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.


Wall Street Fears This Stock Rotation Is Another False Dawn

MarketMinder’s View: As this article highlights, some market professionals believe the long-awaited rotation into economically sensitive value stocks that often characterizes new bull markets is finally underway, citing a strong three-day stretch for small-cap stocks. Others argue bigger, growth-oriented companies will come out on top because economic growth will be weak for the rest of the year, hurting smaller firms. We agree growth stocks should continue leading the new bull higher, but our rationale is different—it isn’t because the economic recovery will be tepid. Rather, as we wrote back in April, a leadership rotation favoring value stocks in a new bull market hinges on capitulation during the bear market’s panicky final throes driving expectations far below what reality likely justifies, priming them for outperformance when the cycle turns. But with the sudden economic contraction and record-fast, correction-like bear market, that capitulation never happened—allowing growth to maintain its leadership. We found the other explanation about why value likely lags—a flat yield curve—sensible enough. Since banks borrow short and lend long, they usually extend more loans when the yield curve is steep and lending more profitable—a boon to economically sensitive companies reliant on outside funding, which value stocks predominantly represent.

Treasurys Stabilize After 10-Year Note Auction

MarketMinder’s View: With the US government raising large amounts of debt to fund its COVID relief response, some Treasury market observers have fretted over sliding bond yields as a potential sign that the US economic outlook is weak (bond prices rise as yields fall). We caution investors against reading too much into short-term wiggles, whether it is the bond or stock market. Rather than speculate, look at what the market is saying. “On Wednesday, the government sold $38 billion of 10-year bonds at a 0.677% yield. It will sell $26 billion of 30-year debt on Thursday. After $48 billion of three-year notes was sold Tuesday, that would bring the week’s total to $112 billion.” Beyond those headline numbers, the bid-to-cover ratio—the dollar amount of bids received versus the amount sold, an indicator of demand—for today’s 10-year Treasury auction was 2.41. That is virtually unchanged from a bond sale in January, when the bid-to-cover ratio was 2.45. Even as the Treasury yield ticked up a bit higher, the market is saying demand for US sovereign debt remains just as robust as it was before the bear market earlier this year—a sign of investors’ faith in America’s creditworthiness.

The Surprise Jump in Prices May Be a Good Sign for the Economy, and It’s Not ‘Stoking the Fires of Inflation’

MarketMinder’s View: “Core inflation, less food and energy, was up 0.6% [m/m in July], and is now running at a 1.6% rate year over year on an unadjusted basis, according to the Bureau of Labor Statistics. That’s the biggest jump since January 1991, but it is still considered to be a low rate and it is below the Fed’s 2% target.” First a minor quibble: The Fed’s preferred inflation gauge is the personal consumption expenditures price index, not the headline CPI or its core measure released in today’s report. As analysts debate the implications of recent inflation trends for the economic recovery and stock market, our takeaway is much more high level: Economic data will likely look a bit wonky this year due to the COVID-driven economic shutdown, which crimped activity across the board. For example, gasoline prices already tend to be volatile without even factoring in how COVID restrictions roiled demand. We suggest refraining from reading too much into monthly moves, especially in the near term as the data start reflecting economic activity coming back online. As for concerns of higher inflation looming next year, that isn’t assured. Yes, money supply is up, but to get higher inflation, that money must be circulating in the economy and chasing a limited quantity of goods. Until we see evidence of that happening—which is unlikely as long as the yield curve remains flattish—high inflation fears seem like a foundational brick in the proverbial wall of worry for this new bull market. For more, see our 4/29/2020 commentary, “Why the COVID Response Likely Won’t Ignite Inflation.”

Recessions Lead People to Make Big Money Mistakes

MarketMinder’s View: Although geared toward younger, less-experienced investors, we think much of the advice shared here applies universally. For example, stick with a financial plan designed to meet your goals; focus on the long term if your investing time horizon spans many years or even decades; and don’t get too caught up in short-term gyrations. These recommendations are all easier said than done, of course, but we believe these simple investing truths bear repeating given all the noise in financial headlines today. As this article concludes, we can all learn from history: “Even the most experienced investors are likely to feel a twinge of panic during a recession, but it’s critical we make financial moves from a place of knowledge, not emotion.”

