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: During a bear market, investors face many challenges—and often, the urge to act or do something big is tempting. While many people feel like selling now and buying back later, a few brave souls may feel the impulse to go the other way and borrow money (i.e., go on margin) to buy stocks. As this excellent piece details, both reactions reek of emotionally driven decision-making, which can damage investors’ long-term portfolio prospects. Moreover, for those feeling the understandable concern that one bear market may permanently decimate their portfolio, the recovery time tends to be quicker than many believe, especially since “market downturns tend to feel a lot longer than they are.” We don’t understate the difficulties of a bear, but patience is of the utmost importance during these times. Or, as succinctly concluded here, “But when markets are roiling, don’t discount the value of doing nothing. I had a seventh-grade shop teacher who used to say, ‘Sometimes I sit and think, and sometimes I just sit.’ For many investors, this is probably a good time to just sit.” (Though, as the article also notes, for certain smaller portfolio maintenance moves, this might be a good time, depending on your situation and needs.) For more, see Todd Bliman’s commentary, “Timeless Optimism Will Conquer Panic. Again.”
MarketMinder’s View: Initial jobless claims soared to 6.6 million in the week ending March 28—essentially doubling the prior week’s record high and bringing the two-week total to around 10 million. This sum is likely to rise in upcoming weeks. The torrent of claims continues overwhelming processing systems, causing delays for filers, and more furloughs and layoffs due to COVID-19-related closures may add to the count. Moreover, Congress’s CARES Act expands the scope of beneficiaries, which may encourage more people to file. Simply, the poor numbers provide a snapshot of the millions of people across the country suffering hardship right now. While unemployment can be a personal tragedy for those affected, it is critical to set worries and emotions over it aside when assessing markets. Employment data lag, rather than lead, stocks. Markets are already aware of the factors that led to these job losses, limiting the eye-popping numbers’ surprise power. It is ultra-myopic, but that is likely why stocks have gone up on each of the two record-setting jobless claims days in this recent stretch. Keep this in mind for most, if not all, economic data releases in the near future—though likely bad, they won’t be new news to stocks. For more, see our 3/26/2020 commentary, “Putting Historic Jobless Claims Into Perspective.”
MarketMinder’s View: As COVID-19 dominates headlines, we believe it is critical for investors to separate their views of the illness, the economy and the market. This article demonstrates why: “Weekly jobless claims are the highest-frequency comprehensive data there is on the job market. They also give some sense of how many businesses must have shut their doors as a result of efforts to halt the virus’s spread or have laid employees off as demand for products and services has dried up. For policy makers and elected officials trying to craft a response to the economic crisis the health crisis has set off, that matters.” We don’t dispute jobs data may shape policymakers’ responses, and commenting on public policy isn’t our arena. However, from an investing perspective—which is our bailiwick—markets are forward-looking and move ahead of economic data. Waiting for jobless claims (already a lagging economic indicator) to improve before declaring the recovery is at hand—as suggested here—could be damaging from an investing point of view since a new bull market will likely be well underway already. As the chart in the article shows, in the last bear market that ended in March 2009, continuing claims for unemployment insurance didn’t begin materially falling until a few months after stocks began recovering. Missing those early-bull gains could hinder long-term, growth-oriented investors’ ability to reach their investment goals. For more, see today’s commentary, “Separate Your Stock Market Views.”
MarketMinder’s View: While we recommend applying a healthy amount of skepticism on any story reliant on the elusive “sources say,” this piece does highlight potential unintended consequences that come with any legislation. Congress’s CARES Act has allotted nearly $350 billion in funding for small businesses to help them get through COVID-19-related disruptions. While banks are supposed to provide the funds, some feel caught between a rock and a hard place. Besides potential regulatory penalties and legal costs due to lending too expeditiously, banks also fear possible public backlash for not making funds available quickly enough. “Their [banks’] main concern is that the Treasury Department said on Tuesday that lenders will be responsible for preventing fraudulent claims by verifying borrower eligibility … Banks also must take steps to prevent money laundering and terrorist financing, a process that would normally take weeks, the sources said.” Treasury officials are allegedly reconsidering their guidance and working on a fix. In our view, this is another reminder that government pledges of huge sums of money aren’t instant cure-alls—the details matter, and it takes time to work through them all. For more, see our 3/26/2020 commentary, “What Is in That Big Stimulus the Senate Just Passed?”
