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.


In New 60/40 Portfolio, Riskier Hedges Are Displacing U.S. Debt

MarketMinder’s View: With long-term interest rates globally near or below zero, this article questions the future of the titular portfolio (i.e., 60% allocation to stocks and 40% to bonds) and whether fixed income can effectively hedge against equity market declines. Some of the experts interviewed here doubt bonds can perform that role anymore, and in response, they are “exploring riskier assets -- from options to currencies -- to supplement or fill the role of portfolio protection that U.S. government debt played for decades ... .” However, we disagree with the crux of this argument: that investors should treat bond holdings as a “hedge.” Nor, in our view, is the primary point of holding fixed income securities their yield. Rather, bonds dampen short-term volatility tied to stocks. It isn’t about moving in the opposite direction as stocks—just moving less, whether up or down, overall and on average. Bonds can still do that with interest rates low, and there are ways to manage around the risk of rising rates. Venturing into complicated option strategies or currencies strikes us as unnecessary and can actually increase your portfolio’s risk, which may run counter to the goals and needs that led you to a blended stock and bond strategy in the first place. More broadly, rather than begin with the premise that investors should start with a 60-40 asset allocation, consider first what your individual investment goals, objectives and time horizon are. Those inputs should decide your asset allocation first and foremost, in our view. For more on asset allocations’ role in achieving your financial objectives, please see our 10/7/2020 commentary, “A Mindset Shift for a Low-Yield World.”

Why Central Banks Want to Create Their Own Digital Currencies Like Bitcoin

MarketMinder’s View: For all the hoopla surrounding digital currencies, little is all that revolutionary since central banks are mainly looking at what is already available. The “digital currencies” central banks want to roll out are less like private cryptocurrencies like bitcoin and more like public versions of electronic payment systems in use today. This article provides some helpful background information about why central banks are looking into this space and potential benefits and drawbacks. Currently, “Behind the scenes, most financial transactions—whether using a credit card, sending money to a relative, or buying something online—involve settling payments over a patchwork of systems. ... The payment is ultimately routed through banks, who sort and settle the transactions, and typically collect fees from merchants for offering the service. That means money can take two or three days to move between accounts.” Under some proposals, a central bank could transfer funds directly into someone’s digital wallet—a faster process—though some worry about the potential privacy issues. That said, even if the Fed pursues some sort of digital currency, it isn’t likely to be a sea change some warn. For more on why newfangled digital currencies are less than meets the eye, please see our 10/15/2020 commentary, “The Facts and Fiction of Fedcoin.”

How Reliable Is a Millennium of Macroeconomic Data?

MarketMinder’s View: We think financial and economic history is a great guide (not to mention tons of fun to read about and study). Though history doesn’t repeat perfectly, it does provide perspective on what is probable—critical to long-term investing success. That said, history has its limits—especially on the economic data front, which this article discusses in regards to a measure of English GDP going back to 1086. “Even if you put to one side the question marks over whether measurement of the variables is accurate, you run into the issue that some of the concepts only came into being relatively recently. In her history of GDP, Diane Coyle writes that the concept was introduced in the 1940s (though there were forerunners dating back to the 18th century). So how can we possibly have readings dating back centuries earlier? The Bank of England partly gets around the problem by using measures of sectoral production for the period from 1270 to 1870 ... The Bank does, however, purport to have a measure of English GDP dating back to 1086. We are somewhat dismissive of this given that, from what we can discern from the data itself, ‘growth’ wasn’t really a thing that economies did to any great degree in the centuries before the industrial era.” Yep: Just because a number comes from an official source doesn’t exclude it from scrutiny—a good lesson for investors to keep in mind.

