as most people suspect.
That signal appears to be valid, based on everything we know now. None of the new restrictions—in France, Madrid or the UK—are anywhere close to what the world lived through six months ago. The affected French cities will still let stores, restaurants and bars operate, with restrictions limiting capacity and operating hours. That isn’t great, but it is far better than early 2020. Madrid’s new restrictions are similar and confined to areas of the city where there are 1,000 infections per 100,000 residents. As for the UK, shops and restaurants in city centers that depend on office workers will no doubt struggle, as the government is urging everyone who can to work from home. But there, too, stores and restaurants will remain open, albeit with curtailed operating hours, and most social gatherings are now limited to six people. Yes, activity may fall compared to August. But simply having most businesses open is a world away from the widely feared full lockdown redux. For stocks, less bad than feared qualifies as a positive surprise.
Stocks had another rocky day on Monday, with the S&P 500’s -1.2% drop bringing it -8.4% from its September 2 high—nearing correction territory.[i] (Corrections are sharp, sentiment-driven drops of around -10% to -20%.) But in a fresh twist, Tech and Tech-like stocks didn’t lead the way down. Instead, Financials took the reins as investors punished banks over allegations of money laundering published by a group of investigative journalists. Beyond that, news featured more of the same: jitters over oil prices, potential new lockdown restrictions and all things election-related. Our opinion of headline news items hasn’t changed: We think all are too widely known, too small or too sociological (meaning, disconnected from economics or markets) to impact much beyond investor sentiment. These are the kinds of stories you get in a correction, not at the beginning of a bear market, in our view. Corrections begin at any time, for any or no apparent reason. While they can be painful to endure, they are normal. In our view, reacting to one is probably more detrimental to your long-term goals than staying put.
Same goes for reacting to big stories like this week’s sweeping money laundering allegations, which ensnared dozens of banks globally. Investigative reporters obtained access to suspicious activity reports banks submit to regulators when they suspect a large transaction relates to illicit activity. In many cases, the banks reportedly executed the transactions anyway, fueling accusations that they are winking at money laundering instead of trying to curtail it. Headlines warn banks will eventually face regulatory fines because of this, but we think this is quite speculative. For one, these submissions aren't proven cases of fraudulent activity by bank customers. They are actions banks flag to regulators, who may or may not use them to open a broader investigation. In some cases, regulators may inform banks not to take action blocking illicit transfers as part of a follow the money operation. Media allegations of bank wrongdoing are also common, and many don't lead to regulatory action. In our view, it is wildly premature to presume this story leads to material action dinging banks’ profits or ability to transact globally.
As for broader volatility, it isn’t unusual for one or two (or three) big stories to collide in a correction—regardless of how young a bull market is. Considering we are just two days shy of this bull market’s 6-month anniversary, we suspect many investors—some who disbelieve in this bull market anyway—fear that this is too soon to be just volatility or a correction. But as Exhibit 1 shows, if this pullback does reach correction territory, it would not be the earliest one ever to arrive—despite its coming on the heels of the fastest-ever bear market and fastest-ever recovery. Three other corrections arrived sooner, less than two months after their respective bear market lows.
This week, two US data releases fanned fears of a faltering recovery: August retail sales and industrial production. Both grew, but they slowed from their earlier fast pace, triggering fears the rebound is on life support. In our view, this is an example of overthinking typically volatile economic data. Instead of portending more economic woes ahead, we think these figures show the US recovery persists—and headlines’ reaction reflects dour sentiment, a bullish cocktail.
First, the data. Industrial production rose 0.4% m/m in August—the fourth straight month of growth, albeit slower than July’s hot 3.5% pace.[i] Meanwhile, August retail sales rose 0.6% m/m, slightly slower than July’s 0.9% and far below June’s 8.6% pace, much less May’s 18.3%.[ii] As Exhibit 1 shows, these series have swung wildly in recent months.
Exhibit 1: Monthly Industrial Production and Retail Sales Growth
Source: FactSet, as of 9/16/2020. Month-over-month change in US industrial production and retail sales volumes, September 2019 – August 2020.
