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: We are of two minds on this article. On the one hand, this piece nicely sums up what moves stock prices most: “It is not the current situation that matters, but what investors have already priced in about the future and how that world view shapes up against the unfolding reality. If the consensus view of the world is negative, markets only need the outlook to become a bit less pessimistic to deliver investors attractive returns.” Yep! But on the other hand, the titular reasons to be bullish about future economic growth—easing US-China trade tensions, support via Fed rate cuts and the US economy, and projected stronger earnings—seem a tad off the mark, in our view. The US/China trade tiff’s maximum costs are currently just 0.4% of global GDP, so a (hypothetical) deal before Christmas likely wouldn’t be an economic game-changer; Fed rate cuts aren’t automatic stimulus; neither employment data nor sentiment surveys are predictive for future US growth, and much of the rest of the global economy is faring better than appreciated; and forward-looking markets have already started pricing in the prospect of positive 2020 earnings. But even excluding these reasons, underappreciated positives still abound amid widespread pessimism. That still supports a bullish outlook for stocks, in our view.
MarketMinder’s View: First: MarketMinder doesn’t recommend individual securities. Any companies mentioned here here represent a broader theme we wish to highlight. One of investing’s most notable recent trends is the rise of ESG strategies—those that weigh a company’s history of environmental stewardship, social impact and corporate governance prior to buying shares. That said, as this article highlights, ESG can mean many different things to different firms. Having a good environmental history doesn’t necessarily mean excluding fossil fuel Energy firms, for example. It could! But it also may mean targeting “the highest ESG-rated companies in each sector” with an eye toward achieving returns that don’t skew far from traditional stock market indexes. That may even mean owning firms with a relatively poor or middling environmental record if they have high scores in social impact and governance. As one analyst quoted here points out, “‘The biggest frustration on behalf of investors is there’s no standardization within this industry.’” Hence, if you are invested in or are considering investing in an ESG approach, be sure to communicate clearly with your financial professional to understand what that term means to them—and whether it actually matches your aims.
MarketMinder’s View: Per the Office of National Statistics, UK Q3 GDP grew 0.3% q/q, meaning the British economy avoided fulfilling one popular definition of a recession—two or more consecutive quarters of negative GDP growth. While backward-looking, the report revealed some underappreciated positives. Exhibit A: the UK’s strong services sector, which grew 0.4% q/q and drove Q3 growth. “There were fears that Brexit uncertainty might have pushed the economy into further negative growth but Britain’s services sector—which encompasses a range of industries from film and TV production to banking and the high street—performed strongly enough to push the UK into positive territory.” Now, UK businesses may have stockpiled and pulled activity forward ahead of the First-October-Now-January Brexit deadline in preparation for a “no-deal” scenario. This appeared to be the case in Q1 2019 when companies were dealing with a March 29 Brexit deadline, but most pundits claim it wasn’t a big factor this quarter. Subsequent revisions will make this more clear and, if it did, then Q4 GDP may suffer as firms work through stockpiles—one way Brexit uncertainty roils growth. Another: “Business investment was the main drag on growth during the quarter after manufacturers cut back on upgrades to factories and purchases of new equipment.” Brexit uncertainty has discouraged risk-taking as companies wait for clarity, which is why we believe once politicians finally get on with Brexit—even the oft-feared no-deal scenario—businesses will finally be able to unleash pent-up long-term plans. For more, see our 10/31/2019 commentary, “Today in Brexit, Day 1,224.”
MarketMinder’s View: After the fourth general election in four years—and second in 2019—Spain’s political scene looks as murky as ever. Acting Prime Minister Pedro Sánchez’s Socialist Party was the top vote-getter, though they remain far from commanding a majority (they hold 120 seats, down from April’s vote result and far below the 176 needed to rule). The primary change between April and November: Far-right Vox surged into third place behind the Socialists and center-right Popular Party, supplanting the centrist, pro-business Ciudadanos Party. As this article also highlights, pundits are now speculating about whether the Socialists will form a government this time, or if voters will have to return to the booth for yet another election. We don’t know how these developments will play out, but Sunday’s results didn’t yield the falling uncertainty an election typically brings. Stocks generally prefer less active governments that can’t enact sweeping change, but many unknowns still surround Spanish politics. Getting resolution on that front would likely reduce uncertainty and unlock the benefits of bullish gridlock.
