A round-up of third-party news stories we believe investors should either pay attention to, or ignore, along with Fisher Investments’ point of view.
MarketMinder’s View: Well how about that: “Chinese negotiators are preparing to offer the administration a deal to buy up to $200 billion worth of American goods, which would allow Mr. Trump to claim victory in his campaign to reduce the trade deficit with China and rebalance America’s trade relationship with its biggest economic rival, according to people briefed on the deliberations. But the Chinese promises would be largely illusory, economists cautioned, given the structural hurdles in China to buying more American exports and the sheer amount of goods the United States would have to produce to meet Beijing’s demand.” Moreover, it is unclear whether they would be pledging to buy $200 billion worth of additional goods on top of current exports to China—or boost their imports of US goods to $200 billion annually (from about $130 billion in 2017). And even if China does crank up its purchases, it would probably divert shipments away from other countries, making the economic impact largely zero sum. Overall, this move (if it becomes official—China subsequently threw a bit of cold water on the rumor) seems mostly symbolic, allowing both sides to claim some victory and avoid new tariffs, staving off that widely feared trade war.
MarketMinder’s View: Attention all 401(k) owners, this one is required reading for you! If you are doing any of these seven things that result in leaving money on the table or shooting yourself in the foot, no time like the present to change course.
MarketMinder’s View: Though this covers just two investor sentiment gauges (AAII’s survey of individual investors and BofA Merrill Lynch’s survey of fund managers), it is a decent snapshot of how folks feel about stocks: a little sunnier than last month, but not wildly happy. This isn’t too surprising, considering stocks have clawed partway back from the correction’s most recent low, and it shows the bull market’s proverbial “wall of worry” has plenty of room left for sentiment to climb. As investors gradually shake off the early-2018 blues and animal spirits stir, we think markets should enjoy a nice ride.
MarketMinder’s View: The gist of the story is this: Energy Master Limited Partnerships (MLPs) have had a very rough couple of years, and as a result, many are disappearing as their issuing firms roll them back up into the mothership. Analysts believe this wave of consolidation could “carry intimations of mortality for a chunky 15.3% of the Alerian MLP Index,” taking its constituent count to 36, the lowest since mid-2004. This leaves the index more concentrated and makes it more difficult for MLP investors to adequately diversify. Even some MLP funds have nearly 20% of their assets in a single issue. If MLPs strike your fancy, you will likely need to be extra-careful to ensure you are diversified.
MarketMinder’s View: There are a lot of US stories hogging folks’ attention these days: China trade talks, NAFTA deadlines and the 10-year yield surpassing 3% to list some big ones. But don’t lose sight of the economic fundamentals. The Conference Board’s Leading Economic Index (LEI) rose 0.4% m/m in April, matching March’s rate, and only 2 of 10 components—stock prices and building permits—detracted. The latter has vacillated between positive and negative contributions over the past several months, which may reflect some weather skew. As for the former, the S&P 500 bounced around throughout April and ended the month flattish, so volatile stock prices’ detraction isn’t surprising. (Note The Conference Board uses the S&P 500’s average daily closing price during the month, not its monthly return.) Notably, the more telling components, like the interest rate spread and the Leading Credit Index, remain positive—signs the US expansion should continue for the foreseeable future.
MarketMinder’s View: Headlines this week have screamed about the 10-year Treasury yield passing 3% and hitting seven-year highs, spurring worries about the potential market repercussions. In our view, these concerns are overwrought. There is nothing magical about the 10-year crossing 3%, and extrapolating higher yields going forward reads too much into short-term volatility. Yes, volatility can strike bonds too—it isn’t a stock market exclusive. This piece does a good job providing historical context to the 10-year’s recent uptick and debunking common rising rate fears. “Another way of thinking about this is that long and slow interest-rate increases aren’t scary for bond investors. It’s the short and rapid changes that can be scary. For instance, from 1940 to 1980, interest rates jumped from 2.5% to 15%. Bonds must have lost money, right? Wrong. A 10-year constant-maturity bond fund generated a 2.5% annual return over this period. Not great, but not bad either.” A number of fundamental factors argue against a sharp rise in rates looking ahead, and in our view, focusing on what a 3% yield means for the future overstates daily market movement. (All that said, we quibble with the final two paragraphs, which pay too much credence to stock valuation fears and mythology, in our view.)
MarketMinder’s View: While nothing is official yet, it seems like the UK is angling for “a customs union in all but name.” The mysterious verbal leaks have said the, “…Cabinet has agreed that the UK will ‘temporarily’ follow elements of the EU’s customs rules after the end of the Brexit transition period for a ‘strictly time-limited’ period. This would reportedly include the UK continuing to apply the EU’s ‘common external tarif’ which is what allows goods to circulate freely in the EU as part of a customs union.” Or, more simply: The UK appears to be trying to extend the transition date beyond December 2020, reportedly to 2023. Granted, a lot can change over the next several weeks, let alone the next couple years—Brexiteers will probably resist, and the EU seems lukewarm toward making concessions. Still, reports like this buttress those who think a “soft Brexit” is the most likely outcome. While that is unknowable today, the latest leaks are yet another example of the public and drawn-out nature of Brexit negotiations. This gives markets more information to mull over and digest likely outcomes, sapping Brexit’s surprise power.
