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.
US and global stocks started this week on a sour note, as fears over the coronavirus’s spread into South Korea and Italy shook sentiment. The S&P 500 finished Monday down -3.4%, with most overseas markets similarly weak.[i] Coverage of the disease leads virtually every financial news website, which are also teeming with analyses from economists, politicians, analysts and pundits. Generally, their take is negative, operating on the assumption markets are just now catching on to the coronavirus’s potential fallout—and arguing more downside lies ahead. But this rocky Monday doesn’t change our view: Sentiment swings can always hit stocks short term, but the coronavirus is highly unlikely to upend this bull market.
First, some perspective seems in order. While Monday’s swings were large, it is worth remembering that the S&P 500 stood at all-time highs last Wednesday.[ii] Global stocks? Eight trading days ago (February 12).[iii] Since their respective high-water marks, US and world stocks are down a little over -4% each. That is the definition of a short-term dip—of which there have been dozens during the nearly 11-year old bull market that began in March 2009. For example: Last year had two nearly -6% downdrafts (April 30 – June 3 and July 24 – August 15) and one very similar to today’s size in September.[iv] We aren’t suggesting you should anticipate 2019’s hugely positive returns this year, just that even in great years, short-term volatility is normal.
As we often write, bull markets end one of two ways: Atop the wall of worry when widespread euphoria makes expectations impossible to meet; or when walloped by a huge, unseen negative. Neither of these seems likely today, in our view.
Among the myriad economic gauges and statistics out there, we think The Conference Board’s Leading Economic Index (LEI) stands out as one worth following. It is broad-based, mashing together 10 data points into a single figure. It is also a useful forward-looking indicator, given it has telegraphed every US recession since 1959. Hence, January’s 0.8% m/m rise—the largest since October 2017 and double expectations—seemingly bodes great for US growth.[i] Yet we think it primarily showcases the gauge’s calculation quirks and doesn’t necessarily mean a huge growth acceleration awaits.
Despite LEI’s history of accuracy, it isn’t a perfect economic forecasting tool. Over the years, it has given a fair few false signals—short-lived declines that didn’t precede an economic downturn. To separate potentially meaningful moves from noise, we recommend analyzing LEI’s components to see what produced a given result. Doing so last autumn led us to believe manufacturing weakness drove LEI’s decline—not an indication of broad economic weakness, as factory output accounts for just 11.5% of US GDP.[ii]
This time around, as Exhibit 1 shows, just one LEI component detracted.
For a long time now, we have held the opinion that political uncertainty over Brexit, rather than Brexit itself, was the chief headwind against the UK economy. Accordingly, once politicians stopped fighting and dithering and got on with it, we believed simply having clarity on the matter would enable businesses to stop waiting, stop stockpiling for deadlines that came and went, and start producing and investing as they normally would during an expansion. It is early days yet, but IHS Markit’s Purchasing Mangers’ Indexes (PMIs) suggest this is coming to fruition.
PMIs are surveys measuring the percentage of businesses that report increased activity in a given month. Readings over 50 mean over half of businesses reported growth, which is a loose indication the economy overall grew. It isn’t exact, as it doesn’t measure how much activity rose or fell. But if the majority of businesses are growing, that is generally a good sign.
Last year, the composite PMI—which combines services, manufacturing and construction—spent a lot of time below 50. It dipped on the eve of each abandoned Brexit deadline and remained in contraction in November and December as the general election threw everything in limbo and businesses apparently entered wait-and-see mode. But in January, it jumped above 50—indicating expansion. The February flash estimate, released Friday, showed it stayed there.
We aren’t even two months into 2020, yet many pundits believe the Wuhan coronavirus will make the global expansion gravely ill. Some have already started slashing market forecasts for the year. Frequent MarketMinder readers likely already know we think fears over the virus’s market impact are overdone. But to us, they are part of a longer-running pattern prevalent throughout this bull market. As soon as one huge story fades, another pops up—like a less-fun game of Whac-A-Mole. Here is a look back at some of the fleeting frenzies that came and went over the past 11 years. In our view, the collection tells a simple tale: Investors are better off tuning out the noise rather than reacting to The Next Big Story.
We don’t have to go back far to see this Big Story headline churn. US-Iran tensions dominated headlines at 2020’s start, sparking World War III warnings. Those fears virtually vanished by mid-January, just in time for coverage to flip to the coronavirus. Similarly, while global equities enjoyed their best year in a decade in 2019, the year featured plenty of Big Stories—some scary-ish, others supposedly monumental for investors.
Remember when the US yield curve flattened—and then inverted—last summer, prompting recession forecasts that didn’t come to fruition? When the yield curve “un-inverted” in early October, far fewer trumpeted the news. Earlier in 2019, Vermont Senator and Democratic presidential candidate Bernie Sanders introduced Medicare for All legislation—gobbling up news coverage. A few other Democratic candidates backed it, too. Health Care stocks reacted negatively to fears of quasi-nationalization in the short term, plunging almost -5% in three days.[i] But that hype passed. Health Care ended the year strong, trailing only Technology in Q4. You could say the same of value stocks’ brief burst of outperformance in September. Headlines were sure it was a huge rotation after years of value lagging. It came and went in a month’s time.
