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 weeks now, several prominent economists have argued the recently passed $1.9 trillion American Rescue Plan portends hot inflation, stirring some investors’ fears. Unlike prior COVID relief packages, they argue, this package splashes out too much cash, which will inevitably slosh around the economy and pump prices higher. We disagree with this for a host of reasons, not least because there isn’t much evidence money is changing hands quickly. Some recent survey and data results illustrate this, showing why investors needn’t fear runaway inflation hurting stocks.
Exhibit 1 shows results from a recent New York Fed survey, which asked stimulus check recipients how they allocated proceeds among spending, saving and paying down debt. Perhaps surprising many, recipients reported spending only 26% of funds (on average across the three rounds of stimulus checks), saving or paying down debt with 73%.
Exhibit 1: Distribution of Stimulus Check Usage
Editors’ Note: MarketMinder’s political commentary is intentionally nonpartisan. We favor no party nor any politician and assess developments solely for their potential market impact.
While Congress continues haggling over new spending and tax changes, politics globally are in a similar simmering lull—a welcome quiet for markets after a raucous 2020. But that doesn’t mean nothing is happening. Uncertainty is ticking higher in some places and lower in others, but all support the global gridlock we think should continue benefiting stocks worldwide this year. Let us have a look.
German Players Move Into Position
Editors’ Note: MarketMinder doesn’t make individual security recommendations. Any reference to an individual publicly traded firm herein is merely included to illustrate a broader point.
China’s latest economic data dump received a lot of press, especially its eye-popping Q1 GDP growth rate. Many also noted China’s economic recovery would likely slow in the coming quarters—a return to its pre-COVID normal—which we think sounds about right and should be fine for stocks. In our view, Chinese economic figures remain a useful, albeit imperfect, preview of post-pandemic life in the US and other developed nations—a helpful way for investors to set their expectations for other major economies’ data.
Chinese Q1 GDP soared 18.3% y/y, a bit slower than some economists’ expectations, but still the fastest growth rate since the country began reporting quarterly GDP in 1992.[i] (Exhibit 1)
Big banks kicked off Q1 earnings season with a bang. Firms reporting this week in the S&P 500’s banks and capital markets categories announced Q1 earnings growth topped 200% y/y, trouncing expectations for more pedestrian double-digit growth rates.[i] This has headlines claiming more gangbusters growth is in store and set to deliver a big positive surprise to stocks. Apologies for raining on a parade, but we think they are in for some disappointment. Not the bull-market-ending kind, but the kind that doesn’t fuel lasting outperformance in more cyclical stocks.
Banks’ blowout growth is wonderful news, but it is backward looking—and has questionable staying power. Simply, markets pre-priced all the economic activity that drove these earnings. Thinking they are predictive is backward. After last year’s March 23 low, the S&P 500 hit new highs in August, preceding economic recovery well in advance. The latest Q4 GDP figure still stands -2.4% below its Q4 2019 pre-pandemic high.[ii] While economists expect expansion this year, that—and its impact on bank earnings along the way—is old news to stocks.
The drivers behind Q1’s bank earnings are well known at this point—and they don’t look sustainable to us. For one, base effects from last year dominated. During Q1 2020, as lockdowns took effect, Financials’ earnings fell -40.6% y/y.[iii] That set up a low base, which alone virtually assured triple-digit growth rates as earnings return toward—and exceed—pre-pandemic levels. With 15 of 65 S&P 500 Financials reporting so far, their blended aggregate Q1 2021 earnings per share (EPS)—combining actual results with remaining consensus expectations—stand at $11.92, which would be 116% y/y over last year’s $5.53.[iv] But pre-pandemic, Financials’ quarterly EPS averaged $9.16 in 2019.[v] In this light, Q1 EPS more than doubling year over year seems much less extraordinary. Growth now has more to do with 2020’s devastation than anything in 2021, besides normalcy resuming.
One of the central tenets of our investment philosophy, which we have mentioned here often[i], is that we think stock markets are forward-looking, discounting expected events over the next several months. Economic data, by contrast, are backward-looking. Data released now reflect activity that happened in a previous month, quarter or year. Therefore, if you are looking at economic data for clues into what stock markets will do, we think you are probably mistaken, as prices likely already reflect that earlier economic activity—and have for some time. To see this clearly, here is a shining, timely example: February’s UK GDP, released Tuesday.