MarketMinder’s View: As we enter Q1 2020 earnings season, analysts are forecasting S&P 500 earnings to fall -5.7% y/y (per FactSet, as of 4/2/2020), which would be the worst since Q1 2016’s -6.9%. The primary culprit, as you might imagine: COVID-19-related havoc. Firms are already announcing negative earnings preannouncements, and many are withdrawing their full year outlook due to coronavirus uncertainty. That makes sense to us given the situation’s fluidity. Companies can’t provide reasonable guidance on 2020 earnings if they don’t know how long social distancing measures like shelter-in-place orders will last. Though this unprecedented uncertainty may roil analysts’ forecasts, we would add that neither experts’ estimates nor companies’ guidance is perfectly prescient even in normal times. Though COVID-19 will no doubt knock many businesses, companies also have a tendency to nudge expectations lower regardless of economic conditions. Moreover, earnings reflect what happened in the past quarter—information stocks have likely already digested.
MarketMinder’s View: While this article is chock-full of high-level information relevant for small business owners looking to get cash via the Paycheck Protection Program (part of the $2 trillion coronavirus relief package known as the CARES Act), some of the details here reveal the limitations of government aid—namely, even expedited processes take time. “Even with the SBA’s review out of the way, same-day approvals will still be a challenge. The fastest bank loan applications usually incorporate a 1-week review.” One expert quoted here noted many small businesses will require several days just to collect all the paperwork necessary to apply. Moreover, sole proprietors or independent contractors will have to wait for a bit before they can apply for a loan. We don’t make these points to criticize the program, but in our view, this process illustrates why any government effort to inject cash into the economy doesn’t happen as quickly as headlines may make it seem. This also underscores why we think it is more correct to view the fiscal response to the coronavirus as a general bailout rather than “stimulus” that creates new demand where none existed.
MarketMinder’s View: The Institute for Supply Management’s March manufacturing purchasing managers’ index (PMI) fell to 49.1 from February’s 50.1. Readings below 50 point to broad contraction, and as the title suggests, reality was likely much worse than the headline number suggests. For one, as noted here, “... the survey was completed before widespread sections of the U.S. economy were shuttered.” Some of the subindexes provide a better sense of the damage. For example, supplier deliveries jumped to 65—likely a big reason why the headline figure was stronger than expected. When this subindex is above 50, it usually indicates slower deliveries, which is typical during an expansion as customer demand strengthens. Yet in this case, COVID-19 drove the high read due to supply issues. We noted a similar phenomenon in our discussion of IHS Markit’s Flash PMIs last week. Looking ahead, the new orders subindex fell -7.6 points to 42.2, the lowest level since the 2008 – 2009 recession’s end—a sign April’s data will likely be weak, too. While US economic numbers will be weak for at least the next month or so, what matters for investors is how the broad swath of data is likely to fare over the next 3 – 30 months relative to what markets have already priced. Going forward, we think investors should prepare themselves for some bad March numbers—and keep in mind markets are looking further into the future and will likely begin pricing the recovery well before it shows up in economic data.
MarketMinder’s View: This article discusses one COVID-19-related economic downturn scenario: a prolonged recession in which it takes years for businesses and consumers to regain confidence and recover. That is possible, especially if coronavirus-driven disruptions persist indefinitely. However, we don’t think the most pessimistic outcome is inevitable. It is equally possible infection rates fall across the developed world and the economic pain, while sharp, ends up being fleeting. Because the situation remains so fluid and nobody can say with certainty how long the interruptions will last, our top recommendation for investors: exercising patience and remembering markets look forward. While we don’t know when the bear will end, we do know a bull will follow—and stocks generally start pricing in the upcoming recovery before economic data confirm any green shoots. For more, see yesterday’s commentary, “From Lows to New Highs: Historical Stock Market Recovery Times.”
MarketMinder’s View: This analysis isn’t perfect, but it does quite a nice job of showing why big government debt increases necessary to fund the fiscal response to COVID-19 aren’t likely to cause debt problems in major developed countries. It focuses on the UK, but you can apply similar logic to the US: “Even after more than doubling the size of April’s gilts sale, the yield on the benchmark 10-year note was little changed at 31 basis points, not far from its record low yield of seven basis points seen on March 9. ... It helps that the average maturity of U.K. debt is significantly longer than all other major bond markets at 15 years, meaning there’s less urgency in refinancing debt.” Low rates are locked in, keeping debt servicing costs in check for the foreseeable future.
