Here we analyze a selection of third-party news articles—both those we agree and disagree with.
Please note: Though we make every effort to source articles from freely available sites, we will also regularly include articles on sites that have limited content for non-subscribers. Doing so is increasingly unavoidable, as more and more financial media is published behind paywalls.
MarketMinder’s View: Heatwaves worldwide have been straining economies, and China is no exception. “Faced with China’s most searing heat wave in six decades, factories in the country’s southwest are being forced to close. A severe drought has shrunk rivers, disrupting the region’s supply of water and hydropower and prompting officials to limit electricity to businesses and homes. In two cities, office buildings were ordered to shut off the air-conditioning to spare an overextended electrical grid, while elsewhere in southern China local governments urged residents and businesses to conserve energy.” The rest of the article details the many industries impacted by the intense weather, from agriculture and energy producers to delivery and office workers (not to mention panda bears). While we sympathize with those enduring the intense heat (especially the pandas, due to the fur and all), our focus is on the broader economic impact—and extreme weather’s macroeconomic impact tends to be fleeting. Yes, factories going off line due to electricity shortages may knock manufacturing output and could even lead to slower GDP growth. But from an investing perspective, this isn’t necessarily a negative shock to markets, which have grappled with industrial output interruptions before, and weakness isn’t news in China at this point. Beyond energy shortages, Chinese manufacturers have also had to navigate supply-chain bottlenecks and the government’s draconian “zero-COVID” strategy over the past two years. We see little surprise power in a plodding Chinese economy for global investors at this point.
MarketMinder’s View: After contractions the past two months, the Philadelphia Fed’s Manufacturing Business Outlook Survey showed general activity turned positive in August, though the underlying was a mixed bag. “The Philly Fed said its diffusion index for current activity jumped to a positive 6.2 in August from a negative 12.3 in July, with a positive reading indicating growth. Economists had expected the index to rebound to a negative 5.0. The rebound by the headline index was partly due to a notable acceleration in the pace of shipment growth, as the shipments index jumped to 24.8 in August from 14.8 in July. The new orders index also showed a significant rebound but remained negative, surging to a negative 5.1 in August from a negative 24.8 in July.” The survey’s future indexes point to tempered growth expectations over the next six months, but as one analyst here put it, “… the latest data from the Philly Fed district implies that there remains a solid demand pipeline and a manufacturing slowdown should not cascade into an outright contraction in output.” Now, the broader takeaways from a regional manufacturing survey are limited, but we think the Philly Fed’s better-than-expected result counters some concerns from the weaker-than-anticipated New York Fed’s August manufacturing survey (which we highlighted earlier this week in our “What We’re Reading” section). The latest US economic data have been giving mixed messages, but contrary to many economists’ forecasts, they haven’t been screaming recession—one reason we don’t think stocks’ rally is out of touch with reality.
MarketMinder’s View: We don’t recommend investors take the titular imperative literally, but there is some high-level truth to the argument presented here: distinguishing between a bear market rally and a new bull market in real time is near-impossible. In our view, a market recovery is apparent only in hindsight and often starts when sentiment is at a low—stocks don’t sound an “all-clear” signal when a bull market begins. Nor is there any one magic indicator to help. “In every blueprint that appears to contain insights, there’s either holes or one that contradicts it. Take the popular 50% retracement indicator, which states that once the S&P 500 recovers half its peak-to-trough decline -- a milestone it achieved Friday -- the index has almost always avoided making new lows. That’s nice, except that a different gauge kept by Bank of America Corp., one that combines the S&P 500 price-earnings ratio with US consumer inflation, is adamant that stocks have yet to bottom. Every market trough since the 1950s saw the measure fall below 20. During the selloff this year, it only got as low as 27. The model has ‘a perfect track record,’ BofA says.” Fine, but coincidence isn’t causality, and mashing two backward-looking measures together doesn’t create a forward-looking indicator. We see great value in looking at market history as a starting point from which to begin determining a reasonable range of probabilities, but widely discussed models get priced in, and past returns don’t predict. So on top of market history, it is important to layer the economic and political factors impacting corporate profits over the next 3 – 30 months and consider: a) how these qualitative factors mesh with the fundamental backdrops of any past cases you are comparing to and b) how the likely reality today aligns with broader expectations. This approach won’t tell you when exactly a new bull market has started, but identifying inflection points isn’t the key to successful long-term investing. Making sure you don’t miss participating in bull markets is much more critical, in our view. For more, see our 8/2/2022 commentary, “Our Perspective on the Midsummer Rally.”
