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.


Trump Lays Into the Federal Reserve, Says He’s ‘Not Thrilled’ About Interest Rate Hikes

MarketMinder’s View: All right folks, we are wading into potentially partisan waters, so remember: Our analysis is politically agnostic, and bias of any kind is blinding in investing. First, here are President Trump’s comments that have media in a tizzy: “I’m not thrilled … Because we go up and every time you go up they want to raise rates again. I don’t really—I am not happy about it. But at the same time I’m letting them do what they feel is best.” Media surmises this is newfangled and dangerous—Trump encroaching on the Fed’s independence, which is necessary to avoid monetary policy being dictated by political pressure. But that seems a yuuuuuge stretch at this point. In theory, the Fed losing its independence would be bad. But one interview—in which the President also said he’ll let the Fed do what it thinks is best—is not compelling evidence that is happening. Moreover, it isn’t unprecedented either. Last year—while considering who he would nominate for Fed head—Trump said he “likes low interest rates.” How is that so different? In our view, the doomsday reaction to Trump’s Fed comments is another sign of the media’s propensity to latch onto and hype up the President’s every word. Considering much of the coverage is negative, this queues up positive surprise power if reality proves more benign than feared. Remember when folks feared a market crash after Trump was elected in 2016? Almost two years later, the economic expansion and bull market have charged ahead. We aren’t arguing Trump is good for markets—no politician is inherently good or bad for stocks. Rather, stocks move most on the gap between sentiment and reality, and with Trump worries weighing on sentiment, it sets a lower bar for reality to clear—a bullish development.

Ireland Open to New Proposal on Brexit Border

MarketMinder’s View: The Irish border question has been one of the most contentious points throughout Brexit negotiations. Last December, UK Prime Minister Theresa May agreed to the idea of a “backstop” solution that would maintain a soft border between Northern Ireland and the Irish Republic, though she rejected an EU proposal of treating Northern Ireland as a separate customs area. After releasing its Brexit White Paper last week, the May government is now calling on Brussels to get beyond its “unworkable” position and figure out a compromise that would maintain “near-frictionless trade.” For its part, the Irish government said it is open to a new proposal, but only if it is better than the current one—and legal. While the EU has yet to officially respond, sudden acquiescence to May’s pushback doesn’t seem likely—as noted herein, if they did, it is likely other countries on the EU periphery would want the same. However, as contentious and charged public comments as can be, this is par for the course for Brexit talks. White Papers and responses to White Papers provide a sense of the parties’ priorities, but just about every big sticking point is far from resolved. However, the very public nature of these developments saps away Brexit’s ability to whack markets with a negative surprise. We may not know what Brexit will look like in its final form, but it probably won’t be a shock when it arrives.

The Winners and Losers From the New ‘Kiddie Tax’

MarketMinder’s View: The titular duty refers to a “special levy on a child’s ‘unearned’ income above $2,100. It typically falls on investment income such as dividends, interest and capital gains, and it doesn’t apply to a youngster’s earned income from mowing lawns or designing websites.” Last year’s tax reform changed some of the rules starting this year, as a child’s unearned taxable income will be taxed at trust rates rather than at their parents’ rate. Though this makes it simpler, it could mean some surprises for folks. Here is an illustrative example: “Say a full-time college student has a high-earning grandparent, and his parents have taxable income of about $150,000. To help with tuition, the grandparent gives the student stock to sell that has a long-term gain of $40,000. Under last year’s Kiddie Tax, the grandson would have owed tax of nearly $5,700 because his parents’ capital-gains rate was 15%. Under the new law, his tax bill will rise to nearly $6,600, because a chunk of the gain is now taxed at the top rate of 20%.” There are ways to address this—e.g., the grandparent could give the stock to the parent, who can then sell and give to the child—but it will depend on an individual’s specific situation. Make sure to consult your tax advisor to figure out the best strategy for you.

Pareto

MarketMinder’s View: A chart showing the five largest stocks in the S&P 500 have the same market capitalization of the bottom 282 stocks combined—shown in this article—went viral on the Twitter recently. Many interpreted the chart as a sign the bull market is dependent on the success of a handful of Tech giants, with some echoes of the 2000 Tech Bubble. However, this analysis provides some helpful context (and charts!) of why that isn’t the case today. Also, for those concerned that the S&P 500’s gains are top heavy, consider: Out of the S&P 500’s 10 market cap deciles, 9 are positive. The first decile—the largest 50 stocks—is one of the top performers, but the fourth and seventh deciles have done even better. Point is, for all the attention the biggest stocks get, they aren’t alone in driving this bull market.