MarketMinder’s View: China’s official Purchasing Managers’ Indexes (PMIs) signaled modest expansion in March, but under the hood, results weren’t exactly encouraging. For one, as this article points out, March’s slight growth followed a record-beating contraction in February, so the economy remains far from pre-coronavirus levels of output. The outlook isn’t great, either. Manufacturing new orders expanded as local firms returned to normal operations, but export orders contracted. So did order backlogs, due largely to American and European firms’ canceling orders as their own COVID-19 containment efforts ramped up. On the non-manufacturing side, which represents the majority of Chinese economic output, new orders contracted and the only positive contributor was sentiment. For the foreseeable future, China’s prospects are tied to the resumption of normal life in the developed world.
MarketMinder’s View: In recent days, headlines have dwelled on Emerging Markets as a potential crisis in waiting. The logic: With the dollar strengthening and dollars in high demand globally, companies in the developing world will be unable to service dollar-denominated debt. While the Fed has direct funding lines established with major central banks, that doesn’t much help companies in smaller nations. Hence the Fed’s solution: a new facility where any central bank not covered by sanctions can temporarily exchange US Treasury securities for dollars. The benefits here are threefold. One, since central banks won’t have to sell Treasurys to raise dollars, Treasury markets should be more stable than they have been in the past couple weeks. Two, companies in smaller Emerging Markets should have an easier time of it. Three, because central banks won’t have to sell dollar-denominated assets to get dollars, it should alleviate the pressure on their own currencies, addressing the issue at the root of all these concerns. We always thought the fear itself was overstated to at least some degree—more of a typical parallel bear market fear than another wallop in waiting—but the Fed’s actions should help boost sentiment at the very least.
MarketMinder’s View: Between OPEC’s price war with Russia and plunging demand due to COVID-19 containment efforts, oil’s huge drop isn’t shocking. As the headline notes, investors shouldn’t expect low oil prices to be a big economic tailwind. Not only is the world much more energy-efficient under normal circumstances than it was decades ago, but with cars, planes and many offices and factories idled, its primary impact will be on food (and other staples) distribution costs and home heating—tiny slivers of economic activity. More interesting, in our view, is what low prices mean for the supply landscape and oil producers over the foreseeable future. Many small US shale producers were already struggling to service debt and stay afloat even before prices’ latest crash, so a wave of bankruptcies and consolidations wouldn’t surprise. It also wouldn’t surprise if some companies kept pumping in order to get whatever revenue they can. However it shakes out though, this is all going as a commodity cycle usually does: High prices incentivize investment in production, which eventually leads to supply increases that depress prices. That is where we are now. But then low prices eventually cause production to fall, eventually leading to supply shortages that drive prices higher and fuel the next round of investment. So while the specific circumstances are different, nothing here is exactly new.
MarketMinder’s View: In keeping with our general political neutrality, we aren’t for or against this proposal, but we do think it is worth pointing out something this discussion omits: Retroactively repealing the cap on state and local tax (SALT) deductions would help a key portion of the population overlooked by last week’s COVID-19 rescue package: Furloughed or laid-off single earners in high-tax, high-income states who make over $99,000 and therefore don’t qualify for the individual $1,200 payments but are still struggling to make ends meet due to their high cost of living. Restoring the SALT deduction isn’t a quick fix, as rebates would take time to reach the recipients, but we thought investors might benefit from having the context on why politicians would pursue this. None of this is stimulus, so whether or not it passes likely doesn’t mean much for the strength of the eventual recovery, but it is worth keeping an eye on in case it affects your tax situation.
MarketMinder’s View: This is a largely excellent discussion of what matters most for investors and stocks—not how deep markets or the economy will sink as a result of COVID-19 containment efforts, but how long the pain will last. The latter, after all, is what stocks’ turnaround hinges on the most. “We all know the economy is going down big. Has gone down big. But the stock market is a discounting mechanism. Its participants make forward-looking bets based on how they feel about the future. But we don’t have any evidence yet of what the future is going to look like, because we have not yet seen an end to the spread, or the death count. We haven’t seen the peak of expenditures or emergency actions. Investors will be willing to bet on what the world looks like after, but only when there’s a sense of the When. These are duration questions: ‘When will people be back to work? When will the extraordinary stimulus and monetary policy begin to be felt. When are the peaks for infection and death in each region of the country? When will shuttered businesses begin to reopen. How long will it take for laid off workers to get hired again?’” Now, stocks may not wait for concrete answers to these questions, as they generally pre-price widely known information. So this isn’t an argument for waiting for clarity—rather, it is a general framework of where stocks will likely be looking the hardest for hints.