So yes: While both series showed growth, it was far slower than torrid midsummer rates. But we don’t think this means the recovery is on the rocks. For starters, both data series have rebounded considerably. Industrial production (shown in Exhibit 2) is -7.3% below pre-pandemic levels and -7.7% below a year ago.[iii] While this is a ways from breakeven, it is still up 11.4% from its April low.[iv] Moreover, part of the reason the early jumps were so large is that the calculation started from an extremely depressed, lockdown-driven base. Slowing is normal as that base rises—especially considering economies worldwide aren’t fully back to pre-pandemic openness.
Exhibit 2: Industrial Production Level
Source: FactSet, as of 9/16/2020. US industrial production, indexed to 100 in 2012, September 2019 – August 2020.
Retail sales show a similar but more nuanced story, in our view. Growth slowed, and we suspect the base effect factors into this too. But consider, also, where that base is today. Retail sales exceeded pre-pandemic levels in June.[v] Modest month-over-month growth off this now-higher base isn’t cause for alarm, in our view.
Fed head Jerome Powell met the press Wednesday after a much-anticipated, two-day monetary policy meeting. Headlines treated it as a landmark event, but as usual, we don’t see what all the hullabaloo is about. Yes, yes, we know: The Fed allegedly has a new monetary policy framework that seeks an average 2% year-over-year inflation rate over some unspecified period of time using an unspecified calculation. Yes, we have seen the forecasts included in the release that hint at rates being near zero through 2023. But in our view, those taking these forecasts to the bank are committing a basic error: presuming that Fed policy is forecastable, even by those who set it. It isn’t, and trying to do so is a fallacy of the first order. Investors should tune out the noise.
First, to be clear, no actual policy change stemmed from this meeting. The fed-funds rate target range is still 0% – 0.25%. The bank is still vacuuming up long-term bonds under its wrongheaded quantitative easing program at the same pace as before, although it said (warned? threatened?) it could increase that pace. So the punditry hubbub mostly features the economic projections. You see, the Fed said it will remain accommodative for a really long time. Pundits argue its “forecasts” define a really long time as, “through 2023,” based on the Fed’s expectations inflation will be 2% (based on the headline personal consumption expenditures price index) and the unemployment rate will be 4% then.
Maybe that seems nice and tidy: Expect basically no return on cash and super-low rates for the next three-plus years, which lots of commentators are calling “powerful forward guidance.” In non-jargon, the Fed thinks talking about low rates sticking around longer is an extension of its policy aims. Since you won’t think rates are about to rise, the Fed believes you may behave differently than you otherwise might. The evidence for this theory is lacking, in our view. But that is what they say they think, and it is what many commentators commonly parrot.
As the dollar’s slide versus the euro continues hogging headlines, so do misperceptions about currency swings’ impact on portfolio performance. As we showed last month, yes, the weak dollar does add to US investors’ returns on eurozone stocks, since Americans get the stock’s actual return plus the currency appreciation. But we don’t think this should play much of a role in determining whether to emphasize eurozone stocks in a global portfolio. Currency cycles and geographic leadership shifts often don’t line up. Here is another reason not to get too hung up on currency moves for good or ill: Though they can affect returns in the short run, they tend to even out over time.
Exhibit 1 shows this darned near perfectly, in our view. It shows the MSCI World Index’s daily price return in euros and US dollars since the euro’s birth on January 1, 1999. As you will see, the two lines often deviated—sometimes by a decent margin. But now, despite all those fluctuations, they are in basically the same spot. In dollars, world stocks’ price return is 108.4% over this span. The euro-based return is a shade behind, at 106.1%.[i]
Exhibit 1: Different Journeys, Same Destination
Welp, so much for the UK ruining its international reputation and reliability as a treaty partner. When rumblings arose early last week of Prime Minister Boris Johnson’s government potentially violating international law by reneging on part of the Brexit deal, some politicians declared the UK’s reputation tarnished—near-guaranteeing no country would sign a free-trade agreement with them and that Brexit would be disastrous for trade. Yet last Friday, the UK turned this narrative on its head, agreeing in principle to a free-trade deal—its first agreement as an independent country in nearly 50 years—with Japan, the world’s third-largest economy. In our view, this is further evidence Brexit just isn’t the isolationist, protectionist nightmare headlines frequently portray.