Coronavirus Digest: Ireland Goes Back Into Lockdown

MarketMinder’s View: This roundup discusses some of the COVID restrictions governments around the world have put in place recently, and Ireland’s is among the most notable. Starting tomorrow and lasting at least six weeks, Ireland’s “non-essential retail businesses will be shut while bars and restaurants will be restricted to a takeaway service. ... making Ireland the first EU nation to return to the severe lockdown restrictions imposed in March.” This is a reversal from policy earlier in the month, when the Irish government made headlines for choosing not to impose tougher measures. In our view, this is a reminder that political decisions—like implementing COVID rules—can’t be forecast. Now, this doesn’t mean the rest of Europe will follow suit, let alone the world. But developments here remain worth monitoring closely, in our view.

Tech’s Influence Over Markets Eclipses Dot-Com Bubble Peak

MarketMinder’s View: This article’s basic thesis is that US markets are frothy, as Tech and Tech-like stocks gobble up more and more of the S&P 500’s market capitalization, anecdotes of retail investors trading Tech stocks abound and valuations swell. The basic evidence that supports the title: “Internet stocks,” which we take to mean the Tech sector (28.1% of S&P 500 market cap, per FactSet) plus the Consumer Discretionary sector’s Internet & Direct Marketing Industry (5.3%) and the Communication Services sector’s Interactive Media and Services Industry (5.5%), now constitute nearly 40% of the index, topping 1999’s record 37%. But as the article notes, the comparison has some significant problems. Back then, the Tech sector was filled with myriad profitless firms that had no realistic path from bleeding cash to turning a profit. Now? “Analysts estimate the tech sector’s share of S&P 500 corporate profits could reach about 36% this year, FactSet data show.” Moreover, these firms are plowing free cash back into their businesses to finance future growth. We are not in a scenario, in our view, where investors are making a highly speculative investment that hinges on pie-in-the-sky hopes of a future where oodles of clicks may eventually bring profits and economic growth continues forever. Today’s sentiment is a whole heckuva lot more cautious and skeptical, as this article demonstrates.

Value Stocks ‘Worst for 100 Years’

MarketMinder’s View: We don’t really think there are good data illustrating the divide in returns between growth and value stocks going back to World War I, and we don’t think strategists cleanly divide the market into growth and value halves—that isn’t how the labeling works. (Stocks are assigned a growth or value factor, which means some are part growth and part value, and it is not a 50/50 split.) But overall, we agree with a whole lot of this. Value stocks, currently out of favor, are unlikely to lead unless and until the yield curve steepens due to long rates rising. While this doesn’t look likely any time soon, “…these trends go in long waves. Growth was the place to be in the late 1990s. Value in the early 2000s. Growth was hot in the early 1970s. It did disastrously for the next decade. And so on. These trends can go on for a decade or more — before doing a 180.” So why hang on to lagging value stocks like banks, Energy firms or Industrials now? “They’re a diversifier. They may go up when the rest of your portfolio goes down. They are, he adds, very likely to do relatively better if interest rates rise.”

Reports of Shale’s Death Were Greatly Exaggerated

MarketMinder’s View: On its way to making a broader point, this article delves into a couple of mergers and acquisitions announced or rumored to be underway in recent days in the oil patch. So with that, we remind you that MarketMinder doesn’t make individual security recommendations and the broader point is what we are highlighting here. That point: While so many presumed the one-two punch of lockdown-squashed demand and OPEC+ moves to increase supply would crush America’s shale oil industry, “All the evidence of late is that there’s life in the oil patch yet. Production from Texas’s Permian Basin in September was 4.49 million barrels a day. That’s down from a peak of 4.9 million in March, to be sure, but higher than in any month prior to September 2019….” Moreover, as noted herein, the acquisitions taking place suggest financial pressure is low on larger firms and quite high on smaller ones, leading to consolidation that may actually make the overall industry more stable. Many people talk like oil and Energy stocks are destined for history’s dustbin, but it looks more like a temporary industry downturn to us—the likes of which we have seen many times in many industries over the years.

