A round-up of third-party news stories we believe investors should either pay attention to, or ignore, along with Fisher Investments’ point of view.
MarketMinder’s View: This is a fairly wide-ranging check-in on sentiment in the wake of the S&P 500’s two-week plunge, and apparently, not much has changed—people still fear rising interest rates and high valuations. They also still seem to think Fed rate hikes will send long-term rates on an irrevocable course higher, and they broadly overlook that what matters most (in terms of interest rates) is the yield curve, not the absolute level of long or short rates. Few can fathom stocks having a great year, and many still worry about valuations. While we have many quibbles with a lot of this commentary, since this is a short space, let’s zero in on interest rates: Fed tightening isn’t inherently bearish and doesn’t automatically start a countdown to a bull market’s end. Rate hikes become problematic when they invert the yield curve—when the Fed jacks short rates above long rates. Even though we don’t expect long rates to make a big move in either direction over the entire year, there is enough room between them and short rates now that the Fed should have plenty of bandwidth to raise short rates if they decide to keep doing so.
MarketMinder’s View: If at first you don’t succeed, try again—that seems to be the motto in Japan’s government these days, with Haruhiko Kuroda nominated for a new term at the BoJ (with a mandate to keep throwing a boatload of quantitative easing and negative rates at Japan’s deflation problem) and PM Shinzo Abe again trying to goad companies into raising wages. And for good measure, Finance Minister Taro Aso is jawboning about the yen getting too strong for his taste. Yes, Japan is presently enjoying its longest economic expansion since the 1980s boom, but that doesn’t mean any of this works. Domestic demand remains weak, and exports are the primary driver of growth. Firms are still mostly living off the easy gains from currency translation, not massively expanding output. Meanwhile, the inflation rate continues flirting with zero, negative interest rates are hurting banks, the yield curve remains quite flat, and loan growth is slowing. Even if Abe gets his wish and wages rise 3%, wage growth doesn’t spur inflation, which remains always and everywhere a monetary phenomenon. About all that has changed is sentiment: Investors have broadly realized none of this works and have low expectations.
MarketMinder’s View: A great, detailed look at Italy’s wild election campaign—and why investors shouldn’t take campaign pledges very seriously. All parties are trying to pander to voters are the moment, but after the election, the likely reality of a hung parliament will force them to moderate and compromise. It is impossible to know now which parties will end up in power or what sort of deal they will strike, but fractured coalitions are inherently gridlocked. While a gridlocked government probably won’t accomplish much in the way of reforms, it also probably can’t do much harm. As markets slowly realize this and uncertainty falls, we think Italian and eurozone stocks should benefit.
MarketMinder’s View: Investors pulled almost $1 billion from a big corporate bond exchange-traded fund Wednesday, amounting to 2.7% of its net asset value. The article argues investors are worried about rising interest rates, and perhaps they are, but even if you expect rising long-term rates this year (we don’t, as discussed here), rushing out of corporate bonds seems like a weird solution. Credit spreads (the difference between corporate and sovereign yields) usually narrow as an expansion ages, as continued growth improves corporate balance sheets and profits. When credit spreads narrow, corporate bonds typically outperform. In our view, the most significant aspect of Wednesday’s withdrawals is that they went fine. People worry about bond market liquidity, fearing fund managers can’t sell assets to meet high redemption requests without causing prices to tumble, creating a vicious cycle of fire sales and redemptions. That obviously didn’t happen on Wednesday, which should put fears of bond market liquidity to bed.
MarketMinder’s View: When now-former South African President Jacob Zuma was on his way out, many investors hoped his ouster would spark a big rally in South African stocks—much like the impeachments of corruption plagued presidents in Brazil and South Korea were bullish in 2016 and 2017. But as this article shows, simply removing Zuma probably isn’t an all-clear. New President Cyril Ramaphosa has a herculean task in front of him as he attempts to root out endemic corruption and reform the country’s institutions in order to open economic opportunities to all people. Meanwhile, the economy remains hamstrung by weak commodity prices and long-running structural issues. Reform is at the top of Ramaphosa’s agenda, but the ANC’s popularity is waning in several key strongholds, which could limit his political capital and push badly needed change through. His ability to accomplish big changes could be a swing factor for South African stocks, and investors might be overestimating the potential.
MarketMinder’s View: This is awfully dour coverage considering UK retail sales volumes actually rose. Less than expected, yes, but growth of 0.1% m/m (1.6% y/y) is still growth. Seems to us like the real story here should be that, once again, higher inflation didn’t prevent the retail component of consumer spending from growing, defying long-running fears.
MarketMinder’s View: “A basket of 10 U.S. stocks with exposure to infrastructure spending beat the S&P 500 by nearly 13 percentage points in the eight trading sessions through November 17, 2016. In the four sessions following Monday’s much-delayed release of the White House’s infrastructure plan, though, the same stocks lagged behind the broader market.” Our question: What did these 10 companies do in between these short stretches? After all, markets are efficient, and expectations for a massive infrastructure push dwindled long ago. Industrials have trailed the S&P 500 over the past year, suggesting no one was really surprised the plan wasn’t anywhere near as robust as what President Trump outlined on the campaign trail. This is why it is always important for investors to think critically about campaign pledges—whoever makes them—and weigh the likelihood they actually come to fruition. Stocks generally move most on the gap between reality and expectations.