MarketMinder’s View: As this article references specific companies’ earnings, please remember MarketMinder doesn’t make individual security recommendations. Particular examples are for illustrative purposes only, as we wish to highlight a broader theme: Skepticism about future earnings appears to be growing, even as Q2 earnings have come in better than expected. “Some market participants are growing concerned, however, that strong corporate numbers may not last, as companies face an array of challenges, including surging inflation and changing consumer spending habits. These may make it difficult for stocks to hold their recent gains or rise further, they said.” Thing is, markets aren’t unaware of these developments or other margin pressures. Stocks price in all widely available information, including broadly publicized forecasts like those aired here. We would add that earnings forecasts are opinions, so rather than take them—and their implications—as gospel, we think investors can use them as reflections of sentiment. Based on the views shared here, sentiment remains far from optimistic, which isn’t uncommon at new bull markets’ beginnings—though whether a recovery has taken hold will be clear only in hindsight.
MarketMinder’s View: Market booms and busts can loom large in headlines—and people’s minds—which, in our experience, can lure long-term investors “into thinking they will last forever.” This article offers some helpful guidance on how to avoid that common error: “... it is very easy to get caught up with the consensus view during both bull markets and bear markets. However, investors who can ignore market sentiment in favour of cold, hard facts could use the stock market’s boom/bust cycle to their advantage by purchasing shares when other investors are downbeat and selling them when others are in an ebullient state of mind. Cynics will argue that a contrarian investment strategy is obvious. Indeed it is. It simply entails using the overreaction of investors to buy shares when they are priced at levels that significantly undervalue their future prospects and sell them when the opposite is true. The challenge with such a strategy lies in its execution. It is incredibly difficult for any investor to ignore the views of their peers – whether bullish or bearish – and invest solely on the basis of facts and figures. However, it is possible for investors who are disciplined and have a long time horizon.” We also agree with this piece’s take on contrarian investing, which is more nuanced than simply doing the opposite of the crowd: “They should not simply buy the most unpopular or worst-performing stocks they can find.” Yup. As Fisher Investments founder and Executive Chairman Ken Fisher wrote about in his book Beat the Crowd, to do so requires thinking differently about what everyone else already knows—and is priced into stocks. Continually applying that discipline is difficult, but doing so can help investors achieve their long-term goals.
MarketMinder’s View: Please note MarketMinder’s policy analysis is nonpartisan—we favor no party nor any politician. We aim to assess the titular legislation’s potential economic and market impact only. The issue raised here: “Unlike America’s longstanding partisan stalemate – not a single Republican voted for the Inflation Reduction Act that President Biden signed into law on Tuesday – the new conflict over climate policy will pit many environmental groups that have pushed hardest for the US to decarbonize against the administration’s efforts to do so.” As the article explores, IRA de-carbonization plans from natural gas pipelines and hydropower transmission lines to carbon capture and nuclear energy are “likely to run afoul of one environmental goal or another.” That queues up prospects for environmental reviews, though as the article notes, the IRA also includes some reforms that may relax some of those regulatory hurdles. For investors, we think this piece raises some basic reminders about legislation’s impact in general. For instance, losers’ sense of loss tends to outweigh winners’ sense of gain, and judging by some of the interviews here, many are unhappy with the perceived tradeoffs that pushed the IRA over the finish line. That implies many legal challenges to come—a big reason new laws’ economic impacts take a while to manifest, if they do at all. For more, please see last week’s commentary, “A Word on the Inflation Reduction Act’s Climate Spending.”
MarketMinder’s View: We think this article helps debunk the commonly held notion a weak currency is preferable for a nation’s businesses since it helps boost their exports. We always found the argument flawed because businesses import, too. Japanese companies confirm as much in the survey cited here: “Of the 11,503 small, midsize and large companies that responded to the survey, 28.2% answered that the yen’s sharp drop had a ‘significant negative impact’ and 33.4% said it had a ‘somewhat negative impact.’ By industry, more than 80% of companies in the ‘textiles, textile products, clothing wholesaling,’ ‘food and beverage, feed manufacturing,’ and ‘eating and drinking establishment’ responded that they suffered a negative impact. Many of those industries are vulnerable to the weak yen pushing up import prices of raw materials such as grains, lumber and energy.” This isn’t to say there are no weak-currency winners—see some of Japan’s chemical and machinery exporters, and “Companies in the real estate sector said they have been receiving a number of inquiries about Japanese real estate, which has become undervalued from the perspective of foreign investors.” In our view—and the surveyed firms’ here, too—a weak currency just isn’t the unalloyed good many make it out to be. For more on putting currency moves into context, please see our 7/26/2022 commentary, “Adjusting for Swings With Constant Currencies.”