Euro Zone Industry Output Rebound Disappoints for Second Straight Month

MarketMinder’s View: “Manufacturing output in the 19-country currency bloc rose by 9.1% in June from May, the European Union statistics office Eurostat said, after it had increased by 12.3% in May on the month. Economists polled by Reuters had predicted a 10.0% rise in June month-on-month. The May reading had also disappointed economists who had been expecting a 15% rise as factories reopened after lockdowns were softened.” We would focus on the bigger picture improvement here and not sweat the titular disappointment. First, these data are backward looking, which stocks have long moved past. Second, that the focus here is on the “miss”—that growth wasn’t fast enough—suggests sentiment remains skeptical, which is a key ingredient in young bull markets. Considering this type of dour reaction is widespread—see the response to the UK’s Q2 GDP report for more—and reality has a low bar to clear to exceed expectations, a bullish development.

Wholesale Prices Surge 0.6%, but Don’t Be Fooled: Inflation No Threat to the Economy

MarketMinder’s View: We highlight this not because wholesale inflation and the producer price index (PPI) are terribly significant for investors, but because it is an example of overall fair coverage of data. As it explains, while headline PPI jumped 0.6% m/m in July—the fastest rise in two years—the recovery in oil and gas prices played a significant role. “Another measure of wholesale costs known as core PPI — which excludes food, energy and trade margins — rose 0.3% last month to mark the third straight gain.” That is quite benign. On a year-over-year basis, which is generally how inflation is reported, the headline index remains negative at -0.4%, while the core measure is a flattish 0.1%. We award more points to the article for not arguing producer prices predict consumer prices, which is a common misperception. Now, it isn’t perfect, as it ignores money supply and velocity’s influence on inflation, and it doesn’t draw a hard line between consumer and producer prices. But we did appreciate the observation of wholesale services prices as a volatile category that rarely (if ever) supports firm conclusions. For more on why wholesale prices don’t drive inflation, see our 6/15/2018 commentary, “Why Inflation Doesn’t Seem Set to Zoom.”

Biden VP Pick Kamala Harris Chosen as Running Mate

MarketMinder’s View: As always, we are politically agnostic and wish to remind you that markets don’t care about personalities and prefer no party or candidate over any other. So as you see a deluge of commentaries trying to draw broad conclusions about the election and its effect on stocks based on presumptive Democratic nominee Joe Biden’s choice of running mate, we recommend turning down all the chatter. Vice presidential picks have much less influence over voters’ choices, in general, than most coverage tends to presume whenever said picks are announced. Mostly, the only significant takeaway is that uncertainty fell a tad more today—a normal tailwind for stocks in the second half of a presidential election year.

Low Cost Shale Drilling Might Not Boost Oil Production This Time

MarketMinder’s View: This short article nicely captures the dilemma facing the many small shale oil producers in the Permian Basin: Do they use the savings from efficiency gains to increase production, or do they pay down debt instead? The former would likely weigh on oil prices, and several firms opted for it in years past. But most of those investments were debt-financed, and small Energy wildcatters—generally deep value plays—have had a notoriously hard time servicing that debt during the pandemic. With the flat yield curve likely shutting off most of their refinancing avenues, we wouldn’t be shocked if they elected to pay down debt instead of drilling a bunch of new wells, which could indeed be one factor supporting oil prices over the foreseeable future. More broadly, these struggles’ very existence is a big reason why, while we don’t think Energy stocks are likely to outperform over the foreseeable future, we think the largest, most stable oil & gas producers within the category are a better choice for diversification purposes than small, shale-focused companies.

Don’t Be Fooled—Under Covid-19 the UK Labour Market Is in Deep Crisis

MarketMinder’s View: Here is a concise explanation of why the UK’s low unemployment figures obscure labor market woes. “First, and most obviously, [Chancellor of the Exchequer Rishi] Sunak’s job retention scheme has meant millions of workers have been furloughed since March. In the absence of 80% wage subsidies, many of them would have been laid off. Second, the way the figures are compiled means that someone is counted as unemployed only if they are both out of work and seeking employment. There hasn’t been much point in looking for a job while the economy has been locked down, so people have been classified as inactive rather than jobless. The government’s alternative measure of unemployment – the claimant count – provides a better guide to what has been happening. It has doubled since the start of the Covid-19 crisis and rose by 94,000 in July to stand at 2.7 million.” We see one lesson and one caution here. The lesson: Understand how different government statistics agencies calculate (un)employment data before drawing conclusions about countries’ labor markets, as methods and results will vary. The caution: Employment data lag the economy and markets—so if/when the job retention scheme ends and UK unemployment rises, we wouldn’t draw any conclusions about where the UK economy or stocks are headed next.

