MarketMinder

Headlines

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.


China Offers a Path to Eliminate U.S. Trade Imbalance, Sources Say

MarketMinder’s View: According to the ever-reliable “officials familiar with the negotiations,” China offered to increase US goods imports by a cumulative total of more than $1 trillion over the next six years, in an attempt to zero out the bilateral trade deficit. This is part of their effort to end the trade impasse and get rid of tariffs adopted and threatened over the past year, though considering intellectual property protections appear to be the linchpin to negotiations, it is anyone’s guess whether this tack will work. As for the economic implications, we suspect it would be rather difficult to actually raise imports by this much in such a short span. As the article notes, pledges to buy more soybeans and natural gas would likely require farmers to adjust their crops and the construction of more LNG export terminals—something US trade negotiators can’t exactly control. Unlike China, America isn’t a command economy. So we wouldn’t expect some huge long-term boost here. But if trade talks do ultimately bear fruit, it could help boost investor sentiment. And if they don’t? The economic impact is likely negligible, as all new or threatened tariffs amount to less than 0.3% of global GDP (using IMF GDP estimates).

Consumer Sentiment Drops to Lowest Level of Trump's Presidency

MarketMinder’s View: Once again showing consumer sentiment depends heavily on what happened just before consumers were surveyed, the U-Michigan consumer sentiment reading fell -7.7% m/m in January. Logically, consumers’ outlooks often worsen after market downturns. The report suggests trade war and government shutdown fears (among others) are weighing on sentiment—observations plenty of other evidence support, not least of all the past few months’ headlines. But we don’t believe weakening consumer sentiment measures automatically mean lower spending will follow, as this piece suggests. History shows consumer sentiment is a coincident indicator at best, not predictive. It often moves opposite consumer spending, as people have a long history of saying one thing and doing another. Feelings often don’t drive actions. If sentiment were predictive, it would be a self-fulfilling prophecy, and neither recessions nor expansions would end.

Social Democrat Lofven Wins Swedish PM Race as Populists Left in Cold

MarketMinder’s View: More than four months after an election yielded a hung parliament, Sweden finally has a government. The new prime minister is the same as the old prime minister: Stefan Lofven, leader of the center-left Social Democratic Party. They will join with the Greens, Liberals and Centre Party, with the tacit blessing of the Left Party, which has agreed to support the bloc through abstentions. On the outside looking in are the anti-EU, populist Sweden Democrats many feared would accumulate power. The new hodgepodge coalition unites the center-right and center-left and has a rather ambitious agenda, but Lofven will likely face many challenges bridging the gap between parties that are ideologically worlds apart—a recipe for gridlock, which should be fine for stocks. Compounding gridlock: The Left stated it wouldn’t sit quiet if it saw extreme legislation proposed. Moreover, Lofven’s reelection continues an EU-wide pattern of populist, euroskeptic firebrands failing to garner enough support to fulfill their headline-grabbing campaign pledges (see: the Netherlands and France). Sweden’s case suggests the populist wave many feared would cover Europe seems less and less likely—another instance of reality beating expectations and reducing European political uncertainty.

UK Retail Sales Fall Worst Since May 2017

MarketMinder’s View: UK retail sales fell -0.9% m/m in December, missing expectations. Excluding auto fuel, retail sales fell -1.3% m/m—the biggest drop since May 2017. Some claim Brexit is to blame. But did the Brexit Grinch really steal Christmas? Or did Brits simply do most of their holiday shopping in November, snagging Black Friday deals? While it is difficult to measure how much Brexit played a part (if at all), in our view, November’s retail figures—which rose 1.3% m/m and 3.4% y/y—suggest December’s m/m deceleration is more a reflection of changing consumer trends than Brexit fears, as Black Friday gains more traction across the pond with each passing year. Moreover, not only are monthly data variable, but retail sales represent only part of consumer spending. They exclude spending on services, which is a big chunk of the UK economy. Thus, it seems difficult to draw sweeping conclusions, especially considering all these data are backward-looking.