MarketMinder’s View: This argues stocks have bounced over the past two months because the market wrongly believes inflation will cool and the Fed will soon cut rates as the labor market cools off enough to slow wages—removing an alleged inflation contributor—but not enough to whack consumer spending. We think this gets a lot wrong about how inflation works, but more broadly, we think the overall argument doesn’t account for how markets work. It boils down to presuming inflation and rate hikes were fundamental negatives and that the market is over-optimistic in presuming those negatives will reverse. But recoveries don’t start when all negatives are gone—they start when sentiment has overshot to the downside and investors have overestimated the negative effect. So even if this simplistic view of why stocks were down this year were correct (which we disagree with), it wouldn’t mean easing inflation and rate cuts were necessary for stocks to recover. All it would take is stocks fully pricing those perceived negatives. With all that said, may we offer an alternate explanation? What if a panoply of fears weighed on sentiment earlier this year, making fear the chief driver, and now uncertainty is easing as the things investors feared gradually do or don’t come true, enabling the world to move on? Frame 2022 in that light, and we think the rally since mid-June becomes a lot more logical. Now, that doesn’t necessarily mean a new bull market is starting—that isn’t knowable now. But it does look like one in many ways.
MarketMinder’s View: In short, China’s economy sputtered in July as the government’s zero-COVID strategy continued disrupting activity amid scattered outbreaks, and policymakers responded with a small interest rate cut on Monday. The slowdown has sparked speculation that China won’t reach the government’s full-year GDP growth target of 5.5%, and there are mounting fears that the boycott of mortgage payments by people who pre-bought unfinished apartments will trigger a full-fledged property crash. Now, as it happens, we think sentiment is probably a tad too sour, given the difficult balancing act between zero-COVID and economic growth is widely known and officials have been downplaying the growth target for several weeks now. The government is also taking steps toward helping struggling property developers complete unfinished apartments and, according to separate Bloomberg reports, is planning to back select developers’ bond offerings. We see a strong likelihood that China’s economy muddles through. But for the sake of argument, let us pretend all these fears come true. Even then, it isn’t an automatic disaster for the world economy at this point. Consider a historical analogue: Japan. Back in 1990, it was the world’s second-largest economy, much like China is now. It was about 15% of global GDP when that year began, not far removed from China’s 18% share (per the World Bank). As has become legend, its real estate bubble crashed and its economy entered an infamous “lost decade.” But the rest of the world did great in the 1990s, even without the supposed engine of the 1980s firing on all cylinders. We see little reason that history can’t repeat this time, as the perception of China as the world’s sole growth engine has long been quite wide of the mark. The global economy is much bigger and broader than that.
MarketMinder’s View: Amid all the handwringing over a potential European winter energy crisis, countries are quietly taking steps to prevent the worst-case scenarios from coming to pass. The latest example: The UK has just approved the reopening of a mothballed natural gas storage site, which should increase its reserve capacity. The owner “is poised to begin pumping natural gas into the Rough storage site at the start of September after securing approval from the Health and Safety Executive. It means the only remaining obstacles to reopening Rough are an agreement between [the owner] and the Government on state support and final consents from the North Sea Transition Authority (NSTA), which are not seen as problematic.” Now, the owner happens to be a publicly traded company, so we remind you that MarketMinder doesn’t make individual security recommendations—we highlight this story because of its place in the overall saga of energy fears. Even modest steps like this can help reality turn out less bad than feared, which is usually enough to help uncertainty fall and boost stocks broadly.