It was the best of times, it was the worst of times. According to the British Retail Consortium (BRC) and KPMG’s retail sales measurement, UK retail sales followed up their worst year ever—and only annual decline—with a lackluster January. Yet according to the Office for National Statistics, crunchers and keepers of all official UK data, retail sales followed a positive 2019—far from the worst on record—with January’s solid 0.9% m/m. One headline today even mismatched the two, oddly declaring January a solid bounce from the worst-ever year. In our view, the disparity underscores why investors shouldn’t get hung up on any one data point.
Exhibits 1 and 2 show BRC and ONS monthly figures since 2019 began and annual figures since 1997, their first year of overlapping data. If you follow these things closely, you may notice the ONS figures in Exhibit 1 don’t match the headline figures you saw in news coverage. This is because the ONS’s main measure is the seasonally adjusted month-over-month change in retail sales volumes, which we think gives the timeliest look and omits skew from price changes. But the BRC doesn’t adjust its figures for seasonality, so it reports only year-over-year change. It also reports total sales values, not volumes, and it doesn’t adjust for inflation. Therefore, to keep like with like, we used the ONS’s year-over-year figures for sales values at current prices instead, and here endeth thy nerdy data ‘splainer.
Exhibit 1: 13 Months of Divergent Retail Sales
On Monday, official Japanese data confirmed what everyone already knew: GDP contracted in Q4, in the wake of October 1’s sales tax hike. But the magnitude was a surprise. The median forecast was -3.7% annualized. The actual: a -6.3% annualized drop, with all major categories except public spending negative.[i] Some interpret the worse-than-expected reading as a sign Japan is extra vulnerable to the coronavirus’s potentially corrosive effects, arguing a recession (using one common definition) is likely. We don’t think there is much benefit from trying to forecast this, considering stocks have already seemingly moved on from the virus and a weak Japanese economy isn’t new news. But there are some interesting nuggets under the hood that may hint at whether this sales tax hike is affecting Japanese demand as much as the last one did in April 2014.
Exhibit 1 shows GDP and select components from Q4 2019 and Q2 2014—each the first quarter after the sales-tax hike to register the immediate impact on behavior. You wouldn’t know it from the tenor of today’s commentary, but results are overall better this time around.
Exhibit 1: Then and Now
Various freight and transport indicators have some worried the stock market’s current rally is built on sand. The Baltic Dry Index, a gauge of shipping costs, is tanking. The Dow Jones Transportation Average (DJTA) is lagging the Dow Jones Industrials (DJIA), allegedly failing to confirm the latter’s recent uptrend. Meanwhile, measures of freight shipping—like railcar loadings—are weak. Because of their focus on moving goods from point to point, some investors see these as real-time snapshots of demand, implying their tumble (or lackluster performance) is a sign of lurking economic weakness broader stock markets haven’t yet priced. But in our view, some gaping holes in this theory render these indicators less than telling.
To start with the best-known measure, a more than century-old notion called Dow Theory posits the DJTA and DJIA need to move in the same direction to confirm a trend. If they hit highs together, that is supposedly bullish. If they hit lows together, bearish. If they deviate, the previous trend likely wouldn’t last. Today, the DJIA is hovering near new records—but the DJTA is lagging.
As Exhibit 1 shows, Dow Theory “worked” ahead of bears in 2000 – 2001 and 2008 – 2009—when the DJIA made new highs, the DJTA didn’t—and it could have helped you avoid 1990’s brief bear. But it wasn’t too helpful ahead of 1987’s Black Monday. It also gave false signals through the 1990s’ bull. In the 2010s, too, it flashed during 2012’s mid-cycle slowdown and 2015 – 2016’s manufacturing soft patch. Yet bear markets didn’t ensue. The problem with these types of gauges is sometimes they work—which is how they make names for themselves—but just as often they don’t, and you can’t know when they will or won’t beforehand.
Outgoing Bank of England Governor Mark Carney may be modern central banking’s most notorious waffler when it comes to interest rates and forward guidance, but on one matter, the steel-blue-eyed gent is consistent: climate change. He has long argued banks and investors have too much skin in the fossil fuel game, and only divestment can re-orient the global economy toward greener, planet-saving initiatives. On the eve of his job switch from central bank chief to UN special envoy for climate action, he made one last attempt to green (sorry) finance: legislation, co-written with the UK Secretary of State for Work and Pensions, requiring large pension funds to “report on how they are considering climate change in their governance, strategies, risk management and targets will encourage financial flows towards addressing the threat of climate change to all our futures, and improve the health of our economy longer term.” In essence, they will have to disclose their portfolio’s carbon footprint … and a lot more. The aim here, which you are free to have your own opinions about, is what it is. Disclosure is a fine thing. The premise underlying it, however, seems suspect when you dig beneath the surface. It presumes investing in fossil fuel companies is bad for the climate. Reality, however, is a little more complex.