MarketMinder’s View: Per this piece, because the yield curve inverted a few months ago, trouble looms: “Once the yield curve has predicted recession, one usually follows even if that signal changes later.” However, “usually” isn’t always. Yes, the yield curve is a good forward-looking indicator of recession, but it isn’t ironclad and an inversion isn’t an effective timing tool. There are false reads, like inversions in 1978 and 1998. And even when an inversion does precede a bear market or recession, there is usually a lag—sometimes more than a year. The yield curve is telling because it is a decent proxy for loan profitability. But it isn’t exact, since banks borrow at market-set rates, not Fed-set overnight rates or long-term government bond rates. To gauge whether lending is still profitable, you must look at actual bank rates—which currently indicate bank lending is profitable. For more, please see our 5/30/2019 commentary, “More on America's (Small) Yield Curve Inversion.”
MarketMinder’s View: First, the numbers: October Chinese trade data surprised to the upside as exports ( -0.9% y/y) and imports (-6.4% y/y) both fared better than expectations of -3.9% and -8.9%, respectively. While most have attributed China’s weak trade numbers to its trade tussle with the US, we think reality is slightly more nuanced. Yes, tariffs and uncertainty have had an impact. But in our view, that headwind is a bit overstated, especially when trade can get rerouted to other Asian nations, then on to the US. That is likely behind the mild year-over-year dip in total exports. More broadly, weak trade data are consistent with other slowing components of the Chinese economy. The primary culprit of the slowdown, in our view: China’s crackdown on the shadow banking sector, which knocked small and mid-sized firms. That affected trading partners globally, particularly in Europe and Asia. While a completed US-China trade deal may buoy sentiment, don’t overstate its immediate economic effects, either—China’s slowdown extends beyond just trade. For more, see our 10/25/2019 commentary, “Why Slowing Chinese Growth Shouldn’t Spook Investors.”
MarketMinder’s View: We have a couple quibbles with this piece. The first: While many experts anticipate Germany entered a technical recession in Q3—commonly defined as two or more consecutive quarters of negative GDP growth—this isn’t certain. Second, this analysis focuses heavily on German industrial weakness but neglects to mention why the German economy isn’t in dire straits even if it did contract: Its services sector, which accounts for the majority of economic output, remains expansionary. Those points aside, we agree with the general thrust here that pundits’ German recession worries are far overstated. Trade uncertainty and the global manufacturing are taking their toll on Germany’s industrial sector, but that weakness looks more like a short-term pullback than a broad extended downturn. More importantly for investors, forward-looking markets have likely already moved on from this old news—and they recognize Germany’s economic reality isn’t nearly as poor as widely believed. For more, please see our 8/14/2019 commentary, “Putting Germany’s Q2 Contraction Into Perspective.”
MarketMinder’s View: With Halloween in the rearview mirror, the end-of-year whirlwind is upon us. Before you get completely swamped in the festivities, it may make sense to do a little prep for next year—particularly on the tax front. To help you get ready, herein lie some helpful ways to prepare, such as ensuring you have paid sufficient taxes for the year. It never hurts to get a head start on Tax Season 2020!
MarketMinder’s View: This article posits that US stocks’ outperformance versus stocks abroad is tied to a flood of foreign capital coming into America, buoying domestic returns. As evidence, it argues, “Foreign private holdings of U.S. stocks hit a record high of $7.7 trillion as of July, the most recent data available, according to Treasury Department figures. The data for foreign funds excludes holdings from sovereign-wealth funds and central banks, meaning overall international holdings are likely substantially higher.” The trouble with this is that doesn’t strip out market movement, a substantial omission. After all, the Russell 3000—a broad gauge of US equities—is up 20.5% this year. Over that span, foreign holdings of US stocks are up 14.9%, suggesting there is no flood of capital into America from abroad. Echoing this point, there is another data series from the same source—the US Treasury—that shows foreigners have yanked out more funds than they have put into US stocks this year. In our view, the story behind recent US outperformance is almost all about sector composition—America just has a bigger dose of Tech and Tech-like stocks than most non-US regions. When Tech leads, as it has this year, the US has an advantage.
MarketMinder’s View: Thursday’s big story: According to officials from China’s Commerce Ministry, the US and China have agreed to phase out some tariffs should they reach a “phase-one deal.” That claim is spurring further optimism the “trade war” is de-escalating, boosting sentiment. But, as noted here, these announcements are light on details and American negotiators have yet to confirm such an arrangement is part of the talks. There is also no assurance US-China trade talks will yield an actual agreement. So we would suggest not getting overly optimistic about a grand deal coming to pass soon. Regardless, while rolling back duties would be a positive—one less barrier for businesses to deal with—trade levies also aren’t the economic scourge headlines have bemoaned over the past year, with threatened and enacted tariffs amounting to just 0.4% of world GDP. For more, see our 8/7/2019 commentary, “Checking In on Tariffs’ Trade Impact.”
