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.


Bernie Sanders Has a Way to Raise 2 Trillion Tax Wall Street Trading

MarketMinder’s View: First, because this piece is laced with politically charged policy ideas, a reminder: Our analysis is focused solely on the potential market impact of the issues discussed here. Vermont Senator and Democratic presidential candidate Bernie Sanders introduced a bill proposing a financial transactions tax (i.e., a levy on the trading of stocks, bonds and financial derivatives). The details: “Under the measure, any stocks traded would be taxed at a rate of 0.5%, bonds at 0.1% and derivatives at 0.005%. So selling $1,000 of stock would incur a tax of $5.” The proposal drove the expected passionate responses. Proponents say this could generate a lot of new revenue from industries that can afford it. Opponents argue the measure would hurt regular investors the most. We would add that if it were to make high-frequency trading cost-prohibitive, it could reduce market liquidity. Yet whether you think this idea is wonderful or terrible, we suggest putting those biases aside and considering a more boring reality: This proposal has a long way to go before even sniffing becoming law. As it stands now, this bill is unlikely to move far in today’s gridlocked Congress. Theoretically, a financial transactions tax may have support under a Democratic White House and Congress. Despite what some pundits may argue, though, nothing is close to conclusive right now. We don’t know which of the 24 (and counting) Democratic presidential nominees will emerge to face President Trump—let alone who will win the Electoral College. Same goes for the next Congress’s composition. To get a Congressional majority, Democrats would have to retain House control in 2020 and pick up at least three Senate seats. All of this is unknowable today, making speculation about a financial transactions tax fodder for think tanks, not a reason for investors to fret. For more, please read our 2/12/2019 commentary, “Why the Slew of 2020 Plans Shouldn’t Tax Investors.”

UK Retail Sales Stall in April

MarketMinder’s View: UK April retail sales volumes were flat on a month-over-month basis—better than expectations for a -0.3% contraction—following March’s strong report. The ONS credited warmer weather as boosting clothing shopping in particular, though some economists noted Easter holiday discounts could also have aided spending. Higher fuel prices may have driven the headline number up too, seeing as sales excluding auto fuel dropped -0.2% m/m. While retail sales cover just a part of total consumption—and the series is bouncy month to month—the persistently dour warnings that accompany the data further illustrate the disconnect between folks’ expectations and reality. Brexit uncertainty is certainly a headwind, but the UK economy is no slouch, either. Though the uncertainty fog will likely persist for the foreseeable future, we don’t think it will derail UK growth—a positive that will become more evident once politicians finally get on with Brexit. For more, see our commentary from last month, “About That Gangbusters UK Retail Sales Report.”

Stockbrokers Face New Rules on Disclosing Conflicts of Interest

MarketMinder’s View: “The SEC is expected to for the first time explicitly require brokers to act in the best interest of their customers—not their own paychecks—when they recommend stocks, mutual funds and other products.” The SEC’s plan—which is still not final, as they will vote on it June 5—follows the Department of Labor’s fiduciary rule, which the courts overturned in March 2018. This is the latest in a long-running regulatory saga over rules aiming to put investors’ interests first. Though a theoretically noble cause, we aren’t convinced regulation and additional paperwork alone will aid investors in identifying who is acting in their best interest. In our view, it is a tall order for any rule to ensure good behavior from a financial adviser or broker. In our view, those seeking investment help should do their own due diligence in regards to any product or service. That process may be more painstaking, but we don’t think there is a suitable substitute for investors seeking advice and help that aligns with their own values.

US Durable Goods Orders Show Notable Pullback in April

MarketMinder’s View: April durable goods orders fell -2.1% m/m, worse than consensus estimates, with transportation equipment orders’ -5.9% drop leading the pullback. Specifically, orders for non-defense aircrafts and parts plunged by -25.1%—likely heavily impacted by one prominent aerospace manufacturer’s drop in orders following the grounding of its newest single-aisle, twin-engine jet due to two recent fatal crashes. That one-off effect aside, big swings are common for durable goods orders, as transportation equipment demand tends to fluctuate. “Core” capital goods orders—which exclude the more volatile defense and aircraft categories—dipped -0.9% m/m after a positive March. While many consider this category a proxy for business investment, it isn’t perfect. For one, capex also includes intellectual property and structures spending—not accounted for by core capital goods orders alone. Moreover, in the US’s services-heavy economy, investment in manufactured products isn’t the growth driver it once was. For more on volatile monthly US data, please read our 5/22/2019 commentary, “Your Handy Late-May Data Roundup.”