US Industrial Production Rises Slightly More Than Expected in December

MarketMinder’s View: “The Fed said industrial production rose by 0.3 percent in December after climbing by a downwardly revised 0.4 percent in November. Economists had expected industrial production to edge up by 0.2 percent compared to the 0.6 percent advance originally reported for the previous month.” The larger-than-expected rise came as manufacturing surged 1.1% m/m—its largest increase since February 2018—and mining output rose 1.5% m/m. One month of data isn’t all-telling—especially since industrial production ebbs and flows often and represents just a slice of GDP (less than 20%). However, in our view, December figures indicate the US economic expansion is faring just fine, despite yuletide volatility—and they provide a notable counterpoint to fears over a large drop in ISM’s December manufacturing PMI.

Corporate Europe Faces ‘Unbearable’ Uncertainty Over U.K. Exit

MarketMinder’s View: MarketMinder does not recommend individual securities—rather, this article demonstrates a theme we wish to highlight. That theme: While businesses in the UK and Europe are unhappy with Brexit uncertainty, they aren’t sitting on their hands. “Many big companies have already spent millions of dollars locking in extra parts and storage space ahead of time, and planning out alternative supply lines in case confusion overwhelms British and European ports.” As illustrated here, a French pharmaceutical firm set up contingency plans more than a year ago to prevent shortages and ensure its scheduled delivery of insulin runs on schedule. Similarly, a British industrial company has explored alternative ways to transport their aircraft engines while accelerating production in anticipation of customer demand. Those are just two examples, but they demonstrate how firms are coping with the uncertainty. While getting on with a Brexit deal should resolve much of this uncertainty—likely to the relief of those business managers tasked with creating contingency plans—these anecdotes exemplify why we don’t think Brexit should derail economic activity. For more, see yesterday’s commentary, “A Noisy Two Days in London Leaves the Status Quo.”

The U.S. Economy Is Flying Blind With a Sputtering Engine

MarketMinder’s View: With the longest US government shutdown in history closing in on the one-month mark, some experts are starting to worry the negative economic fallout is adding up—and without government data, we don’t even know the extent of the damage. While the shutdown is producing hardships for some folks, consider: Government activity comprised less than 13% of GDP in 2017 (with the federal government tallying about 4%). About 75% of that government activity is funded through September, so losing part of a small slice of GDP for a month lacks the scale to dent the private sector-dominant economy. That is true even when you consider the downstream impact on consumer spending from the estimated 800,000 affected workers who are on furlough or working without pay. 800,000 is a big number, but it pales next to the 127.9 million people employed in the private sector at last count. It is also slightly less than the entire working population of Idaho. If Idaho just stopped working for a month, the US probably would not go into recession. Moreover, much of the shutdown-impacted economic output isn’t destroyed. Rather, it is delayed or transferred elsewhere as workers and industries adjust. As for the measurement issues, while the US government produces many fine statistics, they aren’t the only game in town: Businesses and other entities compile and track their own data too, so they aren’t “flying blind.” (P.S. The entire analogy of an economy “flying blind” is a little off, as it presumes there is a pilot reliant on data to steer us toward growth. But economic growth is the spontaneous result of hundreds of millions of people taking actions to consume, invest, save, work and more.) For more, see our 1/7/2019 commentary, “Day 17: Stocks and the US Government Shutdown.”  

Why Greece’s Road to Elections Runs Through Macedonia

MarketMinder’s View: In non-Brexit political news, following the government’s victory in yesterday’s confidence vote, Greece still faces the prospect of early elections due to a naming dispute with the Republic of Macedonia, a long-running sore spot between the two nations that is rooted in ancient conflict. This piece provides a succinct rundown of the relevant history and controversy, but the upshot: If the Greek parliament fails to ratify the agreement resolving the dispute, Prime Minister Alexis Tsipras may have to call snap elections rather than wait for his term’s scheduled end this autumn—potentially adding some political uncertainty to the eurozone’s Emerging Market. However, as a sign of how far sentiment has moved on from Greece as a headline grabber, few mainstream financial media outlets are fretting over the prospect of a Greek vote and potential uncertainty it could bring. It seems most acknowledge Greece’s issues, whether economic or political, lack the scale to meaningfully impact the eurozone, let alone global markets. And with Greece having met its austerity commitments and exited its bailout, prospective leadership changes just don’t carry the international weight they did even four years ago. Though some stubborn European ghost stories persist, others, like Greece, appear to have lost much of their fright factor—a positive for sentiment, in our view.