MarketMinder’s View: In today’s episode of “Bond Markets Can Also Be Volatile,” we go to Europe, where 10-year sovereign debt yields for several countries have returned to positive territory. “The move in European sovereign debt markets reflects fresh optimism on the state of the regional economy as trade tensions between the U.S. and China have cooled, the chances of the U.K. leaving the bloc without a deal have ebbed and the ECBs latest easing moves.” We aren’t convinced those given reasons for optimism are as causal as this makes it seem—after all, the ECB restarted long-term bond buying, which should lower rates, in theory. In our view, the likelier culprit is simply a sentiment wiggle—the same force that drove rates so far below zero in the first place. It seems to us perhaps it is starting to dawn on investors that Europe’s economic reality has been—and remains—far better than most appreciated. While headwinds persist (e.g., global manufacturing weakness and counterproductive monetary policy), the gap between expectations and reality is sizable in Europe. That is reason to be bullish, in our view.
MarketMinder’s View: As the UK prepares for December 12’s general election, politicians are starting to publicize their spending proposals to woo voters. Chancellor Sajid Javid’s plan involves “lifting the public investment target from a long-term average 1.8pc of GDP—and a nadir of 1.4pc in the austerity years—to the OECD level of around 3pc.” This article argues the commitment to higher public spending is both fiscally responsible and necessary (i.e., governments need to spend to spur slowing global growth). While we won’t opine on the policy choices here—our concern is solely on capital market impact—we agree the UK’s debt situation isn’t onerous today. Tax revenues easily cover today’s debt interest payments, so the UK could take on more debt and it wouldn’t be cumbersome for some time—especially at today’s low interest rates. However, whether the UK economy needs a fiscal boost is another matter. We aren’t pro- or anti- government spending, but in our view, the private sector generally does a more efficient job of allocating capital. Government spending tends to be most effective during recessions, when capital is hard to come by, as the article notes. The UK may not be expanding at a gangbusters rate today, but it isn’t contracting—and we suspect businesses will be more willing to unleash investment plans once Brexit clarity arrives. Keep that in mind as the Conservatives, Labour and other parties fill the airwaves with their plans to boost the economy.
MarketMinder’s View: Spanish voters return to the voting booth this Sunday, but the latest polls suggest no single party is likely to come close to wielding a majority—pretty much the status quo for recent Spanish politics. Political experts have outlined a number of outcomes ranging from incumbent Socialist Prime Minister Pedro Sánchez leading a left-leaning government to no government forming at all—prompting yet another election. For investors, the upshot: More gridlock is likely. That is usually quite bullish, but year to date, the MSCI Spain is up just 8.9% versus the eurozone at 19.8% and world at 22.1%. (All returns via FactSet with net dividends, in USD, through 11/7/2019.) We think two things are at work here: One, market composition. The gauge is heavily weighted towards Financials, which have disappointed this year tied to falling interest rates and odd ECB monetary policy. That said, since interest rates’ low in mid-August, returns have improved some. And two, while gridlock—the effect of all this infighting—is positive, how you get a government out of the multiparty morass is totally unclear. That almost prevents the typical falling uncertainty you get after an election, as has been the case since April. In our view, resolving this with a do-little government actually forming would be a plus.
MarketMinder’s View: “The Labor Department said Wednesday that productivity, a measure of economic output for each hour worked, fell 0.3% in the third quarter. … Weak productivity growth has been a hallmark of the current economic expansion, now in its 11th year.” Ordinarily, we wouldn’t comment on such a backward-looking statistic, but we think investors would benefit from correcting a couple of the article’s claims. First, it states weak productivity “is a key reason the overall economy has expanded more slowly than in previous expansions.” Well, perhaps to some extent, but productivity is only one economic input, and moreover, GDP isn’t synonymous with “the economy.” Capital is a key economic input, and with below-average money supply growth globally—a byproduct of misguided monetary policy—businesses aren’t accessing capital at the rate they otherwise might. Second, this piece goes on to argue “greater productivity is a key ingredient in raising living standards” since it drives faster wage growth. But the data don’t seem to bear this out. Despite productivity flipping between growth and contraction throughout this expansion, wage growth has accelerated. But contrary to the claim here, this needn’t spur higher inflation. As Milton Friedman explained, firms factor inflation into the wages they offer. Hence, saying wages drive inflation is equivalent to saying inflation drives inflation. Broad changes in money supply can impact the price of labor, but not the reverse.