MarketMinder’s View: We believe the titular imperative sentence is good advice: Be skeptical and don’t blindly accept projections or forecasts as accurate. As an investor and general news consumer, you must engage with the rationale behind a forecast and ask why. Does the forecast depend solely on past data and extrapolation, or are there some forward-looking inputs as well? What are its limitations? In that spirit, we agree with this article’s challenges to the White House’s economic forecasts. However, we have critiques of the critique, too. The argument here posits that forecasts of 3% annual growth aren’t reasonable because the White House’s attempts to spur economic activity will have only a temporary effect—once they pass, longer running trends like demographics and productivity will take hold and weigh on GDP. And sure, that could be one possible outcome. But what if technology continues advancing and keeps boosting productivity? Experts have been predicting a tech slowdown for decades, but it hasn’t come to pass yet. Demographics aren’t set in stone, either—immigration policy and birthrates could change and/or workers may stay in the labor force even longer. We don’t know what reality will hold, and extrapolating some recent developments 10 years or more into the future discounts how dynamic the economy and people are in general. It also ignores the impossibility of accurately measuring all economic output in the digital age. Most importantly, from an investing point of view, stocks focus most on the next 3 – 30 months, as anything beyond that timeframe is unknowable. The US economic expansion isn’t showing signs of contracting any time soon, so until something changes, we suggest considering long-term economic forecasts for what they are: interesting thought experiments.
MarketMinder’s View: There goes the streak! After four straight positive months, industrial production slipped -0.1% m/m in January. Mining (-1.0% m/m) drove the headline number down, while the Manufacturing (0.1%) and Utilities (0.6%) subsectors were positive. Though some experts fret weaker industrial production—coupled with the tumble in January retail sales and rising inflation—could mean Q1 economic growth will disappoint, we suggest folks keep the bigger picture in mind. Industrial production ended the year strong—which likely reflected some hurricane-related skew—but overall, it has been a volatile gauge throughout this expansion. Some bouncy months, both negative and positive, don’t tell the whole story of a still-healthy US expansion. Moreover, statisticians have had some well-documented problems with seasonal adjustments during Q1 the past several years, and efforts to patch it don’t seem to have fully fixed the issue so far. We might be seeing this effect once again.
MarketMinder’s View: If you would like some helpful perspective on how to put some recent US January data in context, give this piece a read. A snippet: “Start with retail sales. Sales got a boost, especially among auto dealers and home centers, in the months following a pair of major hurricanes that wreaked havoc in the south. So it shouldn’t come as a shock that sales of autos and home-repair materials would eventually taper off. That’s exactly what happened in January. Auto sales tanked 1.3% and spending at home and garden centers tumbled 2.4%. Both declines were unusually large and not likely to be repeated soon.” Now we aren’t in the business of predicting what future economic data will look like—retail sales are volatile—but for investors, it is important to distinguish what seems temporary and what looks like a trend. Doing so allows you to figure out what exactly is noise and what you should pay attention to.
MarketMinder’s View: Some economists are worried that if some Italian politicians get their way and implement a swath of tax cuts and higher spending upon entering office, Italy’s debt problem will balloon out of control. Sounds scary, especially since Italian debt stands at 132% of GDP—second-highest in the eurozone (Greece is first, of course). However, before we even dive into whether the campaigning pols’ projections are accurate or not, here are two questions to consider. One: When does any politician fulfill all of his or her campaign pledges once in office? Two: Which party looks like it will gain an overwhelming majority to actually implement its advertised fiscal policy? Right now, a center-right coalition led by Forza Italia is leading in the polls, but it doesn’t look likely to grab a parliamentary majority. If they have to form a coalition government, will they be able to push forward all their desired ideas? Highly unlikely. So before jumping to a potential doomsday, we recommend investors look at the political landscape first to see whether the scariest scenario is even likely. And that isn’t even accounting for the fact that pols tend to moderate once they are in office as their top goal is to maintain power. Campaigning is easy. Governing is hard. (If you have doubts, please see Greek Prime Minister and former firebrand extraordinaire Alexis Tsipras, who seems very “establishment” these days.)
MarketMinder’s View: Some have recently criticized Indian Prime Minister Narendra Modi for an uptick in protectionist moves, which include higher tariffs on imported smartphones, potential tariffs on solar panels and data sharing restrictions with international exchanges. Does this mean India is turning inward—and potentially putting Modi’s streak of positive incremental economic reform in jeopardy? We wouldn’t go that far. For one, countries slapping tariffs on certain sectors or products are common practice, even in today’s globalized economy. There is also a practical reason for this: Pols must curry favor with their constituents, and tariffs and other protectionist measures can play well locally. India has eight scheduled state legislature elections this year, and those results could be an early barometer of the national mood toward Modi’s Bharatiya Janata Party (BJP)—important with general elections coming up in 2019. While we are always watching for the potential eruption of a global trade war, some Indian protectionism isn’t necessarily a sign that it is closing itself off from the global economy. For more on trade, see our 2/1/2018 commentary, “The Trade Parade Marched On in 2017."