Forget Gold: These Are the Real Safe Haven Assets That Will Make You Money in a Sell-Off

MarketMinder’s View: When markets get volatile and/or uncertainty picks up, many investors feel the desire to hold something “safe.” In this case, “safe” often means “something less volatile than stocks.” Some of the options listed here—gold mining stocks, song royalty funds, index-linked bonds and currencies—purport to “protect” your money during volatile times while helping you “grow your money at the same time.” In our view, this is an attempt to have your cake and eat it too—growth with capital preservation—and a dangerous investing fallacy. Moreover, while volatility is a risk, it isn’t the only one investors face. For example, liquidity matters, too. Niche investments tend to be illiquid, which makes it difficult to access your money should you need it in a jiffy. Song royalties may sound enticing, but are classic rock royalties really a sure thing in an age where song supply is basically infinite? Instead of trying to find investments to take the sting out of short-term volatility, we think investors should ask themselves an important question: What are your investment goals? If you require long-term growth, we believe owning a globally diversified portfolio with stocks makes sense—depending on your individual objectives, time horizon, cash flow needs and circumstances. To enjoy stocks’ historical long-term gains, investors must accept short-term volatility as the price. As difficult as that can be—especially following a year like 2018—we believe sitting tight is generally the most prudent move investors can make when short-term volatility strikes. For more, see our 1/4/2019 commentary, “Cash Is a Fickle King.” 

France Triggers €50m Contingency Plan in Case of No-Deal Brexit

MarketMinder’s View: If you are looking for more evidence Brexit isn’t catching businesses or governments off guard, see the latest from French Prime Minister Édouard Philippe: “Five decrees will be issued ‘within the next three weeks’ including authorisation for major investment in new infrastructure such as border control checkpoints, roads, lorry parks and warehouses at the ports and airports ‘most concerned’ by the prospect of no deal, Philippe said. Authorities will also start hiring 600 extra government employees to deal with the consequences for cross-border trade of the UK leaving the EU without a deal, including customs, veterinary and other inspectors to carry out the necessary checks on goods, livestock and food products.”

Why Investors Should Look Past Brexit

MarketMinder’s View: As headlines spin over the latest developments between UK Prime Minister Theresa May and Parliament, all the noise may make it difficult for investors to see the fundamentals underlying the UK economy. This article makes a couple solid high-level points—e.g., expectations have turned far too pessimistic today—but some of the evidence seems a bit off, in our view. For example, we don’t think UK “austerity” and falling savings ratios are responsible for slower UK GDP growth. For one, the data suggest UK austerity is a myth—total public spending hasn’t fallen once since austerity’s alleged start in 2010. Moreover, valuations alone don’t make UK stocks a buy today—particularly compared to eurozone stocks. Valuations, at most, indicate sentiment, and in our view, dour sentiment is clouding many investors’ views of the underappreciated positives underpinning both the UK and the eurozone. The titular sentiment is sensible, in our view—successful investing usually requires tuning out the noise—but investors should be bullish for sound, forward-looking reasons, too. For the latest on Brexit, please see today’s commentary, “A Noisy Two Days in London Leaves the Status Quo.”