Italian Markets Rattled After Tria’s Future Is Thrown Into Doubt

MarketMinder’s View: If you aren’t familiar with Italy’s Finance Minister Giovanni Tria, he is the gentleman who helped the Five Star Movement (M5S)-League coalition enter government. In late May, a M5S-League coalition effort failed after President Sergio Mattarella rejected the coalition’s first FinMin choice, noted euroskeptic Paolo Savona.  Both M5S and the League decried the president’s decision, and the threat of new elections loomed. At the 11th hour, however, M5S, the League and the president reached a compromise—euro-friendly Tria. Now, not even a month and a half later, Tria seems to have lost favor with party leaders Luigi Di Maio and Matteo Salvini. The deputy prime ministers disagree with Tria over nominations for a state bank and may be looking for his resignation (under Italian law, even the prime minister can’t fire a government minister). While Di Maio and a Treasury official denied the reports, headlines claimed this hurt confidence in the new Italian government. To us, however, this shows how difficult it will be for the M5S-League coalition to pass meaningful change. Besides bickering with each other, they must also contend with other government officials who may not share their views. This leads to gridlock, and while this article claims that is a negative, we believe it is an underappreciated positive, preventing the rollback of reforms or passage of sweeping legislation markets dislike. For more on why, see Jamie Silva’s column, “A Primer on Political Risk.”

Fed Report Shows Concerns Mounting Over Tariffs

MarketMinder’s View: “Manufacturers in every one of the Federal Reserve’s 12 districts worried about the impact of tariffs, a US Federal Reserve report said on Wednesday, even as the US economy continued to expand at a modest pace.” Not to go all dismissive on you, but this—along with many other sentiment readings showing similar results—seems like pretty strong evidence the latest tariffs are reflected in stock prices already. Not just because the dollar amounts involved are widely known, but because business leaders and investors alike have spent considerable time mulling what would happen if they were to snowball, and they have succumbed to fear. Meanwhile, they have made buying, selling and holding decisions in the stock market. Current prices are a result of all the trades they have placed while holding those fears. So stock prices over the next year or so will partly reflect how reality differs from these fearful expectations—in other words, whether there is a surprise. A bad surprise would probably be quite bad for stocks. But a good surprise, like tariffs not turning into a global trade war and the economy not imploding, would probably be quite happy for stocks. We have been watching this saga for months, and we still think the second scenario (the good one) is the likelier of the two.

Britons Shun Clothes Shops as Heat Wave and World Cup Push Up Food and Drink Sales Instead

MarketMinder’s View: Seems about right to us—during an epic heatwave, it is human nature to think about ways to shed as much excess clothing as possible, not to go hog wild at the haberdashery. And during World Cup season, it isn’t surprising that people would seek heat relief at the pub, where cool drinks flow and a match is always on, rather than an air conditioned boutique that won’t let you lounge. In other words, this indeed just seems like typical monthly data variability, especially with June’s 0.5% month-over-month drop coming on the heels of two months when Royal Wedding mania boosted sales far above normal.

House GOP Push to Extend Tax Cuts Meets Resistance in Senate

MarketMinder’s View: In the immortal words of Phil Hartman, Gridlock! The House is mulling three tax-related bills—one to make last year’s individual income tax changes permanent, one to add incentives for retirement saving and one to “promote innovation.” They are planning a September vote, and Senators’ response for now seems to be a collective “that’s nice.” Those up for re-election in November have already shifted into campaign mode and either don’t want to upset the apple cart or prefer to use taxes as a wedge issue on the campaign trail. And with 60 votes needed to clear procedural hurdles to passage, the tax bill has about a snowball’s chance in a chamber whose partisan balance is presently 51-49. So for now, we doubt it is worth spending much energy dissecting the finer points of any House tax proposal.

US Crude Oil Output Hits 11 Million bpd for First Time Ever

MarketMinder’s View: Neato! And a big reason we don’t expect oil prices to surge. Fast-rising US output boosts global oil supply, which is growing well enough to meet rising demand. Infrastructure bottlenecks may crimp Texan production, as this piece notes, but other shale oil fields have more capacity, so production growth seems unlikely to stall out any time soon.

How to Calculate Your Net Worth

MarketMinder’s View: A good primer for anyone who wants to get a better understanding of their own financial situation. Knowing your net worth—assets minus liabilities—is also a key first step to long-term goal setting, as it can help you know how much you need your retirement savings to grow over time to provide for your needs. We’d just go one step further and calculate liquid net worth, which excludes assets like your home and focuses on financial assets like stocks, bonds, cash and other securities.