Welsh ‘Firebreak’ Sends Recovery Hopes Up in Smoke

MarketMinder’s View: With COVID flare ups occurring across much of Europe, we are closely monitoring the re-imposition of restrictions on business activity. Yesterday, one of the harsher measures implemented since the spring was unveiled in Wales: Starting Friday evening, there will be a 16-day ban on non-essential business activity, renewing measures taken in the spring. However, though the Welsh measures resemble the springtime’s—and may have a deleterious effect on businesses, workers and consumers there—they affect a much smaller swath of the UK economy at large. As this notes, “In the context of the wider UK economy, the shuttering of Wales will have little effect. The principality has a population of 3.1m – around a third of the size of London – and accounts for just 3.4pc of overall gross domestic product, or around £75bn. … If Welsh output were to fall by 10pc in the next fortnight, that would translate into just 0.3 percentage points shaved off national output over the period, and a de minimis effect on the quarterly figures. Just 195,000 jobs in Wales were put into the Government furlough as of July 31.” The lesson: Monitoring lockdowns is important, but rationally scaling them is critical.

EU Makes Bond Market History With Record $275 Bln Demand for SURE Issue – Bankers

MarketMinder’s View: After the EU unveiled a plan to issue joint debt in May—and passed the budget making that a reality in July—many have speculated that EU debt would draw significant interest in the bond market. Few foresaw quite this level, though, as investors bid for over €233 billion ($275 billion) in the first sale of the collective bonds to support the region’s temporary “Support to mitigate Unemployment Risks in an Emergency” (SURE) fund. Given that the EU sold only €17 billion in bonds, this equates to an astronomical 13.7 bid-to-cover ratio and yields right around zero percent on 10- and 20-year issues. (For some perspective, strong demand at a sovereign bond auction would typically be in the 3 or 4 bid-to-cover range.) They could have, but didn’t, fill the entire slated €100 billion fund twice over just today! At any rate, this shows there is ample demand for high-quality sovereign debt, seemingly more than sufficient to gobble up the large amount of issuance needed to fund various coronavirus response strategies worldwide.

What If the 4% Rule for Retirement Withdrawals Is Now the 5% Rule?

MarketMinder’s View: Here is an interesting piece that, contrary to today’s zeitgeist, cites the originator of the “4% rule” as saying a higher withdrawal rate may be equally sustainable today. For those unfamiliar, the 4% rule states that you can withdrawal 4% of your initial portfolio value, adjust over time for inflation, without depleting your assets. Many argue this concept is dead because today’s ultra-low bond yields mean long-term returns will be too weak to sustain withdrawals of this amount. This article promotes that viewpoint of returns, yet it notes: “‘But people have to keep in mind that inflation is equally important as returns in this analysis. And that when you have a low inflation environment, your withdrawals are also going up much more slowly.’” This is a valid, and not often shared, consideration. Now, we think investors must also consider that the 4% rule is only a rule of thumb. Your personal circumstances and time horizon should be the key to determining a withdrawal rate. It is also sensible to keep in mind that your cost of living may not reflect national inflation rates, which are based on a basket of goods purchased economy-wide. For more, see our 10/7/2020 commentary, “A Mindset Shift for a Low-Yield World.”

Wales Imposes Two-Week Lockdown: 'Everybody Must Stay at Home'

MarketMinder’s View: As European COVID infection rates pick up, we have been closely watching governments’ responses. After UK Prime Minister Boris Johnson announced a three-tier COVID restriction system for England, on Monday, Welsh officials announced it would impose “a two-week ‘fire-break’ lockdown from Friday in which everybody apart from essential workers must stay at home. … All non-essential retail, leisure, hospitality and tourist businesses will have to close in Wales, as will places of worship. Most children apart from some older students will return to school in the second week after the half-term holiday.” Though officials haven’t resorted to the sweeping lockdowns from earlier this year, an escalation is always possible—though any political decision is unpredictable. We will continue monitoring governments’ COVID policies should things change.