Diversification Is (Almost) Undefeated

MarketMinder’s View: As the nifty chart in this article illustrates, stocks’ (the S&P 500 since 1926 for these purposes) frequency of positivity really bear out over time: “On a daily basis, it’s more or less a coin flip between being positive or negative but the further out you extend the time horizon the better your chances of success.” Now, past performance isn’t representative of future returns, and year to year, market returns can vary greatly. However, as concluded here, “the longer you extend your time horizon, the better your chances are of having a positive experience in the markets.” The article’s discussion of blended stock-and-bond portfolios also highlights a core point: Though even bonds see wiggles that could give you pause month-by-month or year-by-year, the solution is thinking longer term and remaining focused on your goals and needs. The data illustrate the volatility-dampening benefits for those with shorter time horizons, which is really why they have a place in portfolios, in our view. Now, as to how you calibrate a mix of stocks, bonds, cash and other securities, that should always hinge on your goals, needs and comfort with the inherent risks and volatility.

Uncertainty on Wall Street Is at a Record High

MarketMinder’s View: We highlight this article not to criticize the sentiment gauge discussed here, but rather, as a friendly reminder that investors should always dig into a metric’s methodology and understand how it works. For example, the Global Economic Policy Uncertainty Index “analyzes three main elements: News mentions of terms that suggest economic uncertainty; expiring federal tax code provisions, and disagreement among economic forecasters.” While we could debate the pros and cons of including these data—sentiment overall is a squishy stock market driver to measure—consider: The index’s previous all-time high was January 2017, when President Donald Trump took office. That dwarfed October 2008—the throes of the Financial Crisis, which we think is a little sketchy? That comparison alone reveals some of the limitations of using sentiment-tracking data on a forward-looking basis. For more on how to break down gauges, please see our 8/4/2017 commentary, “From the Annals of Badly Constructed Indicators.”

Straightforward Facts About the American Economy

MarketMinder’s View: If the media’s coverage seems gloomy nowadays, don’t take their word for it—plenty of tools exist for you to check yourself! This article offers some good tips on how: “One of my favorite sources of information today is the St. Louis Fed’s FRED database. A brief visit there can go a long way toward exposing as dubious — and in many cases as flat-out wrong — many commonplace assertions about the modern economy.” And after reading this article, check out the following page on FisherInvestments.com for more sources of economic and market data: Helpful Links for Market & Economic Data.

Forest Fires, Guitar Strings and the Economy: Why the Next Recession May Be Short and Shallow

MarketMinder’s View: Here is some interesting research, courtesy of the Cleveland Federal Reserve: “After examining the effect of business cycles on the economy as a whole and individual states in the postwar era, they basically found no evidence that long periods of growth are followed by devastating downturns like [2008’s]. The most recent example was the shallow six-month recession in 2001. It followed a record 120-month expansion from March 1991 to March 2001.” What causes the next recession—rather than the expansion’s duration—will determine its magnitude. For now, though, leading indicators suggest further growth ahead and argue against a recession starting any time soon.

U.K. Parliament Rejects Theresa May's Brexit Deal in Pivotal Vote

MarketMinder’s View: The votes are in, and UK Prime Minister Theresa May’s Brexit proposal lost by more than 200. With three working days to present Parliament with a revised plan, she may meet with EU heavyweights to see if they will offer concessions, particularly regarding the Irish backstop. The Labour Party has called for a no-confidence vote, which is scheduled for Wednesday and could lead to May’s replacement or snap elections. Or not! The political fallout is in flux, as are Brexit negotiations. As the March 29 deadline to exit the EU—deal or no—approaches, few options are off the table, including a deal, a deadline extension, a no-deal exit and even a second referendum. We won’t try to handicap potential outcomes here, but any resolution would be welcome, in our view. With little clarity today, UK businesses can’t activate Brexit contingency plans. The sooner they know what to expect, the sooner they can get on with it.

China Dec New Loans Beat Forecasts, Hit Record $2.4 Trillion in 2018

MarketMinder’s View: Chinese policymakers have long sought to crack down on risky shadow banking without squeezing credit too much. While loan growth slowed last year, the overall credit picture doesn’t appear as bleak as frequently portrayed. “For 2018 as a whole, China’s loan growth looked solid, with banks extending a record 16.17 trillion yuan in new loans—more than the gross domestic product of Italy. … The total was nearly 20 percent more than the previous all-time high in 2017.” December figures also handily beat expectations for (typically soft) yearend loan growth, potentially indicating previously implemented stimulus measures—like lower bank reserve requirements, lower interest rates and small business lending quotas—are starting to take effect. More is likely on the way, as Chinese officials announced plans today for additional tax cuts. Given the government’s commitment to preserving social stability as it trims financial sector excesses, we think a “hard landing” remains unlikely.