Why It Might Be Time to Invest in Non-US Stocks

MarketMinder’s View: First things first: In our view, the time to invest in non-US stocks is always. The US makes up only about two thirds of global developed market capitalization, so if you ignore Europe, Australasia and Canada, you overlook a big opportunity set and means of managing risk. Diversification is the only reason you need to invest globally. Reasons you shouldn’t lean on, in our view, are all the backward-looking factors described in this article, which argues non-US stocks are on the verge of outperforming because of Europe and Asia’s relatively better containment of COVID this summer, the EU’s big COVID assistance fiscal package and non-US stocks’ lower valuations. All are widely known factors, and the third has an added drawback of being a mean reversion argument—a force that generally doesn’t apply to capital markets. Moreover, this piece ignores the structural factors working against Europe right now: its relative lack of Tech and Tech-like stocks and strong value tilt. In a new bull market where Tech and Techish stocks and huge, growth-oriented companies are leading, Europe is highly unlikely to lead. US investors might get a short-term boost from currency conversion, but currency markets move independently of stock markets and shift on a dime. We don’t suggest basing portfolio positioning on them. Again, we think it is beneficial to own some Europe and Asia for diversification, but we wouldn’t go hog wild.

Utilities Lose Their Recession Spark

MarketMinder’s View: This piece suggests that, for those concerned the new bull market lacks staying power, stocking up on Utilities is a viable way to maintain stock exposure while owning a traditionally defensive sector. Its year-to-date underperformance allegedly creates an especially attractive entry point. By all means, have some Utilities exposure for diversification, but we doubt an overweight will be much benefit looking forward. For one, Utilities’ performance this year doesn’t strike us as an aberration. The MSCI World Index’s Utilities sector outperformed the broader World Index peak to trough in the downturn, perhaps not by as much as you would expect of a defensive sector, but leading is leading. Its year-to-date underperformance stems mostly from its lag during the recovery, which is exactly what you would expect. Moreover, because this bear market was more like a correction than a bear market in terms of its duration, markets are behaving as they typically do during a post-correction rally rather than a new bull market, with the huge growth-like companies that led as the last bull market matured leading in the recovery. That leadership probably won’t shift, which doesn’t favor Utilities, in our view. At a more philosophical level, if you agree with the observation in this article that the bear market and recession were incredibly compressed—and we do—then that also argues for Utilities’ underperformance since stocks are a leading indicator of the economy, not the other way around. The winter’s bear market was stocks’ way of pricing in the recession that is now showing up in data later. A second bear market—with potential Utilities outperformance—would therefore require some new, huge negative that isn’t presently known to stocks. A gradual recession recovery wouldn’t cut it, in our view, given how widely discussed it is.

Earnings Calls Need a Makeover Amid Covid

MarketMinder’s View: Hear, hear! While earnings calls are indeed a useful opportunity “to hear from some of the most powerful people in business — leaders who have a remarkable vantage point when it comes to what’s happening in the broader economy,” getting to the useful part of the call, which is the Q&A portion, requires listening to an hour or more of execs reading publicly available reports verbatim, usually with minimal intonation. These reports also cover extremely backward-looking periods, making them of little use to investors. Whatever they show, markets have generally already moved on, and companies have for the most part disclosed any major contributing factors by the time the results become official. Compounding those longstanding gripes, “as the national work-from-home experiment continues, with parents juggling round-the-clock office hours, kitchen hours and parenting hours, time is precious. Analysts and investors often have to cover numerous earnings filings and calls a day, and so it’s no surprise that so many research reports hit our inboxes in the middle of the night. Leaving the calls as purely Q&A forums would be more productive, as would saving certain questions that get too in the weeds for a discussion offline with an investor-relations representative.” That is a dynamite idea, as those Q&A sessions are where all the useful nuggets come from. Last year, for instance, earnings Q&As gave us oodles of information on how tariffs were affecting businesses worldwide. Skipping the rote commentary and giving more time for questions would make these calls manifestly more interesting and useful for investors, in our view.