To see this, look no further than today’s Wall Street Journal, where Rebecca Elliott delivers a smashing look at how the largest oil and gas firms are also huge investors in carbon-reduction efforts. Their method of choice: carbon cleaning and capture. These companies aren’t just trying to reduce emissions from their own smokestacks. They are funding technology that wants to suck carbon out of the atmosphere and channel it into greenhouses, next-generation fuels and your next can of seltzer. One Texas-based oil producer is building, along with a Canadian engineering company, “a facility in the Permian Basin of Texas and New Mexico that would take up to roughly 1 million metric tons of carbon dioxide out of the atmosphere annually. That’s equivalent to the greenhouse-gas emissions from more than 200,000 cars a year, according to EPA estimates.”
As green initiatives go, carbon capture sometimes gets a bad rap—largely from potentially biased activists. But most people in the know acknowledge carbon capture is vital to meeting long-term climate targets without forcing perpetual poverty and underdevelopment on Africa and much of the less-developed southern hemisphere. Planting a trillion trees, as the helicopter-flying elite at Davos pledged to do, is all well and good. Planting what an Arizona State University engineering professor calls “mechanical trees” is probably even better, because it is more economical. It generates profits, giving people incentive to develop and spread the technology.
Editors' Note: Our political analysis is intentionally non-partisan. We favor no political party or politician in any country and assess political developments solely for their potential market or economic impact.
So much for European politics getting boring after Brexit. First Irish voters gave republican nationalist Sinn Féin a popular vote win at Sunday’s general election, likely toppling the government led by current Taoiseach Leo Varadkhar. Then on Monday, a regional government kerfuffle climaxed with the resignation of Chancellor Angela Merkel’s successor, Annegret Kramp-Karrenbauer (aka AKK), from her post as Christian Democratic Union (CDU) party head. Pundits naturally harped on how the rise of fringe parties led to establishment figures’ downfall in both nations, and from a sociological standpoint, we can see why that is worth spilling some ink over. Yet investors’ reaction—including a large-ish drop in Irish stocks on Monday—seems rather overwrought to us. The likely result in both nations is gridlock and reduced legislative risk, which stocks generally like just fine.
We can see why Sinn Féin’s rise spurred headlines globally, for it isn’t just any nationalist party. It is widely considered the former political wing of the Irish Republican Army (IRA), and its longtime leader (until 2018) was detained in connection with several IRA crimes (though never formally charged). That is all sociology and painful history, but we think it is important context for understanding why the party’s strong showing touched a nerve. In the decades since 1998’s Good Friday Agreement, which cemented the peace deal between the republic and Northern Ireland, Sinn Féin retained its nationalist agenda but pivoted toward left-wing populism. As in much of Europe, Irish voters have increasingly soured on the two main parties, Fianna Faíl and Fine Gael, both of which lean center-right. Meanwhile, the collapse of the center-left Labour Party and Social Democrats created a void on that end of the spectrum, which Sinn Feín filled. Its calls for boosting public housing and increased social spending played well with voters still scarred by Ireland’s Celtic Tiger boom and bust, as well as the ensuing debt crisis and years of austerity.
Editors’ Note: Our political analysis is intentionally non-partisan. We favor no political party or candidate in any country and assess political developments solely for their potential economic or investment impact.
Three days after Iowans caucused for their Democratic presidential candidates of choice, we still don’t know the results. A preliminary tally shows former South Bend Mayor Pete Buttigieg and Vermont Senator Bernie Sanders tied with 11 delegates each, Massachusetts Senator Elizabeth Warren claiming 5, and the remaining 14 waiting for a home. But after several days of chaos and reports of inconsistencies and errors, Democratic National Committee Chair Tom Perez has called for party officials to “recanvass” or double-check every caucus worksheet by hand. As we write, it is unclear whether the state committee will do so. On the surface, this saga isn’t terribly relevant for investors. The Democratic nominee was impossible to predict before this comedy of errors began, and it will remain so for weeks after it is finished, given the wide-open field. But how we got here is, in our view, a shining example in the dangers of letting partisan bias influence your investment decision making.
For those who haven’t followed the nitty gritty, this mess started when a smartphone app failed. The app, created by a little-known firm called Shadow, Inc., was supposed to be a streamlined way for precincts to count and deliver results, speeding the reporting and tabulating process so the public could get the results quicker. But as newly launched apps are wont to do, it crashed, forcing most districts to phone in their results, which overwhelmed understaffed hotlines. While some suspected hackers were behind the glitch, the Democratic Party cited “coding issues,” and an NBC report highlighted evidence that the app was rushed and poorly beta tested. People naturally wondered how this happened and why other alternatives—existing apps or better-known developers—weren’t used. It didn’t take much digging for reporters to discover what seems like a probable answer: Shadow is affiliated with Acronym, a progressive nonprofit that has a political action committee and heavy ties to the Democratic Party.