Maxine Waters Takes the Reins of a Powerful House Committee. Wall Street Is Nervous.

MarketMinder’s View: Please note: While this article delves into politics and highlights a specific legislator—Democratic Rep. Maxine Waters, CA, the new House Financial Services Committee Chair—we don’t favor any party or politician. Neither do stocks, which care about policies, not personalities, and we are highlighting this article to reiterate this timeless point, because it is all about personality. While this particular committee head’s party may control the House, giving her some say-so over legislation in that chamber, the other party controls the Senate and White House, making it highly unlikely that contentious actions in the House become national policy. Regardless of the ideological leanings and agenda at hand—and whether you love or loathe them—focusing on committee leadership overstates their influence. Committees can hold hearings, launch investigations and determine whether bills make it to the House or Senate floor, but this is a far cry from garnering bipartisan support for sweeping legislation that could rattle stocks. While media like to focus on rivalries and personalities, larger structural factors typically hold sway—like a split Congress in which a Republican-controlled Senate would have to sign off on any bills. The longest-and-counting (and not bad for stocks) partial government shutdown suggests this sort of harmony isn’t likely. Moreover, the growing number of Rep. Waters’ Congressional colleagues announcing 2020 presidential runs probably have little appetite (or time) to ram through potentially controversial reforms that may polarize voters. For more, see our 1/7/2019 piece, “Previewing the 116th Congress.” 

Italy Passes a $34 Billion Vote of Confidence

MarketMinder’s View: In the first Italian sovereign bond auction since the Italy/EU budget standoff ended, “… it looks like the country has successfully raised a multi-billion euro deal for 16-year maturities at an acceptable premium of 18 basis points over its existing benchmark yield [3.2%]. Demand from investors exceeded 30 billion euros ($34 billion), way ahead of supply.” This is nice, but it isn’t a sea change in demand for—or the affordability of—Italian debt. Last June, amid worries over the government’s spending plans, Italy’s Treasury rolled over 10- and 50-year debt at lower rates than the maturing bonds in an oversubscribed auction. The same happened today, as the maturing bond this issuance replaced had a 4.25% coupon, according to the Italian Treasury. In other words, Italy’s debt stock got a bit cheaper today, helping debt service payments remain near generational lows relative to GDP. So in our view, this story speaks more to gradually fading fears of political instability endangering Italy’s finances, which have long weighed on sentiment towards the eurozone. While fears of a eurozone slowdown linger, having one fewer bogeyman is bullish, in our view.

China's Exports Shrink Most in Two Years, Raising Risks to Global Economy

MarketMinder’s View: “China’s December exports unexpectedly fell 4.4 percent from a year earlier, with demand in most of its major markets weakening. Imports also saw a shock drop, falling 7.6 percent in their biggest decline since July 2016. Analysts had expected export growth to slow to 3 percent with imports up 5 percent.” While not great, we suspect the decline at least partly reflects some trade getting pulled earlier into the year as businesses on both sides of the Pacific raced to beat new tariffs. That seemingly caused imports and exports to spike in the summer, and now we may be seeing the aftereffects. Now, it is way too soon to know how long this reversal will last, especially since the Lunar New Year’s shifting calendar placement tends to skew year-over-year growth rates in January, February and even March. So it will be difficult to get a very reliable read on Chinese data for the time being. However, recent history shows a prolonged decline in trade—however unlikely—isn’t an insurmountable negative for China’s economy. Imports and exports fell for much of 2016, without sparking the long-feared hard landing. With China’s economy increasingly more reliant on services than heavy industry and trade, we doubt it turns out different this time. Overall, we continue to believe a hard landing is unlikely, particularly with several rounds of fiscal and monetary stimulus only just starting to kick in.