MarketMinder’s View: Say what? Bankruptcy as an economic cushion? Yes, as it happens, at least in China. While officials have introduced many market-oriented reforms since the early 1980s, they have been loath to accept one key consequence: the prospect of failed companies. Instead, they have sought to shore up social stability by having local governments prop up insolvent firms, many of them state-owned. This makes the economy less efficient and results in distressed businesses’ assets sitting idle for years. One woman highlighted here used her family’s savings to buy a storefront in a building that was under construction in 2014. She was going to transfer her business there, graduating from a food cart to a full-fledged restaurant. Instead, she is still manning the cart because the project stalled out and, without bankruptcy proceedings to help sell off assets, no one could buy it and complete construction. She is also still out the money she paid. By allowing bankruptcies to proceed, not only can officials help people slowly get used to the risk of losing money—a key cog in financial markets—but they can ensure failed firms’ assets get liquidated and used to their potential. That is an overall economic positive.
MarketMinder’s View: Good news! You can now take even more advantage of the magic of compound growth by socking away an extra $500 (or $1,000 if you are age 50 or above) in your traditional 401(k) next year. Contribution limits will rise to $19,500 for most, plus $6,500 in extra catch-up contributions. If your employer matches your contributions, that is even more free money! If you contribute to a Roth 401(k) as well, your total defined contribution plan, um, contribution limit will rise from $56,000 to $57,000 (plus catch-up contributions, if eligible). Contributing an extra $500 annually may not seem like a lot, but it adds up. Using straight-line math and a hypothetical 8% return, contributing $19,500 instead of $19,000 adds up to an extra $129,528 in your account after 40 years. Sadly, IRA contribution limits are not going up next year, but the income limit for tax-deferred IRA contribution eligibility is. See the article for all the details.
MarketMinder’s View: Could the tide be turning for German manufacturing? German factory orders “rose 1.3% in September, far exceeding estimates of 0.1% gain. The first increase in three months was driven by a solid pickup in investment and consumer goods, with demand from outside the euro area providing a particular boost.” Given pundits have been worrying over Germany’s manufacturing slump (part of a global trend) for the better part of this year, this larger-than-expected increase may assuage recession fears some. However, we will have to wait and see if this rise proves to be a longer-term trend—especially since German factory orders are a notoriously bouncy dataset. Nevertheless, even if there is more manufacturing pain to come, that doesn’t mean Germany’s economy is uniformly weak. The country’s services sector, which comprises the majority of its GDP, is still chugging along just fine. For more, see our 8/14/2019 piece, “Putting Germany's Q2 Contraction Into Perspective."
MarketMinder’s View: “The ISM said its non-manufacturing index climbed to 54.7 in October from 52.6 in September, with a reading above 50 indicating growth in the service sector. … The bigger than expected increase by the headline index came as the business activity index rebounded to 57.0 in October from 55.2 in September and the new orders index jumped to 55.6 from 53.7.” Of the 18 industries covered in the survey, 13 reported expansion, and while a single month’s purchasing managers’ index (PMI) isn’t authoritative by itself, October’s numbers are consistent with the longer-term trend. That trend indicates US non-manufacturing firms are in solid shape. Since the services sector generates the bulk of US output, its relative strength compensates for manufacturing’s recent global soft patch.
MarketMinder’s View: This piece argues a $3.4 trillion cash pile—built up by investors spooked by trade war fears and market volatility—is “dry powder” for the bull market and reason to be optimistic about stocks looking ahead. We agree being bullish is sensible right now, but not because of “cash on the sidelines.” For one, investors preferring cash may reflect broad skepticism—especially given “the difference between combined flows into cash and bond funds relative to stocks over the past year is the greatest since 2012.” Notably, monitoring cash inflows and forecasting the impact on stocks misperceives how the stock market works. Basically, it is a really big auction. The number of buyers or how much cash they have on hand matters less than buyers’ eagerness to bid up stock prices. In our view, the economic, political and sentiment drivers impacting stock demand still point positively—and that is why investors should be bullish now.
MarketMinder’s View: On the one hand, the Regional Comprehensive Economic Partnership (RCEP)—which China and 14 other Pacific nations hope to sign next year—is further evidence protectionism isn’t sweeping the globe. On the other, it shows trade deals aren’t necessarily game-changers for international commerce because they may not do away with protectionist measures like tariffs—rather, they may end up just decreasing them a smidge. Under the tentative agreement, “tariffs are agreed between countries rather than across the board. For some countries, sensitive issues such as agriculture won’t be touched. … Even once signed, implementation would take months to start and years to complete.” About all RCEP does is harmonize non-tariff barriers to the lowest common denominator, potentially creating a protectionist bloc that could be a touch more difficult for non-participating nations to access. So don’t overstate RCEP’s economic and market impact right now—especially since details are still up in the air.