U.S. to Sign Limited Trade Deal With Brazil

MarketMinder’s View: On Monday, the US and Brazil reached a limited trade deal agreement, and though details are scant, the deal “focuses on trade facilitation, or aligning the methods the two governments use to process goods passing over their borders, with the aim of making it easier for companies to trade between the countries. It will also reduce regulatory barriers to trade and strengthen rules to root out corruption.” Politicians on both sides are claiming a big victory, and while we agree making it easier to trade is a positive, don’t overstate the benefits, either: The winners here are limited largely to select sectors (e.g., agriculture). Moreover we caution against overestimating the economic impact on trade given the limited scope of US-Brazilian commerce—as of 2019, just 2.6% of total US goods exports went to Brazil, while Brazilian goods accounted for 1.2% of total US imports (per FactSet). Nevertheless, we think this development along with the Trump administration’s other limited trade deals undercut the common concern of rampant protectionism stemming from the US.

Financial Questions Every Art Collector Should Ask but Often Doesn't

MarketMinder’s View: For those who view their art as part of their investment portfolio, this piece shares some helpful pointers many don’t consider. For example, art isn’t a liquid asset, meaning it isn’t easy to sell quickly. That can present a problem if you find you need cash in a jiffy. Moreover, holding art as an investment comes with little-noticed costs including conservation, insurance and storage and appraisals—all of which can add up over time. Finally, one other consideration shared here: “Collectors and their families also take a big risk if they assume that estate taxes and administration fees can be covered by selling the art. During a recession, or if the market for a particular style or artist is depressed, sale proceeds might fall well short of expectations.” In our view, art is better suited for personal enjoyment than as a key component to an investment portfolio for most people.

For Long-Term Investors, Small Things Like Presidential Elections Don't Matter

MarketMinder’s View: Before reading this, please note that MarketMinder favors no political party nor any candidate. This piece covers a lot of ground, and we have some quibbles. For example, in our view, the Fed’s actions aren’t responsible for the bull market. We also think it makes sense to adjust your portfolio if you have strong evidence others don’t see that a bear market is likely forming. That said, we also think this article shares some helpful perspective on stocks’ ability to rise in the face of bad news as well as presidential elections’ market impact—or lack thereof. As noted here, “Presidents are powerful, but they don’t control the market. … With all the factors affecting the staggeringly complex markets and the overall economy, presidencies don’t matter as much as it may seem in campaign season.” The article then runs through several common arguments making the case for why a Biden or Trump presidency would be good or bad for markets, which inadvertently illustrates a broader reality: “The more important point is that stock markets have risen and fallen under both Democratic and Republican presidents — and more often than not, they’ve risen.” We agree. Though politics certainly impacts markets, what matters more is policies, not personalities—and for investors, focusing on the former can help tune out the noise related to the latter. Remember this as election chatter reaches fever pitch in the coming weeks.

China's Economic Recovery Gains Even More Momentum

MarketMinder’s View: For a bit of positive global economic news to start your week: China’s Q3 GDP rose 4.9% y/y. Though growth fell short of expectations, Chinese GDP is now up 0.7% through the first nine months of 2020—recovering lost output from its COVID-driven national lockdown. Looking under the hood, the recovery appears broad-based, with growth in consumer spending and the services sector picking up. Q3 GDP is consistent with other recent datasets, including growthy purchasing managers’ indexes and positive readings for September exports and imports. While nothing here tells us about the future, growth in the world’s second-largest economy is a positive for the global economy, adding to demand for goods and services.

Threat of Double Dip Recession Looms as Second Wave Hits

MarketMinder’s View: We aren’t about to quibble with any of these economic forecasts for the UK, as they all hinge on whether the recent local COVID restrictions snowball into a nationwide lockdown—except to say that the impact is actually impossible to forecast, as these are political decisions. However, we think this is a handy point to keep in mind: “Philip Shaw at Investec said the economy was not likely to shrink in the final quarter of the year as a whole, because even flatlining GDP at September’s level would leave the nation in a better position than it was in the early days of the third quarter when restrictions were only starting to lift.” Mathematically, this is true: If GDP flatlines in October, November and December, it would still register as quarter-over-quarter growth due to the depressed base effect from July and, to a lesser extent, August. In our view, this illustrates GDP’s backward-looking skew, which is why it isn’t predictive for stocks. It is nice of the ONS to release monthly GDP so we can more quickly see changing trends, but that is more a plus for data geeks like us than investors trying to assess what markets will price in over the next 3 – 30 months. Whatever GDP shows this autumn, stocks will have already lived through and priced in. To say otherwise is to say markets aren’t at all efficient, which we think is always and everywhere a grave error.