U.S. Job Openings Rise in June, Likely Exaggerate Labor Market Health

MarketMinder’s View: This piece argues that because 198,000 of the 518,000 new job openings in July were in hotels and food services—and 104,000 people simultaneously quit jobs in that category—the increase is something of a false positive, inflated by people who left jobs because they were frightened of COVID exposure or couldn’t get childcare. This hypothesis is probably impossible to test without an in-depth survey, but that isn’t necessary for investors to navigate this one. For one, these suggested negatives are largely sociological issues—important to people, politics and perhaps everyday life, but outside the realm of issues markets generally consider. Two, even stripping out those elevated quits, there was still a net increase in hotel and restaurant job openings, so that is evidence of reopening having a positive economic impact. Three, this is a prime example of what we call the Pessimism of Disbelief—investors’ and pundits’ tendency in a new bull market to twist good news into bad. Perversely, coverage like this is a reason to be bullish, in our view, as it shows sentiment is exceedingly dour in classic early bull market fashion. For more on the latest US jobs data, please read our 8/7/2020 article, “A Two-Pronged Note on Today’s Jobs Report.”

The Tax Breaks for Homes That Help You Now

MarketMinder’s View: With rock-bottom mortgage rates incentivizing home buying and mortgage refinancing—and tax-law changes still relatively fresh—we reckon many readers could use a primer on mortgage-related tax breaks—what they are, who qualifies, and what you can get. For instance, yes, you can deduct mortgage interest, but whether this actually benefits you depends on the size of your standard deduction compared to your total itemized deductions, which are limited by the cap on state and local tax (SALT) deductions. “Here are examples provided by Evan Liddiard, a CPA who directs federal tax policy at the National Association of Realtors. Say that a married couple buys a $400,000 home with a 20% down payment, a 3% interest rate and a 30-year fixed rate mortgage. The first-year interest deduction would be about $9,500. If the couple deducts that amount, along with the limit of $10,000 for SALT, they’d still need more than $5,300 in charitable or other write-offs to get above the $24,800 threshold. Many single filers will find it easier to get a benefit. If a single person buys a $250,000 home with 20% down and a 3% interest rate, the first-year interest is about $5,950. If this buyer lives in a higher-tax area and has $10,000 of SALT write-offs, then his total itemized deductions are more than $3,500 above the $12,400 threshold, even without other write-offs.” Read on for more useful nuggets.

French and German Factories Surge as Global Rebound Hopes Rise

MarketMinder’s View: Some good, albeit backward-looking, news for your Friday: “Industrial production in Germany jumped by almost 9pc in June from the previous month, according to official figures, with exports up by 14.9pc. At the same time French production climbed more than 14pc, the Insee statistics bureau said. Production is rising for all types of goods, from food to machinery to transport equipment. Output in both countries remains below its pre-coronavirus levels, but factories have recovered more than half of the yawning gap that opened up during lockdowns. The biggest increases in orders for German goods came from the domestic market, but export demand is also picking up.” Industrial production isn’t bouncing as quickly as it fell, but that isn’t surprising. The national lockdown happened all at once. Reopenings are more gradual, hence recovery is slower. The pace doesn’t matter as much as the eventuality of life getting back to normal and boosting earnings over the next 3 – 30 months—which is where we think stocks are looking right now, not the recent past.

Ignore the Gloomsters: Britain Is in a Far Stronger Position Than Anyone Thinks

MarketMinder’s View: In addition to being a delightful breath of fresh air about the art of economic punditry, it also offers a compelling case for optimism that the recovery from COVID-19 will go better than most presume. “All my contrarian instincts tell me not just that the Covid hysteria will be largely behind us by early next year, but that the economic rebound may also be somewhat faster than generally assumed. Start with the old truism that just as in a boom things are never quite as good as they seem, nor are they ever quite as bad as they look in the depths of a crisis. Covid is driving some big structural changes in the economy, but I wonder if they’ll be quite as transformational as made out. The idea, for instance, that we’ll permanently give up much social spending and instead choose to stay at home with a bottle of wine and a Netflix subscription strikes me as deeply unlikely. Once the pandemic fizzles out, much of this activity will resume.” So, most likely, will normal office life and the many hospitality businesses it supports—also widely feared to be gone forever after 9/11, only for normal life to return. Add in largely healthy banks, stock and bond markets that are happy to continue funding healthy companies, and higher savings indicating some pent-up demand, and the setting seems ripe for a relatively robust recovery as the virus continues fading.