MarketMinder’s View: Chinese regulators have long been trying to discourage banks from taking loans off their books and repackaging them as products that nonbank lenders (i.e., “shadow lenders”) sell as investments (also known as wealth-management products). After regulators announced the rules, banks have pushed back, asking for a delay in rollout to avoid spooking customers with volatility or unintended defaults. Many analysts believe the move is necessary to get a handle on the high debt levels in the country, worrying that no or ineffective action could blow up into a big economic crisis. We wouldn’t go quite that far. Regulators have taken a much tougher stance toward banks in order to boost transparency in the country’s notoriously opaque system, but at the same time, the government has shown the ability—and willingness—to step in when necessary to maintain stability. We don’t believe that emphasis will meaningfully change for the foreseeable future, either.
MarketMinder’s View: Sensible tax advice! “You’re preoccupied with gathering the documents for your 2017 tax return. But this is exactly the right time to also focus on your 2018 return. ... with the new tax changes hitting this year, you may find your employer is withholding too much money or not enough. In the latter case, do you really want to find out when you file your 2018 return next year that you’ve got a big tax bill?” This article walks you through some steps you can take now (or soon) to save you some headaches next year. You will need a W4 or online calculator, paystub and your 2017 tax return. Then, get to it!
MarketMinder’s View: The will-he-or-won’t-he saga involving South African President Jacob Zuma appears to be over. After initially rejecting his own party’s calls for his resignation—and a no-confidence vote—as recently as this morning, Zuma changed tune and has announced he will leave office. Many draw comparisons to Brazil and Korea, when stocks rallied massively after presidents embroiled in scandal were ousted, thinking this raised the chances for pro-market reform. Yet this comparison is likely overwrought. South Africa’s economy is struggling with a variety of woes, including Energy issues, weak commodity prices, corruption and more. Zuma’s African National Congress, as this article documents, has been losing popularity in key strongholds, calling into question their political capital and the next president’s ability to push through badly needed reforms. Further, some analysts suspect Zuma isn’t done yet and political turmoil may get worse before it gets better. All in all, we believe trying to bottom-fish in South African stocks isn’t likely to pay off.
MarketMinder’s View: We guess some measure of positivity is warranted regarding Japanese GDP’s eight straight positive quarters and 2017’s full-year 1.6% growth—the fastest in seven years. And perhaps this quarter’s 0.5% annualized growth is better than the surface indicates, as there are signs (nice growth in consumption and imports) of rising domestic demand. However, that is basically one read. The broader picture remains one of growth driven mostly by external demand, which speaks more to global economic strength than any strong pickup in Japan’s domestic economy. This article also credits the Bank of Japan’s “aggressive easy-money policies” with propping up growth and frets whether it will continue, but contrary to this popular narrative, we believe the central bank’s negative interest rates and bond purchases have been counterproductive. They flatten the yield curve and reduce bank profits from lending, discouraging them from making new loans to bolster growth.
MarketMinder’s View: Here is a look at the innards of the Atlanta Fed’s GDPNow “nowcast,” which attempts to divine the current quarter’s GDP growth based on the latest economic readings. On February 1, its Q1 estimate swung from 4.2% annualized to 5.4% after the Institute for Supply Management released its manufacturing purchasing managers’ index. The next day, the BLS reported employment figures used in GDPNow and the nowcast dropped to 4.0%. Read on if you want to know the gory details, but to us this illustrates forecasting models’ pitfalls. For one, ISM’s PMIs don’t even measure the magnitude of growth—they measure breadth. Moreover, many of the gauges require similar interpretation and logical leaps to make an estimate. And employment is lagging, not coincident. So while GDPNow spits out a number drawing from an impressive array of “real-time” information—that tend toward accuracy as more data are gathered—by necessity they use arbitrary assumptions to get them to “work.” As science-ey as employing a “dynamic factor model” may seem, it amounts to a patchwork assembly of past data glued together by guesswork. For investors, it is also worth remembering markets move ahead of economies. Even if we could fine tune GDPNow to tally output perfectly, it would still be stuck at now. Markets have already moved on. For more, please see Christopher Wong’s 3/27/2017 column, “Chart of the Day: Which Indicator Is Actually at Now Now?”
MarketMinder’s View: The bad loan problems this documents are old enough to be in kindergarten at this point, which should highlight a key point here: They are well known, unlikely to materially move stocks. After all, as we type this blurb, eurozone loan growth is outpacing America’s, where banks don’t have these alleged issues. Having older, non-performing loans on the books isn’t great. But it is more a part of the sentiment backdrop presently than a real issue, one reason we believe eurozone bank stocks are actually pretty well positioned at this time.