Logistics Bottlenecks Hamper Efforts to Produce Less in China

MarketMinder’s View: MarketMinder doesn’t recommend individual securities, and any companies mentioned here are only for illustrative purposes. The point we want to highlight: Global trade logistics are complex, and businesses aren’t going to completely uproot existing relationships because governments say harsh words and implement some additional taxes in the form of tariffs. As noted here, “Poor roads, sparse rail lines and congested ports in Vietnam, Thailand, the Philippines, Cambodia and other potential manufacturing destinations in Southeast Asia have stretched out delivery schedules and raised shipping costs, according to manufacturing and transportation company executives, even as companies have migrated some factory work to the region in the past decade in search of lower labor costs.” China’s longstanding connections make it an integral cog in the global supply chain, a role unlikely to change overnight. Tariffs may prompt businesses to look at alternatives, but we think it is a stretch to argue they will fundamentally shake up the global trade landscape right now—an important point for investors to keep in mind as trade fears swirl.

Euro Zone Business Growth Fails to Shine in May: PMI

MarketMinder’s View: With May’s end approaching, weak eurozone manufacturing data continue leading financial headlines. IHS Markit’s May flash composite purchasing managers’ index (PMI) registered 51.6—readings above 50 indicate expansion—but most coverage focused on the manufacturing PMI’s 47.7. Manufacturing’s fourth straight monthly contraction has driven pundits to call eurozone growth “brittle,” spurring speculation the ECB will have to step in to support growth. We don’t think much has changed, though. Manufacturing grabs attention, but less-heralded services, the dominant economic sector, continues chugging along. The eurozone services PMI hit 52.5, and Germany and France—the biggest member-state economies and the only two reporting flash figures—also reported growthy services (55.0 and 51.7, respectively). Even if manufacturing’s soft patch persists for a while longer, the eurozone expansion likely doesn’t need assistance from the ECB, whose past attempts to help were counterproductive, in our view. That this help-required narrative persists points to how dour sentiment is. This sizable gap between low expectations and solid economic reality is bullish, in our view.

US Manufacturing Activity Dives to More Than 9-Year Low on Trade War Worries, Survey Shows

MarketMinder’s View: Are we starting to see economic fissures from US-China trade tensions? Some—including this piece—posit yes, as IHS Markit’s US May flash composite purchasing managers’ index (PMI) dropped to 50.9, a three-year low. The services PMI posted 50.9, but the manufacturing PMI got more attention with its 50.6, the softest recording since September 2009. All three figures point to expansion, but some worry “trade war” fallout is weighing on the economy. We aren’t as convinced. Though PMIs are timely, they are also surveys—imperfect, especially since sentiment can have an outsized effect. Per IHS Markit’s report, “Business expectations fell to their lowest since the series began in July 2012. Reduced confidence was commonly attributed to hesitation among clients and increased uncertainty, which were both often linked to global trade tensions.” We aren’t saying “soft data” are meaningless, but we believe viewing data within a broader, longer-term context is more beneficial. Yes, industrial production has contracted in recent months—but these are also in line with the recent global industrial soft patch. Moreover, recent history has illustrated industrial weakness—both in the US and globally—doesn’t automatically derail growth. Rather than read too much into one monthly report, we think this is a reminder data can often be a mixed bag—which stocks don’t mind as much as whether future economic results beat expectations overall and on average. For more, see yesterday’s commentary, “Your Handy Late-May Data Roundup.”

In Germany's Smallest State, Traditional Politics Is in Tatters

MarketMinder’s View: Friendly reminders: Our political analysis is nonpartisan by design, regardless of country, as political biases can blind from making sound investing decisions. Second, we don’t think a single state’s election is necessarily representative of a whole nation, though some high-level themes may apply. In that spirit, this profile on the German state of Bremen—the smallest of 16 federal states—nicely captures a political trend coursing throughout Europe. From Spain to Sweden, center-left and center-right establishment parties have been losing support to smaller groups—many which pundits describe as “populist.” That is leading to some previously unfathomable partnerships. As this article notes, with the center-left Social Democratic Party (SPD) expected to suffer big losses in Bremen, some political pundits think its usual governing partner—the left-leaning Green Party—could make a deal with the center-right Christian Democratic Union. In our view, this is a prime example of how smaller parties outside the mainstream are “pancaking” European politics—ushering in a new version of gridlock, as new governing partners are more ideologically opposed than ever before. This is reason to be bullish, in our view, as gridlock reduces uncertainty by decreasing the likelihood of sweeping legislation. We expect this phenomenon to play out in this weekend’s European Parliament elections, too.