Most countries release GDP quarterly, but the UK—like Canada—produces a monthly report, giving more insight into the economy’s short-term twists and turns. That has been particularly illuminating during the pandemic, as it gives a more detailed look at the lockdowns’ varying economic impacts. The third UK lockdown took effect in early January, and that month’s GDP fell -2.2% from December.[ii] But in February, there was a slight recovery. GDP grew 0.4% m/m, even as strict nationwide business restrictions remained.[iii] To us, that is a noteworthy sign of the country’s economic resilience, which we think probably benefits many people at a personal level.
But to stocks, it is very old news. That would be true of any month’s GDP, but something that happened the day before the release ties a bow on it: Businesses began reopening from that third lockdown. That reopening has been scheduled since February 22 , when Prime Minister Boris Johnson announced it. Also widely known: The government’s plans to have all remaining restrictions lifted by June 21, provided the virus doesn’t escalate again. For nearly two months, the government’s reopening timetable has been common knowledge—a fact investors were likely well aware of as they bought or sold. This is what we refer to when we say markets anticipate expected events.
Eleven years into a 150-year sentence for swindling investors out of nearly $20 billion in an elaborate Ponzi scheme, Bernie Madoff passed away on Wednesday. His arrest and subsequent downfall, during the throes of 2007 – 2009’s global financial crisis, put fraudsters in the spotlight globally. Numerous articles documented the tricks and lies he employed—as well as the signs his was a house of cards. Our firm’s founder and Executive Chairman, Ken Fisher, dedicated an entire book to teaching investors how to spot and avoid crooks: How to Smell a Rat, published in 2009 and still a great read. With the passage of time, Madoff and Ponzis fell out of the headlines. You could be forgiven for thinking his conviction shone a light on the approach, ending them. Sadly, that is far from accurate. Now, with investors growing more optimistic, some ne’er-do-wells likely see opportunity—investors lowering their guard. So, given that, let us once again review the biggest red flags to watch for.
This year alone, numerous examples have hit the headlines. Just last week, a would-be actor was accused of faking a production company, lying about big deals with Netflix, and spending his investors’ money on a lavish home and repaying astronomical credit card debt.[i] Last month, a San Diego woman was sentenced for bilking investors out of $400 million, claiming she would generate huge returns by extending high-interest loans to restaurants seeking liquor licenses.[ii] Prosecutors in Indiana just charged a man with wire fraud over elaborate schemes involving life insurance and food exports.[iii] A Nevada court slapped a $32 million judgment on a man who guaranteed investors 300% returns trading cryptocurrency options, then stole their money.[iv] A guy in North Carolina just got over 10 years in prison and a $6 million fine for telling people his non-profit would invest their money in charitable gift annuities and then, you guessed it, spending it on his extravagant lifestyle instead.[v] Rounding out the recent pack is a West Virginia pharmacist who just received a similar sentence after convincing family and neighbors to invest in a company she owned, claiming it had big contracts with the Department of Defense.[vi]
All of these followed the same basic playbook Madoff … well perfected is the wrong word, but you get the gist. Specifically, there are three common threads running through these and pretty much every Ponzi we have read about ever.
We don’t often tip our hat to mainstream financial news coverage, but in the spirit of good sportsmanship, let us give credit where credit is due: The vast majority of financial outlets got inflation right. Instead of freaking out about CPI’s acceleration from 1.7% y/y in February to 2.6% in March and warning of runaway inflation ahead, they calmly explained the jump came from a math quirk known as the “base effect.”[i] We think that is a point worth reiterating here, as inflation isn’t the only data showing bigtime math skew right now—a key concept for investors to understand as they sift through economic results this spring and summer.
We first highlighted this early last month, after Fed head Jerome Powell started sprinkling base effect warnings in his public comments. Inflation rates, as we explained then, are calculated on a year-over-year basis. So March’s inflation rate is the percentage difference between CPI in March 2020 and March 2021. The “base” is that March 2020 level.