MarketMinder’s View: Nor should it, for a reason this piece indirectly highlights. No, we don’t think the tax is benign because it represents just a sliver of the affected companies’ profits. And no, we don’t think the best way to measure its relative risk is by weighing the relative returns of buyback-heavy companies versus the S&P 500—in our view, these companies’ recent outperformance isn’t really telling of anything. The theory that buybacks turbocharge individual companies’ stock returns often doesn’t hold true in reality, as they are just one factor affecting supply and demand for a company’s shares. No, in our view, the primary risk would have been if the tax were structured in such a way that it risked creating a stock supply glut broadly. Buybacks’ primary benefit in recent years hasn’t been reducing stock supply outright, but helping offset new shares issued in stock-based employee compensation plans. If companies weren’t able to sterilize these new shares by taking supply off the market at the same time, it would dilute extant and new investors alike, similar to a stock-based merger. Miraculously, Congress seems to understand this: “The law would allow companies to offset share issuance — such as shares issued as part of employee compensation,” so it won’t discourage buybacks that serve to manage share supply. That is a very little-noticed silver lining, in our view.
MarketMinder’s View: This piece is a mix of a good rundown of recent trends in oil prices, supply and demand for oil and what Fisher Investments Founder and Executive Chairman Ken Fisher calls, “the pessimism of disbelief.” It documents the fact that West Texas Intermediate crude prices have tumbled below where they were when Russia invaded Ukraine in February and that “Gasoline prices have fallen every day over the last nine weeks, to an average of less than $4 nationwide, and prices of jet fuel and diesel are easing as well. That should translate eventually to lower prices for things as diverse as food and airline tickets.” The big picture, as this notes, is that supply is rising while demand is down—the exact consequence you should expect when prices rise. Markets are much more self-correcting than people think. But lest you see this as relief, the article spends a great deal of time warning that a host of unpredictable factors (hurricanes, conflict, the fall of fragile regimes in Venezuela or Libya) and some widely known ones (cessation of sales from America’s Strategic Petroleum Reserves) could send prices up once more. We see the insistence and focus on such factors as ways to dismiss the larger trend—or presume it will soon morph negatively. That looks like the pessimism of disbelief to us, a sign sentiment is exceedingly dour.
MarketMinder’s View: Nothing here was much of a surprise, considering Japan eased COVID restrictions in March. As a result, “Leading the second quarter’s [2.2% annualized] growth was private consumption, up 1.1% on the term, as more people ventured out for dining, travel and leisure… .” But it strikes us as somewhat interesting that net trade made virtually no contribution to growth, considering all the chatter about the extremely weak yen. Traditionally, many pundits would claim a weak yen is a plus for Japan, as it makes the country’s exports more affordable. They usually overlook the fact Japan imports many components, fuels and other materials, which a weak yen doesn’t help at all. This time, most observers’ takes have flip-flopped. Yet still the reality is more benign, as those factors can offset—which largely seems to have happened in Q2, despite the yen spending much of the quarter hovering near its lowest level against the US dollar in 30 years.
MarketMinder’s View: Whether or not the two consecutive GDP contractions in Q1 and Q2 2022 qualify as a recession is an increasingly politicized issue, which this article sort of illustrates by quoting White House officials who deny it is with conviction, citing data like unemployment, falling gas prices and the upturn in the stock market. But none of those data actually confirm or deny whether the US is in recession. As we have written here for more than a decade, employment data lag economic growth. It wouldn’t be surprising to see hiring persist and the unemployment rate remain low after growth has rolled over. Two, inflation and gas prices usually fall in a recession. They don’t support the titular assertion. Stocks lead the economy and normally begin rising in a new bull market before growth recovers. We also can’t say the upturn since mid-June really is a new bull market yet. Now, where we do agree with this piece: For investors, this debate is largely semantic. Whatever we wind up calling this period, stocks likely pre-priced this to a great extent in this year’s bear market. So, in our view, let the politicians cast this period however they want. Don’t let the label skew your view of future conditions, which the stock market is likely to focus on.