MarketMinder’s View: We highlight this mostly as a public service announcement to prepare our readers for the high likelihood that Japan will be the first major economy to enter recession (using the widely accepted definition of two straight GDP contractions). Its GDP plunged in Q4 on the back of October’s sales tax hike, and even as it has avoided mass lockdowns to contain COVID-19 thus far, its businesses have felt knock-on effects from containment efforts elsewhere. We would argue the article overestimates the economic impact of the Olympics, which aren’t a huge driver, but losing that tourism revenue later this summer will hurt. Whatever happens, though, don’t overestimate Japan as a global economic bellwether. It had unique domestic problems before COVID-19 struck, and the disease’s eventual fading won’t make those go away.
MarketMinder’s View: It is entirely possible that when this bear market ends, it will be beneficial to rotate into industries or countries that got beaten up the most during the downturn. But in our view, it is premature to make this determination or identify the prime targets, as that likely depends on how long the bear market lasts. If the interruptions to business fade soon, we expect what led before the bear to resume—an almost correction-like scenario. If they last, the rebound from a prolonged downturn would likely favor value-oriented and smaller companies. Either way, we suspect simply looking at the countries whose price-to-earnings ratios take the biggest hit is far too blunt of an instrument, as this bear market didn’t start because valuations were stretched, and there will likely be huge skew from wild swings in corporate earnings over the next few quarters.
MarketMinder’s View: Germany’s COVID-19 economic rescue package is pretty much official now, and it consists of €750 billion in new state aid as well as the state development bank’s €500 billion war chest. As in the US, German officials seek to prevent companies receiving aid from returning profits to shareholders. Considering dividends are among the first things to go when companies get into trouble, this strikes us mostly as a solution in search of a problem. But the more governments and central banks try to interfere with this—and the longer the interference lasts—it could incrementally diminish demand for stocks. It isn’t anywhere close to a problem now, in our view, but we do think it is a development worth monitoring.
MarketMinder’s View: In a remarkable about-face from common criticisms of corporate America “hoarding cash” a decade ago, today it is common to blame them for not carrying bigger cash buffers to see them through weeks of temporary closures. This article shows this latest argument’s many shortcomings. For one, nonfinancial corporations are already sitting on a giant cash mountain. Pure cash tops $1.2 trillion, and according to the Fed’s latest data, total liquid assets are nearly $5 trillion. Plus, as the article explains, money saved is money that doesn’t get reinvested into the business, be it through new research & development, facilities or employees. “Holding cash depresses firms’ return on equity. That’s the reason why investors have spent decades pulling their hair out over the mountainous cash pile of Japan Inc. Cash holdings would also likely limit productive investment, as companies would save for a crisis that may take more than a decade to arrive.” In other words, in order to avoid having to lay people off, a company could forgo 10 years of hiring—not ideal, in our (and probably many potential employees’) view.
MarketMinder’s View: Nearly three weeks ago, oil prices plunged as OPEC and Russia went from trying to agree on production cuts to support prices to waging a price war. With production soaring and prices low, the world is running out of places to store a huge glut of surplus crude, and now it looks like at least one of the price warriors wants to call a truce: “Now, a senior Russian figure - previously responsible for output negotiations with the Saudi-led Opec cartel of producers - has appealed for greater co-operation, as the true extent of the economic damage from the Covid-19 pandemic becomes apparent.” That makes sense, considering how much of Russia’s tax revenues depend on higher oil prices, but only time will tell whether these overtures result in an agreement. Either way, don’t be shocked if oil keeps bouncing around as supply and demand drivers fluctuate.
MarketMinder’s View: In our experience, when governments pass huge fiscal stimulus packages like the one Congress finalized this week, concerns about a vast increase in government debt aren’t far behind. This piece does a valiant job of trying to head them off, and it makes some salient points in doing so. For one, the deficit increase would likely (based on what we know now) be a one-time event, not repeating year after year. That was the case in 2009, when people feared President Obama’s fiscal stimulus measures would drive runaway deficits—but the deficit peaked that year and fell for several years thereafter. Moreover: “Economists focus not on the absolute level of the debt, but on the interest costs to service it relative to the size of the economy.” We would go a little further and say interest relative to tax revenues matters more, but either way, this sort of scaling shows our present debt load is affordable, with interest payments just 15.5% of tax revenue in 2019. Adding to it right now probably won’t break the bank either: “As the economic outlook dimmed over the last month, interest rates plunged to unprecedented lows. The United States government can issue 30-year bonds at only a 1.44 percent interest rate at Thursday’s close — and in inflation-adjusted terms, borrowing costs are negative.” Uncle Sam also has a lot of bandwidth, considering interest payments reached 15% – 18% of tax revenues for much of the 1980s and 1990s—and the US didn’t have a debt crisis.