Italy Drives in Reverse

MarketMinder’s View: As this piece notes, Italy’s new populist coalition government has introduced some legislation to undo prior governments’ labor market and pension reforms—measures that benefited Italy’s public finances and gave businesses more hiring flexibility. Though most observers believe they helped the economy and most normal folks, they were politically unpopular. Hence the drive to undo them, which seems to be happening at the expense of other, potentially beneficial changes like a flat tax. We agree undoing these reforms would be a setback. However, we think the commentary overlooks a crucial factor: The coalition controls only 53% of seats in the lower house, and it doesn’t exactly have a uniform ideology. The Five-Star Movement is a hodgepodge of leftists and “techno-libertarians.” The League is hard right. The likelihood they can agree on the finer points of any legislation to radically overhaul the labor system seems low for now.

Opinion: The Idea of ‘Investing in What You Know’ Is More Dangerous Than You Think

MarketMinder’s View: Despite some quibbles, we agree with this study’s core conclusion: “People tend to conflate their sense of understanding of what a company does with the risk of investing in the company. When we think we understand what a company does, like making great chicken, we judge it to be a safer investment. Unfortunately, people’s sense of understanding of what a company does is completely worthless as a guide to actual risk, meaning that relying on it is an unwise investment strategy.” As Ken Fisher asked in his book The Only Three Questions That (Still) Count, what do you know that others don’t? Unless you have information nobody else does, the stock market—which discounts all widely known information in real time—has likely already priced it in. Moreover, folks tend to overstate their knowledge of a company, focusing perhaps on a product they like and less on important information like future profitability, sector trends and the like. For investors, it isn’t what you know necessarily that matters as much as what everyone else does. As for the quibble, we disagree with assessing a stock’s “actual risk” with volatility or rate of return metrics, which are usually based on backward-looking information. The ultimate risk with any stock is the loss of your investment—and constructing a well-diversified portfolio helps mitigate that risk.

Here’s the Question You Really Want to Ask Your Financial Advisor

MarketMinder’s View: As well-meaning as regulatory standards may be, it behooves investors looking for an adviser to conduct their own due diligence. “If you’re working with a financial advisor, you want to make sure you have ‘the talk.’ And that conversation should be around exactly how you are paying them. ... ‘Do I pay you directly as the client, or do you receive commissions based on the products or services you provide?’” This is a fine start, but we would go further. What are all the costs and fees attached to various products and services they offer? Are they in-house or external? Keep asking questions until you fully understand what they are about. Ask about their experience, customer service and record of success meeting clients’ financial goals. Get a sense of their values. Government regulations can’t ensure an adviser has your best interests at heart, only you can.

4 States Sue US to Void Cap on State and Local Tax Deduction

MarketMinder’s View: Ever since Congress passed tax reform last year, folks have sought creative workarounds—especially for state and local tax (SALT) deductions, which hit high-tax states like New York and California particularly hard. In this case, four states—New York, Connecticut, Maryland and New Jersey—have sued the federal government to void the $10,000 cap on federal deductions. Legal opinion is mixed, and because your friendly MarketMinder editors aren’t legal experts, we won’t prejudge the outcome. However, taxes are Congress’s domain, so the states are likely facing an uphill battle in any attempts to circumvent the law. Again, we don’t know how this case will get resolved, but for investors, this is another reminder legislative change’s effects aren’t knowable in advance. Whatever the outcome, though, markets likely won’t be surprised as this grinds out slowly in court.

Europe Is Said to Explore Talks With Trump on Car-Tariff Cut

MarketMinder’s View: While most fret over tariffs’ potential ill effects, few notice another possibility: freer trade. To wit: “[European Commission President Jean-Claude] Juncker will likely signal the EU’s willingness to consider a so-called plurilateral sectoral deal to reduce car tariffs between the two sides as well as other major car-exporting countries, said one of the officials, who asked not to be identified because preparations for the meeting are ongoing.” Now, usual caveats against taking unidentified sources at their word apply, but in our view, escalating tariff retaliation dominates headlines, obscuring the chance of lower duties and more trade. Next week’s discussions could go nowhere, the auto industry may be disappointed and more proposed tariffs could go through, but with the expectations bar set so low and sentiment pessimistic, the potential for upside trade surprises has risen, in our view.