MarketMinder’s View: “A gauge of New York state manufacturing activity plunged by the second-most in data back to 2001, with sharp declines in orders and shipments that indicate an abrupt downturn in demand. The Federal Reserve Bank of New York’s August general business conditions index slumped more than 42 points to minus 31.3, with the drop just behind that seen in April 2020, a report showed Monday. A reading below zero indicates contraction, and the figure was far weaker than the most downbeat forecast in a Bloomberg survey of economists.” That is what this article reports, which is all factual and not great. But, some other points it doesn’t convey: This is a very narrow, volatile gauge that people usually don’t pay much attention to. That makes a lot of sense when you consider it dates only to July 2001. There have been two full recessions (2007 – 2009 and 2020) since. (The 2001 recession began in March and ended in November, per the National Bureau of Economic Research.) Manufacturing also comprises 4.5% of New York state’s economic output, per the National Association of Manufacturers. Furthermore, since the 2020 lockdowns, the index has posted an average move of 17.2 points (up or down) monthly, more than doubling the average from its inception through 2019’s close. Nine of this index’s ten biggest monthly swings have come since January 2020, with August marking the fourth such swing in 2022. So seeing something narrow with little history swing big (as it has repeatedly since the lockdowns) get so much media attention seems like more of a sign of dour sentiment than a harbinger of what lies ahead for the broader US economy.
MarketMinder’s View: Please note, inflation has become a hot political topic. Our commentary is intentionally nonpartisan and focused on the potential economic and market implications only. We also don’t dismiss the real financial hardship many households and businesses face due to higher prices. However, stocks take a cold view of economic developments, so it is critical for investors to do the same. With all that said, we think this piece nicely illustrates how markets work—and prices’ critical role in signaling oil producers and consumers to make some changes this year. “Whether it was motorized-rickshaw operators in Dhaka, Bangladesh, Uber drivers in Baltimore, mothers picking up children after school in Savannah, Ga., operators of truck fleets and police departments or managers of large manufacturing plants, the signal was the same. It said to consumers, ‘Energy has gotten scarcer; it is time to conserve.’ And to suppliers, it said, ‘This stuff has gotten a lot more profitable to produce; see if you can find ways to provide more.’” As the article details, this is what happened: Consumers adjusted their thermostats and reduced their driving while energy firms worldwide increased production, thereby bringing supply and demand into better balance. Correspondingly, oil prices have been falling since early June. While the market doesn’t yield change immediately or painlessly, it is the best allocator of scarce resources, in our view—especially in comparison to elected officials.
MarketMinder’s View: The titular gauge is the widely watched University of Michigan’s sentiment measure, which, “… rose to 55.1 from 51.5 in July, data showed Friday. Consumers expect prices will climb at an annual rate of 3% over the next five to 10 years, from 2.9% in July. They see costs rising 5% over the next year, the lowest since February, compared to last month’s 5.2%. The sentiment gauge exceeded all but one forecast in a Bloomberg survey of economists who had a median projection of 52.5.” As the survey’s director notes, though, consumer sentiment is still low by historical standards, and, “In the current context, even strong labor markets have been raised as negative news for business conditions, as consumers recognize the challenges businesses may face with hiring.” So yes, despite some improvement, moods are still pretty dour. While it may feel counterintuitive, that is a common condition in a bull market recovery, which often begins when sentiment is at a low. A new bull market’s beginning will be clear only in hindsight, but in our view, one is close—if not already underway. For more, see our June 16 commentary, “A Quick Reminder: Feelings Don’t Foretell.”
MarketMinder’s View: Spoiler alert: This article admits it doesn’t know the answer to the titular question—a refreshing response, as we agree a bear market’s end is apparent only with a good deal of hindsight. We do quibble with this piece’s focus on distinguishing cyclical bull/bear markets from secular bull/bear markets because, in our view, the latter is rather arbitrary and not much use when assessing market drivers. Secular market trends can supposedly span several decades, so forecasting a secular bull or bear market requires forecasting the far future—not useful, in our view, since stocks look forward to the next 3 – 30 months at most. Moreover, a period considered a secular bull market can include several cyclical bull and bear markets along the way, presenting numerous investment opportunities. That said, the bounty of historical data shared here do make a useful high-level point: Stocks are volatile in the short term, and there is no all-clear signal for when a downturn ends. Here, too, is an interesting observation: “For example, by my count there have been around 350 trading days since 1928 when the U.S. stock market was down 3% or worse. There have also been nearly 290 days when it was up 3% or more in a single day. … Here’s the kicker — more than 90% of all up and down 3% days have taken place during a correction of 10% or worse. And 83% of those up and down 3% trading sessions took place during a bear market drawdown (down 20% or worse).” These types of findings can be useful in setting expectations, but recognize the past doesn’t foretell the future—and, as always, we urge investors to make portfolio decisions based on forward-looking criteria, not backward-looking thresholds. For more, see our June 22 commentary, “Some Key Concepts Useful in Navigating Today’s Markets.”