According to the UK’s Department for International Trade, the agreement will boost annual trade between the UK and Japan by £15.2 billion ($19.4 billion)—with 99% of exports to Japan tariff-free.[i] For reference, the UK’s total trade (exports plus imports) with Japan amounted to £29.1 billion in 2018.[ii] The deal will liberalize rules of origin, allowing more products (e.g., UK biscuits and some types of clothing) to qualify for tariff-free trade. Some digital provisions—notably, data localization—mean companies won’t have to set up offshore servers to continue doing business, benefiting British financial services companies and Japanese game makers. Moreover, Japanese automakers will see tariff reductions for 92% of automotive parts, while UK dairy farmers will get tariff-free access to Japan for some of their cheeses—a notable compromise given the issue nearly derailed negotiations.
While some are pumping up the big-sounding headline numbers, reality suggests the economic benefits are modest given each country sends only about 2% of goods exports to each other.[iii] Yet the UK-Japan agreement is more significant for what it symbolizes, in our view. Namely, all the hubbub about an inward-turning, backtracking UK isn’t dissuading other countries from signing deals. The UK and Japan are even treating their deal as the next step for the UK to eventually join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—an 11-member free-trade agreement.[iv] Tied to that, UK Trade Secretary Liz Truss confirmed last week trade talks were back on with Canada.
Editors’ Note: MarketMinder is politically agnostic, and we favor no politician or party in any country. We assess political developments solely for their potential economic and market impact.
Japan’s Liberal Democratic Party (LDP) confirmed now-former Chief Cabinet Secretary Yoshihide Suga as its new president on Monday, paving the way for him to succeed Shinzo Abe as prime minister when the legislature votes on Wednesday. Aside from introducing a bit of political uncertainty over the potential for a snap election, we think the appointment mostly extends the status quo for Japanese politics—and their influence on the country’s economy and stocks.
Most of the commentary on Suga centers on his somewhat unusual background for a high-ranking politician. Unlike every other prime minister in the past two decades, he doesn’t come from a prominent political family. Rather, he comes from a rural town where his father was a strawberry farmer (yum) and his mother a school teacher. He worked at a cardboard factory to put himself through school. He is also famous for his love of pancakes, sit-ups and a morning walk. Of course, stocks don’t care whether a country’s leader has a sweet tooth or a strong core—policy is what matters, and on that front, Suga likely continues his predecessor’s initiatives. As cabinet chief, he was not only Abe’s personal fixer—the guy who corralled the vast bureaucracy—but also reportedly the architect of Abe’s economic initiatives. Therefore, it seems unlikely the government will suddenly begin lobbying the Bank of Japan to let up on quantitative easing bond purchases. Fiscal policy probably won’t change much, either. Suga has mooted a third consumption tax hike, but for now the chief priority appears to be shepherding an economic recovery while managing COVID-19, which a tax hike would likely not help much.
Editors’ note: MarketMinder is nonpartisan, favoring no party or politician, as political bias blinds and leads to investment mistakes. Our sole purpose here is to analyze the election’s potential economic and market impact.
With elections moving into high gear and polarized rhetoric hitting fever pitch, all the sound and fury might be a bit disorienting. But this is a normal part of the election cycle—and nothing that we think should prompt hasty portfolio moves. While it may not seem like it, markets are very good at sifting through possibilities and whittling them down to probable outcomes as November nears. That falling political uncertainty usually provides a tailwind for stocks, in our view, and 2020 should be no different.
When fears abound, it is crucial to keep perspective. Admittedly, this can be hard, especially when pundits—and campaigns—are prone to spinning extreme scenarios to attract attention and voter interest. At a partisan level, the hype and fear seems to go both ways. Some warn Democratic candidate Joe Biden would preside over the most leftwing agenda since FDR if he were to win and his party took Congress, dooming markets. Even though Biden’s platform left out some of the more contentious proposals floated during the primaries, including Medicare for All, it did include several items championed by his more progressive challengers. On the other side, many envision President Donald Trump doubling down on his China stance, upending global commerce and supply chains (not to mention starting a new cold war). There is growing fear that the TikTok and WeChat bans are only the tip of the iceberg, and that Chinese retaliation will damage American businesses in China heavily in a second Trump turn.