MarketMinder’s View: Well look at that: After the US pushed May 17 as the deadline for a NAFTA overhaul deal—a date both Mexico and Canada argued wouldn’t be met—it seems officials from all three countries have softened their language a bit. Canadian Prime Minister said “there is a good deal on the table”; Mexico’s Economy Minister Ildefonso Guajardo indicated a deal could be reached by the end of May; US House Speaker Paul Ryan suggested there could be “wiggle room” if the US International Trade Commission allowed it. Now, none of this means a new NAFTA deal will be reached, but also don’t underestimate politicians’ ability to make agreements at the 11th hour or kick the can further down the road. As we often write here on MarketMinder, watch what pols do, not what they say.
MarketMinder’s View: West Texas Intermediate (WTI) crude oil prices have climbed above $70 recently, so US producers should be flush with cash now, right? Not exactly. The top 20 oil companies that focus on fracking “collectively spent almost $2 billion more in the quarter than they took in from operations, largely due to bad bets hedging crude prices, as well as transportation bottlenecks, labor and material shortages that raised costs.” This article explains how that hedging has weighed on shale drillers: “Seeking stability after years of wild fluctuations in crude prices, many operators entered into derivatives contracts in late 2017 that effectively ensured they could sell some of their 2018 output for $50 to $55 a barrel. Now that prices have risen to more than $70 a barrel, many are failing to capture the value of the rally.” These contracts are commonplace for those dealing in volatile commodity markets. Consider the flipside: When oil prices plunged several years ago, many producers weren’t roiled immediately since they had contracts that locked in higher prices. This is why we believe investors should be selective when perusing opportunities in the Energy sector—some producers, particularly smaller ones and those with higher extraction costs, still face headwinds. For more, see our 4/27/2018 commentary, “Will Higher Oil Prices Fuel Energy Stocks?”
MarketMinder’s View: The latest plot twist in Italy’s months-long efforts to form a government: a leaked memo! Media are interpreting the memo as evidence that a populist Five Star Movement (M5S)-League coalition plans to radically reshape Italy’s relationship with the EU, prompting Italexit fears. We suggest not jumping that far ahead. Besides M5S and the League disavowing the memo as out of date, the proposals resemble vague musings more than concrete demands. Second, proposals are just that—non-finalized ideas that negotiations and compromise can change. President Sergio Mattarella has the power to strike down laws he believes are unconstitutional, including fiscal matters. The coalition would only be able to pursue agreed upon terms with the president. Besides that, the M5S-League coalition itself isn’t ideologically uniform, making it even more difficult to pass radical legislative change. While the uncertainty surrounding this potential populist Italian governing coalition can knock sentiment in the short term, the likely political upshot is gridlock. That is the status quo for Italy, and that hasn’t hindered eurozone markets—let alone the global bull market—yet.
MarketMinder’s View: Japan’s eight-quarter growth streak ended in Q1 as GDP fell -0.6% annualized, missing expectations of a milder -0.2% contraction and down from Q4’s 0.6% (revised down from 1.6%). Data were weak across the board: Household spending slipped -0.1%, private capital expenditures fell -0.3% and exports slowed to 2.3%. Though the latter managed to add to headline GDP, they weakened considerably from Q4 2017’s 9.2% and Q3’s 8.2% annualized rate. That said, we offer the usual caveat: Don’t overthink one quarter of data that will get revised in June. In our view, Japan’s Q1 contraction highlights the economy’s dependence on externally driven growth—domestic demand remains tepid. Global growth seems to have taken a bit of a breather in Q1, but considering forward-looking indicators indicate more expansion to come, the global economy likely continues to pull Japan along with it.
MarketMinder’s View: US industrial production—measuring the nation’s manufacturing, mining and utilities output—hit a new high in April, continuing its two-year long bouncy upward trajectory. Under the hood: “Manufacturing output rose 0.5% in April after a flat reading in March. Motor vehicle output fell 1.3%. Mining output, which includes oil and gas production, rose 1.1% while utility output was up 1.9%.” Though just a small slice of America’s services-driven economy, “The rise in industrial production in April was supported by increases for every major market group. Consumer goods, business equipment, and defense and space equipment posted gains of nearly 1 percent or more.” Widespread growth in these areas suggests US GDP continues pumping on all cylinders.
MarketMinder’s View: According to the International Energy Agency, the oil supply glut hanging over markets since 2014 is no more, thanks largely to OPEC and friends’ production quotas: “The IEA said commercial oil inventories for the Organization for Economic Cooperation and Development countries declined in March by 26.8 million barrels month-on-month to 2.819 billion barrels. That’s 1 million barrels below the latest five-year average metric widely used by oil market participants to assess the rebalancing process.” However, this doesn’t necessarily mean oil prices will keep on rising and rising—not when other parts of the world (e.g., the US) can ramp up production to take advantage of those prices. Plus, demand isn’t likely to jump far ahead of supply. In our view, a selective approach to Energy stocks—focusing on big, global, integrated producers—makes the most sense right now. For more, see our 4/27/2018 commentary, “Will Higher Oil Prices Fuel Energy Stocks?”
MarketMinder’s View: Here is some fun news you can use, courtesy of the SEC. If you have ever wondered about participating in a cryptocurrency “initial coin offering” ICO—one of those newfangled blockchainy-type things—check out the SEC’s mock site, HoweyCoins. As noted in the SEC’s press release, “The SEC set up a website, HoweyCoins.com, that mimics a bogus coin offering to educate investors about what to look for before they invest in a scam. Anyone who clicks on ‘Buy Coins Now’ will be led instead to investor education tools and tips from the SEC and other financial regulators.” The more you know!