Last year, as lockdowns halted commerce in March, CPI started falling. It fell again in April and May, then started recovering in June. By August, it was back at pre-pandemic levels. Overall, prices surrounding that blip are in line with their long-term trend. But you will not know that from the inflation rates for the next few months as those year-ago bases bounce around. When you divide a given numerator (like March 2021’s consumer price index level) by a smaller denominator (March 2020’s), the result increases—just simple math. The denominator got smaller in March. It will get smaller still in April and May. That will boost annual inflation rates even if prices don’t change month to month. Then the annual inflation rates will probably slow significantly as the denominator gets larger again over the summer.
Tuesday, the IMF unveiled its latest World Economic Outlook, which revised its projections for global growth this year upward to the fastest-expected pace in decades. Yet the fast growth isn’t evenly distributed—the IMF expects America and China chiefly to drive the acceleration. Pundits had two general reactions to these forecasts. One camp celebrated the fast growth, thinking it has economically sensitive stocks set to soar. The other fears a divergence between America and China versus pretty much everyone else stoking instability and a world of equity market haves and have-nots. But in our view, extrapolating anything from such forecasts is a stretch.
The IMF’s upward forecast revision was its second in three months. It now expects annual GDP for the whole world to rise 6.0% in 2021, up from January’s 5.5% projection. For a bit of perspective, global GDP hasn’t grown this fast since 1973, according to World Bank data. Big components of that: the IMF’s forecast for 6.4% and 8.4% US and Chinese GDP growth, respectively. While it has only been about a decade since China eclipsed 8.4% GDP growth, America hasn’t topped 6.4% since 1984.[i]
Many take economists’ brighter outlook—not just the IMF’s—as a fresh sign markets will boom, favoring economically sensitive value stocks. The trouble? The fact so many expect fast growth means it likely has little power over markets. Beyond the IMF, private forecasts also show 2021 US growth surging. Presently, the median of 67 forecasts puts this year’s GDP growth at 5.8%.[ii] But this isn’t a new development. A year ago, several were already publishing 2021 US growth forecasts above 6%. The same is true for China. Many private forecasters penciled in upwards of 8% Chinese growth last April.
Editors’ Note: This piece touches on politics, and as such, we remind you that MarketMinder favors no political party nor any politician. We assess developments solely for their potential market impact.
On the heels of President Joe Biden pitching and stumping for his infrastructure plan—and its embedded corporate tax hike from 21% to 28%—Treasury Secretary Janet Yellen has been doing some related stumping. Yellen, it seems, is championing a 21% global minimum corporate tax rate. Wednesday, the G-20 said they will discuss her idea this summer, which has pundits treating her plan as if it is—or is soon to be—a fait accompli. But, friends, whether you love or loathe this plan, we suggest keeping your emotions in check. This is going to be some very difficult sellin’ for Yellen.
The rationale behind Yellen’s proposal is straightforward enough. A central tenet of economic theory holds that people (and businesses) respond to incentives. Taxes are one such incentive. The more you tax something, the more you incent a business to find ways around it. Worldwide, nations’ approach to taxing corporations varies pretty widely. Hence, multinational corporations have long sought to domicile in nations with friendlier systems. Yellen and Biden, perhaps rightly, fear hiking US corporate taxes could lead some US multinationals to seek friendlier shores elsewhere.
Editors’ Note: MarketMinder does not provide individual security recommendations. The below merely represent a broader theme we wish to highlight.
On Saturday afternoon, I wandered into Target to complete a normal springtime ritual: buying a few packs of Topps Heritage baseball cards. It is usually easy. You just walk in around Opening Day, head to the trading cards rack by the cash registers, grab what you need and hand over your hard-earned cash. But this time, no such luck. All I found was a bunch of empty shelves, some dusty Pokémon packs and a tumbleweed. The rumors were true: Baseball cards were back, resellers had cleaned out the inventory, and longtime hobbyists like me were shut out. Then my mind flashed to the two new card shops in town. It felt like 1993 all over again. But this article isn’t about the Junk Wax Bubble that wrecked baseball cards in the mid-1990s. Nope, it is about something more interesting that happened on Tuesday: Topps, the age-old trading card company, announced it was going public via Special Purpose Acquisition Company (SPAC). To assuage would-be investors worried that the company is a one-trick baseball card pony at the mercy of the hobby’s weird ups and downs, it hyped its many new forays into the weird world of non-fungible tokens (NFT). With that, the newly public company put itself at the center of a Venn Diagram depicting pretty much all of today’s investment fads.
Exhibit 1: A Venn Diagram of Fads