You Can Still Claim Social Security Spousal Benefits – Even If Your Spouse Is Gone

MarketMinder’s View: Social Security can be hard to navigate regardless of your personal situation, but there are a lot of unique provisions (and frequently forgotten benefits) for those whose spouse has passed away or those who have been divorced. If either applies to you, we suspect you will find this piece helpful, as it details the ins and outs.

Look Who’s Really Chasing Hot Stocks Like Zoom

MarketMinder’s View: This spends a lot of time editorializing against fund managers, and we prefer to stay above the fray. But it also includes some data debunking the widespread thesis that stocks’ rally this summer stemmed not from markets’ rationally pricing in a better future 3 – 30 months ahead, but from uninformed speculators using apps like Robinhood and creating a bubble. As always, MarketMinder doesn’t make individual security recommendations, and we pull this text solely because it illustrates the main point: “Let’s look at Zoom Video Communications Inc., the teleconferencing company whose stock is up more than 660% so far this year. Given the popularity of its service and the stock’s scorching performance, you might expect Zoom is a darling among individual investors and traders. Yet, on the Robinhood app used by millions of individual traders, Zoom was only the 49th widest-owned stock this week, according to the online broker’s tally of most-popular holdings. In fact, of the 25 stocks with market values above $10 billion that have the hottest returns so far this year, only two— Moderna Inc. and Peloton Interactive Inc. —are among the 25 most-popular stocks on Robinhood. They are up more than 288% and 375%, respectively, in 2020.” Anecdotal, yes, but illustrative all the same.

Why Boris Johnson and the EU Will Keep Talking on Trade Deal

MarketMinder’s View: This piece does a good job of cutting through the latest Brexit bluster, which has the world fearing a no-deal Brexit once again after UK Prime Minister Boris Johnson told his country to prepare for that outcome. As it explains, this is just more of the same brinksmanship we have seen throughout the Brexit talks, albeit more hyperbolic. “What mattered in Johnson’s BBC interview is what he didn’t say: After warning two weeks ago that he would walk away from the long-running trade talks if no progress had been made before the EU summit, Johnson is, in fact, ready to keep talking despite the absence of progress. His intended threat of a no-deal Brexit came with the caveat, repeated three times in the six-minute interview, that it would only happen ‘unless some fundamental change of approach’ is perceptible on the EU side. The EU, for its part, had urged the U.K. to keep talking, and instructed its key negotiator Michel Barnier to keep doing what he has been doing for months. And Barnier said indeed that he would be in London next week to do just that, in a meeting with his counterpart, the U.K. Brexit negotiator David Frost.” As always, watch what politicians do, not what they say.

Jobless Workers Built Up Some Savings. Then the $600 Checks Stopped

MarketMinder’s View: Based on data from Chase showing unemployed people’s checking account balances this year, this article argues falling account balances in the wake of the CARES Act’s expiration means people have burned through extra unemployment assistance saved earlier in the year, teeing up problems for consumer spending in the coming months. We won’t argue the expiration of the extra $600 in weekly benefits from the federal government had no impact on individual households, and the subsequent partial replacement may still force some people to budget very carefully. That is a difficult situation for anyone, and we are empathetic. However, extrapolating this to broad economic troubles seems like a stretch. The data include “Chase customers who receive direct-deposited unemployment benefits in every week of July and August, 2020, while the employed group is never observed receiving direct-deposited benefits in 2020.” (See their official publication if you want the full details.) The problem with this is that it ignores the nearly 11 million people who lost—and then regained—jobs during and after the pandemic. Portraying 80,000 unemployed customers of one bank as emblematic of society as a whole just isn’t an accurate way to view the economic impact, in our view.