How Modi’s Victory Could Reshape India

MarketMinder’s View: With India’s election results now in the books and Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) appearing to have won an outright majority in Parliament’s lower house, pundits are now debating what Modi will do with his new mandate. Will he renew efforts to push forward with economic reforms—a hallmark early in his first term—to help make India’s economy more competitive? Or will Modi focus instead on more sociological issues, like foreign policy or consolidating power? We don’t have a crystal ball, nor are we political experts, but we do think trying to determine a politician’s impact following a free and fair election is an exercise in futility—regardless of the country. Based on our understanding of history, newly elected/reelected politicians aren’t typically able to pass as much major change as folks hope (or fear) for. Political capital is a finite resource, and even the most popular politicians on the campaign trail can run out of it quickly once in power, as Modi demonstrated during his first term. Modi may push through a few of his desired initiatives early in his new term, but his ability to “reshape” a place with nearly 900 million eligible voters and “… is incredibly diverse, more a continent than a country, with 22 official languages and thousands of regional, tribal and caste groups,” may be a tad overstated. For markets, the key will likely be how his actions square with investors’ expectations.

Separatists, Far-Right Make for Rowdy Start to Spain’s Parliament

MarketMinder’s View: “Jailed Catalan separatists, far-right lawmakers, a record number of women and the biggest Socialist group in years held a rowdy opening session on Tuesday of a parliament that reflected Spain’s divisions and diversity like no other in recent memory.” A motley political assembly—pancaked by populists—may be raucous, but noise doesn’t mean a lot of sweeping policy change is forthcoming. In our view, the opposite is more likely. Spain’s Cortes Generales looks gridlocked to the gills as acting Prime Minister Pedro Sánchez gets first crack to form a government—a process that might not get resolved until July or even later given his party lacks a majority. While all the name-calling and finger-pointing on the first day highlights Sánchez’s challenges, a do-little government isn’t a negative for the Spanish economy. GDP growth has been among the eurozone’s fastest despite years with an ineffective government in place, and we don’t see that changing because some smaller parties have gained seats at the table. Speaking of elections, we think imminent European Parliament elections should yield more of the same.

White House, Congressional Leaders Push for Two-Year Budget Deal

MarketMinder’s View: That titular push may sound like music to the ears of those who don’t want the debt ceiling or government shutdown to return to headlines, but we wouldn’t get too optimistic yet: Vague words and frequent meetings ensure nothing. The reason for the recent chatter: “The meeting of top administration officials and congressional leaders of both parties served to kick off what could be months of contentious negotiations ahead of a Sept. 30 government shutdown deadline, which will roughly coincide with when Congress needs to raise the nation’s borrowing limit or risk default.” Congressional leaders are playing nice for now, but they can just as quickly change their tone the next day depending on how negotiations ago. Considering politicians’ tendency to talk big and cater to their constituents, we have a feeling the noise will only intensify through the summer. But if talks break down and it seems like the US is hurtling towards another shutdown/debt ceiling brouhaha, consult recent history. Government shutdowns don’t shut down bull markets, and debt ceiling fears are vastly overstated.

US Companies Face Retaliation in China as Trade War Deepens

MarketMinder’s View: To get a sense of some of the fallout from the US-China trade tiff, “Roughly 47 per cent of the members of the American Chamber of Commerce in China and a similar group based in Shanghai said that on top of recently imposed tariffs, they faced retaliation such as slower customs clearance, more inspections and delayed approvals for licences, according to a survey released on Wednesday.” For those who lean on the more optimistic side, you could interpret this to mean that about half of the surveyed businesses haven’t faced retaliation. We aren’t diminishing the negative impact tariffs are having on companies—we think stocks prefer freer trade and greater ease of doing business, all else equal—but scale here is key. Companies doing business with China may be thinking about shifting some of their supply chains around, but the vast majority aren’t pulling out of the country, either. A true global trade war would be a market negative capable of derailing the bull market, but we aren’t close to that yet.