Unless the Fed Changes Course, a 2019 Recession Collision Is the Most Likely Outcome

MarketMinder’s View: From a high level, we agree with the spirit of this article: An inverted yield curve commonly precedes economic trouble. However, we disagree with the conclusion—that the Fed is about to hike us to recession. First, it presumes Fed rate hikes are predetermined, and that any sort of “forward guidance” is a blueprint for how the FOMC will act. But Fed folks change their minds often, and in our view, their decisions aren’t predictable. Second, it uses the 10-year minus 1-year Treasury yield spread as its yield curve measure. We don’t believe this spread is as telling as using the fed-funds rate or 3-month rate since banks fund their lending at much shorter-term rates (and oddly enough, this analysis acknowledges this point). The spread between the 10-year and the effective fed-funds rate suggests our central bank has room to hike. Finally, the second graph in this piece suggests credit and money supply are already contracting—but they aren’t. Indeed, total bank credit and broad money supply—unlike the narrower measures used here—are growing nicely. For more on why yield curve and Fed fears are overrated, please see our 7/10/2018 commentary, “Evaluating ‘Flat Yield Curve’ Fears.”

Three Metrics of Stock Market Overvaluation

MarketMinder’s View: This article cites commonly used—but in two cases very flawed—measures to value the stock market: the cyclically adjusted price/earnings (CAPE) ratio, stock market capitalization to GDP and the price-to-sales ratio (PSR). As we have noted before, CAPE is a bizarre and tortured way to “normalize” earnings—that is, get a sense of stocks’ earnings trend. It averages 10 years of backward-looking earnings data and then adjusts for inflation. Yet stocks are forward-looking, and CAPE tells you nothing about future earnings streams. GDP also has little to do with stocks’ direction. As mentioned, investors care about stocks’ future earnings prospects for public companies, but GDP is an estimate of national economic output—both the public and private sectors (and is also backward looking). PSR is a fine metric—Fisher Investments’ founder and Executive Chairman Ken Fisher pioneered it with great success to help identify overlooked value stocks in the past—but that advantage has been priced in, and the ratio’s underlying information is also backward-looking. We aren’t denigrating valuations—some, like the forward price-to-earnings ratio, can give you a sense of sentiment—but nothing about them tells you where stocks are headed next. (And one final quibble: A correction is a short, sharp, sentiment-driven drop of -10% to -20% or so. They are normal during bull markets, and we don’t believe they can be forecast with any reliability. A bear market is a longer, fundamentally driven decline of -20% or more, and unlike corrections, we believe they can be identified. We add this color because this analysis seems to interchange these terms loosely.)

Retirement Bills in Congress Could Alter 401k Plans

MarketMinder’s View: Tax-advantaged retirement saving may get an overhaul if bipartisan plans currently wending their way through Congress survive. “Among the proposals Congress may consider are a new type of savings account that is more open-ended than current vehicles, ways to encourage savings that can be tapped in an emergency and the repeal of a provision that prevents people over age 70 ½ from contributing to Individual Retirement Accounts.” It is too early to say whether any of this becomes law, but we welcome any proposals making it easier for folks to invest for their retirements. That said, one bill would “encourage 401(k)-style plans to offer annuities,” which we take a dim view on. In our experience, most annuities make it more complicated and expensive for investors to reach their financial goals—we believe there are better options out there.

The Outrage Epidemic

MarketMinder’s View: Though on the longer side, we recommend this piece to all MarketMinder readers. It is a tremendous analysis of today’s media environment and the many opportunities—and challenges—facing consumers. For all the handwringing over how to address “fake news,” the responsibility isn’t with the government or the businesses to figure out the solution—it is on us, as readers, to ensure we are healthily skeptical and engage with and question what we read and watch. That doesn’t mean it is easy—we all carry our own biases and beliefs. However, if we want to make sound decisions that factor in the news—particularly relevant for investors—we must intake perspectives from both sides and be humble enough to admit when we don’t know something rather than double down on a flawed opinion. And to keep perspective, it never hurts to turn off the screen and spend that time with good company instead. For more ways to sip facts from the firehose of opinions, please see Elisabeth Dellinger’s 3/10/2017 column, “How to Analyze Alternative Facts and Ferret Out Fake News.”

Honey, I Shrunk Our Income Gap

MarketMinder’s View: As we regularly share here on MarketMinder, all data have limitations, so investors must treat all numbers with a healthy skepticism. Consider this telling example from a study of Census Bureau data: “Couples where the wife earns more than the husband systematically overreport his income and underreport hers. … In a society where males are still often defined by their ability to be ‘breadwinners,’ couples are clearly uncomfortable with new economic realities. And apparently they are frequently resolving that discomfort by lying about it — not with flagrant lies, but with little cheats that nudge them in the direction that better conforms with social norms.” The upshot is the spousal income gap looks several percentage points larger than it would otherwise appear. That particular takeaway falls more in the realm of sociology—which doesn’t drive markets—but there is a broader lesson any news consumer can benefit from: “Don’t put too much faith in self-reported data that can’t be verified by other means. When you see reports about how people answered a researcher’s question that might reflect on them socially in some way, be skeptical. Remember that there’s always a gap between our self and the face we present to the world.”