Trump Re-Imposes Tariffs on Canadian Aluminum, Prompting Trudeau to Vow Retaliation

MarketMinder’s View: Weeks after the US-Mexico-Canada Agreement—the new version of NAFTA—took effect, President Trump has reinstated a 10% tariff on Canadian aluminum imports, claiming America’s northern neighbor was flooding the market and undercutting domestic producers. Whether or not this is true is largely unprovable and mostly beside the point—this all just seems like typical election-year politicking. The last version of the tariff and the accompanying Canadian retaliation didn’t derail either country’s economic expansion, and we doubt things go differently this time. Considering a new trade deal is in effect, the likelihood of snowballing protectionism from here seems minimal. Stocks have also long since proven they can deal with new tariffs like this, too.

A Bullish 'Golden Cross' Forms in the Dow Industrials

MarketMinder’s View: The golden cross is a popular technical indicator, and it forms when an index’s 50-day moving average crosses above its 200-day average—supposedly a super-bullish sign. Its evil twin is the death cross, a supposedly bearish indicator that flashes when the 50-day average crosses back below the 200-day. Neither is predictive—past performance, which underpins them, never is. A golden cross confirms a rally has happened, but what comes next rests on forward-looking fundamentals. Further, this article focuses on a golden cross that formed in the Dow Jones Industrial Average, a broken, price-weighted gauge of 30 US stocks. We are bullish for fundamental reasons—namely, the strong likelihood of corporate earnings rising over the next few years as the virus fades—not because of what any index—even correctly constructed ones—did over the past 50 or 200 days.

Investing Lessons From the Apple Stock Split

MarketMinder’s View: Please note MarketMinder doesn’t make individual security recommendations. Rather, this article provides a timely reminder about a broader theme: Not all stock market indexes are equally useful. The Dow Jones Industrial Average may be the most well-known stock index, but its flaws disqualify it as a useful resource for investors, in our view. For one, the Dow holds 30 randomly selected US stocks with a big weighting in the Industrials sector—not sufficient to represent broader American capital markets or its diverse, services-led economy. Two, the Dow is a price-weighted index—and this article shows the follies of that approach via the implications of Apple’s stock split: “After Apple’s stock split is complete, it will have about 17.3 billion shares outstanding. Another Dow component, Travelers, has about 250 million shares outstanding. This means that each dollar change in Apple’s stock price would translate into a value change almost 70 times as large as a dollar change in Travelers’ price. In an S&P index fund, a dollar Apple change would count to almost 70 times as much as a dollar Travelers change. But in a fund tied to the Dow — notice that I’m not saying ‘indexed to the Dow’ — a dollar change in either stock price would count the same.” In our view, investors are better off ditching the Dow for a more diverse, market capitalization-weighted index—like the S&P 500 or, better still, the global MSCI World Index—to track markets.

Don’t Rush In to Social Security, Despite Concerns About the Economy

MarketMinder’s View: Those planning to take Social Security within the next few years may feel motivated to speed up their timeline due to concerns that the novel coronavirus will impact the program’s health, reducing payouts if they delay. If you fall in that camp, this article offers some wise counsel to consider before acting. Namely, Social Security is likely to undergo some changes, regardless of COVID-19 or not. “With benefits on pace to be reduced at some point in the mid-2030s, Congress, educators and think tanks already are studying (and arguing about) ways to ‘save’ or stabilize Social Security. Among them: means testing for benefits; raising the ‘full retirement age’ (when a person is first eligible for unreduced benefits); raising the payroll tax; changing how benefits are taxed; and changing how cost-of-living adjustments are calculated.” We don’t know which (if any) of these reforms will be enacted, but the decision likely won’t be made overnight. It also seems likely, as noted here, that more of the burden will fall on younger workers rather than those currently receiving benefits. Regardless, we do think it makes sense to regularly review your retirement plan to ensure it is aligned with your investment goals and objectives. If something has changed, updates may be warranted.