‘Medicare for All’ Falters as Top Democrats Fret Over Backlash

MarketMinder’s View: This article touches on some political themes, and as a reminder, our commentary is intentionally non-partisan. We highlight this piece because it illustrates an important lesson about politics: Just because a radical-sounding idea gets attention doesn’t mean it will even get close to becoming law. “A bill sponsored by Representative Pramila Jayapal of Washington State and 109 other Democrats hasn’t gained much support since its release in February, and the Budget panel’s Democratic chairman said he doesn’t see such legislation advancing any time soon. ... The Jayapal legislation is mostly backed by Democrats in safe districts, with few cosponsors among the 40 members who won seats previously held by Republicans in 2018 to give the party control of the House. Winning their support will be tough; many of them prefer to support incremental health-care changes rather than one as far-reaching and politically risky as Medicare for All.” Yup. Sweeping legislation typically faces a long and rocky road before it is enacted—if it ever is. Not only does “Medicare for All” face intraparty divisions in the Democrat-controlled House today, but it likely wouldn’t make it through the Republican-controlled Senate, much less the White House. Theoretically, if the Democrats gain a majority in Congress in two years’ time, they may be more open to pushing through such legislation. But as 2010’s Affordable Care Act shows, it would likely be watered down in the (arduous) process. For now, 2020 political outcomes are impossible to game, much less the likelihood for major legislation—making this a source of uncertainty weighing on sentiment, but likely not a negative fundamental development stocks will need to weigh. For more on why it is premature to cheer or fear a health system overhaul, please see our 5/16/2019 commentary, “Why You Shouldn’t Overrate Campaign Trail Proposals: ‘Medicare for All’ Edition.”

As the Stock Market Makes a Comeback, the Bond Market Flashes a ‘Dire’ Warning About the Economy

MarketMinder’s View: This piece puts way too much stock in short-term market movements, in our view. The misperceived thesis: Bond markets, where Treasury yields are near year-to-date lows, see trouble stocks are missing. The problem with this common misperception: US stock and bond markets are highly liquid, with participants pricing in all the same widely available information near instantaneously. However, stocks and bonds have different drivers. Stocks care about the economic, political and sentiment drivers impacting investor demand—and how expectations square with reality—while US government bonds primarily weigh inflation expectations and supply. The article also cites market breadth—the number of stocks outperforming the overall market—and fund flows as concerns. Breadth typically narrows as a bull market matures, but it doesn’t necessarily suggest the end is nigh. Rather, it shows growth-oriented, big-cap stocks are in favor. As for fund flows, we don’t think an uptick in stock fund outflows is an inherently bearish signal. Stocks trade in an auction market—for every seller, there is a buyer, and flows don’t tell you what investors did with the proceeds. At most, fund flows are one way to gauge sentiment—particularly when they are at extremes. Overall, the fretting suggests sentiment remains dour overall, setting up a low bar for reality to clear—bullish for stocks!

Renminbi 'Weaponisation' Talk Overblown

MarketMinder’s View: As the US/China trade spat continues, many worry China has a pair of powerful weapons in its holster—devaluing the yuan (aka the renminbi) to aid its exporters, or dumping its Treasury holdings in an effort to send US interest rates surging. This article cites a couple sensible reasons why China would likely refrain from these actions. First, a yuan devaluation “might trigger destabilising capital outflows” from China—unwelcome at a time when policymakers are trying to bolster investment and growth. Second, unloading Treasurys en masse would introduce the thorny problem of what to do with the dollar proceeds. Converting them all to yuan could send the currency skyward—not good for China’s exporters—and “aside from the US, no other global capital market is sufficiently deep that it could absorb such a large of stock of funds without disruption, let alone while affording essential liquidity.” China doesn’t hold lots of Treasurys for leverage—it does so because they are the world’s most stable asset and lowest credit risk. For more, check out last week’s commentary, “On Rumors of a Chinese US Treasury Dump.”

SALT Apocalypse Predictions Have Not Come True

MarketMinder’s View: While this article touches on topics that could trigger political biases—blinding for investors—we feature it to highlight an ideology-free lesson: Predicting tax changes’ effects isn’t straightforward. Many worried the 2017 tax reform’s cap on state and local tax (SALT) deductions would spur huge revenue shortfalls in high-tax states. Yet reality has played out differently, with tax revenues up year over year—and some states taking in record amounts in April. Reasons include: The SALT cap “is saving states money by lowering their borrowing costs. That’s because investors seeking to reduce their tax bill are plowing a record-setting amount of cash into municipal bonds, driving interest rates lower. … States are also benefiting from a broader tax base because the law eliminated some exemptions and limited deductions, like mortgage interest. Since states that levy income taxes use federal adjusted gross income or taxable income as the base, they have more income to tax.” While tax changes create winners and losers—and this isn’t the final word on the 2017 tax bill’s effects—they frequently don’t play out as most expect, which is a big reason they don’t have a preset market impact. We think this is an important lesson for investors to keep in mind with any legislative matter, tax-related or no.

There Is No Technology-Stock Bubble

MarketMinder’s View: Since MarketMinder doesn’t recommend individual securities, we don’t suggest you buy, sell or take any other action with the companies mentioned herein. Disclaimer aside, we found this to be a sound analysis of why comparisons between today’s Tech IPO scene and the late 1990s’ don’t hold water. First, firms going public now are generally much better established than their flimsy dot-com predecessors. “Whereas the New Era’s fringe consisted of businesses that lacked clients, most current technology firms have significant revenues when they go public. They may yet go bankrupt if they cannot convert the top line into bottom-line success, but at least they stand a puncher’s chance.” Another missing bubble element today: euphoric sentiment. “Brokerage firms are not blanketing the airwaves with day-trading advertisements; there are no best-sellers advocating that the trees can grow to the sky; and Morningstar analysts are not receiving death threats for assigning low star ratings to technology stocks.” Instead, caution and warnings abound in the face of a solid economic and political backdrop for stocks. For more, see our recent commentary, “More IPOs Shouldn’t Slow Stocks.”

Want to Be a 401(k) Millionaire? Here’s What It Takes.

MarketMinder’s View: Though the objective of becoming a 401(k) millionaire is lofty, the ingredients are simple: making consistent contributions (ideally to the legal maximum—$19,000 in 2019), starting to invest as early as possible, taking advantage of any matching company contributions, owning a portfolio targeting long-term growth (in our view, that means owning stocks) and remaining disciplined through short-term market volatility. In particular, your contributions don’t impact the latter two ingredients, which are most critical, in our view. Over time, stocks’ higher short-term volatility fades, leaving compound growth to work its magic on stocks’ historically superior longer-term returns. Staying focused on your full time horizon—how long you need your assets to work for you, which may stretch well beyond your retirement date—isn’t easy by any stretch, but it may help you join (or stay in) the titular elite group.

Brexit Stockpiling Boom Ends for UK factories: CBI

MarketMinder’s View: “British factories suffered the biggest fall in orders [in May] since late 2016, gearing down from their rush to stockpile before the original Brexit deadline in March and boding badly for the economy in the second quarter, a survey showed. … Factories are now lumbered with the greatest stocks of finished goods since 2009, the [Confederation of British Industry] said.” Per one economist, “the towering inventories pointed to a ‘significantly weaker’ performance ahead for the manufacturing sector, which accounts for 10 percent of British economic output.” It isn’t yet clear the extent to which tepid factory activity will bite UK growth in Q2. However, while inventory overhang may weigh on manufacturing growth in the near future, this doesn’t make GDP contraction automatic. The UK’s services-driven economy has expanded alongside manufacturing soft patches before. More notably, UK factories’ post-stockpiling retrenchment was widely anticipated, sapping surprise power if it persists. We don’t believe UK markets need rip-roaring economic data to rise. For more, see last Friday’s cover story, “UK Stocks Look Past the Brexit Fog.”

European Elections Could Be Hugely Significant for the Economy

MarketMinder’s View: As European voters head to the polls to elect members of European Parliament (EP) this week, analyses surrounding the vote’s potential fallout have reached a fever pitch. The argument here: A strong populist showing would be the death knell for the euro, as it portends to populists doing well in future elections (e.g., France). From an investment perspective, this article argues stocks may not see—or outright disregard—this looming trouble until it is too late. In our view, this is a classic example of overstating possibilities rather than looking at probabilities. Stocks move on the latter. Yes, it is possible populists do better-than-expected in EP elections, which could have political fallout at the local level—and future ramifications. Yet that projection relies on variables that are largely unknowable today and ignores European voters’ history of using European Parliamentary elections as a protest vote. Moreover, we don’t buy the claim populists entering power is an automatic negative—most often, it leads to gridlock, as it has most recently in Italy. Stocks aren’t perfect leading indicators, especially in the short term, but in our view, they digest and price in information better than any pundit or expert out there. We don’t believe they are missing anything that is widely known, and when in doubt, trusting the market seems like the way to go. For more, see today’s commentary, “How Populists, Despite Fears, Can Boost European Stocks This Year.”