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: Please note MarketMinder doesn’t make individual security recommendations. The companies mentioned here are incidental to the broader point on the prospects for—and the potential market impact of—a second COVID-19 wave. Over the holiday weekend, “scenes of packed beaches, bars, boardwalks and pool parties” have led to alarm that Americans are broadly ditching social distancing rules, sparking fear of a vigorous second wave of the virus. Many argue this would necessitate renewed lockdowns later, allegedly dooming stocks. First, understand: March 23 may or may not prove to be the bear market’s low. We can’t know that now and won’t be able to until we have the benefit of quite a few months’ hindsight. It is possible a second wave comes and does necessitate lockdowns. But is it probable? Considering markets are well aware of this potential scenario, it would likely have to be not only bad but worse than expected to move markets materially. We can’t know that now, and nothing in this piece changes that. Ultimately, the key in our view: Stocks look forward 3 to 30 months. It is totally normal—not euphoric—for stocks to rise significantly before earnings, economic data or even the virus’s likely trajectory reflect marked improvement. A lot of the warnings here sound like standard “second shoe to drop” pessimism common around and shortly after bear market lows.
MarketMinder’s View: This piece features a survey and interviews with various economists discussing their expectations for the economic recovery (not the market recovery, mind you). “Tellingly, only 1 out of 31 economists forecasted a V-shape, which would see a quick recovery after the sharp decline of the past few months.” Most of them projected a rather long slog for GDP and unemployment to return to pre-contraction levels, which may or may not be true. But for investors, surveys like this are most helpful for gauging sentiment and baseline expectations, which reality can then either hit, miss or exceed. Currently, it seems the bar reality needs to clear is set rather low. Hence, whether these forecasts prove accurate is likely less significant for markets than most think. Markets really don’t much mind whether GDP is at all-time highs or not. Unemployment, a late-lagging indicator, is even less helpful. Rather, markets are likely to move more on the expected direction of activity and how activity relates to expectations. They may already be anticipating the improvements many of these economists forecast later this year.
MarketMinder’s View: “The record stimulus of 117 trillion yen, which will be funded partly by a second extra budget, followed another 117 trillion yen package rolled out last month. The new package takes Japan’s total spending to combat the virus fallout to 234 trillion yen ($2.18 trillion), or about 40% of gross domestic product.” Despite the titular moniker and this article’s take, we wouldn’t call this package “stimulus”—it mostly amounts to more bridge loans for smaller businesses, medical support for healthcare workers and supplies, rent support and payouts to struggling households. Nor is it as large as the headline reading. For one, this $1.1 trillion figure—and the preceding extra budget—aren’t all government spending. They combine central and local government outlays, as well as estimates of induced private sector activity including bank lending. All that inflates the headline figures—not unlike America’s, where much of the spending relies on banks making bridge loans and borrowers requesting them. Actual Japanese government spending doesn’t total 40% of GDP—our research puts it at closer to 11%.
MarketMinder’s View: The flipside of debt fears, as we observed recently, is inflation dread. The latest example comes from the UK, which is borrowing record peacetime amounts to fund its pandemic response. While the article acknowledges the market doesn’t seem too concerned at the moment, it suggests capacity constraints, lower productivity and global protectionism will ignite inflation down the road, as the Bank of England prints mountains of money to boost demand. Beyond being a grab bag of over a decade’s worth of fears that didn’t come true, this hypothesis strikes us as sheer speculation that extrapolates recent events to a hyperbolic degree. It is also quite possible that output increases after lockdown ends, productivity remains higher than 20th-century indicators are built to capture and the UK trades more with the rest of the world. We would also note that the BoE’s asset purchase program isn’t actual money printing and the last decade proved it disinflationary. Neither it nor any of the bank’s other facilities amount to permanent monetary debt financing. For those worried about inflation, we suggest not reading too much into the most recent data. A big temporary increase in money supply was necessary to replace lost wages and revenues. Similar monetary jumps during and after past crises didn’t bring runaway inflation, despite rampant fears otherwise.
MarketMinder’s View: While it is always important to be on the lookout for credit and debit card scams, they are on the rise as fraudsters seek to take advantage of folks’ fears (and charity) during the pandemic. Thankfully, a few simple steps can lower your risk. Scammers rely on obtaining your personal information to unlock your accounts, including (but not limited to) passwords, account numbers, your social security number, mother’s maiden name and other common identifiers. Never divulge such information to someone who calls asking for it. Also, monitor all your accounts for suspicious activity—perhaps a chore, but less troublesome than being liable for unauthorized charges. Then, if you suspect anything, you can freeze your account. Lastly, as this article notes, using credit cards—instead of debit—also helps protect you because “federal law limits your liability for fraudulent credit-card purchases to $50,” and charges are easier to reverse.
MarketMinder’s View: This article rounds up a host of more timely, albeit narrower, gauges of economic activity—like air travelers, online restaurant reservations, truck loads, mortgage applications and property showings—that are picking up after recent historic declines. While these “real time” data points don’t perfectly track more comprehensive measures, they hint at a potentially nascent economic recovery as states gradually reopen. In our view, its progress largely depends on governments’ further loosening COVID restrictions—renewed clampdowns could reverse these gains. “Much of the pickup in activity reflects states’ decisions to start opening up segments of their economies that had been shut down to prevent the spread of infection, including Florida, Georgia and Ohio.” Though we disagree with the point here that consumer spending’s recovery relies on businesses’ rehiring workers—personal consumption isn’t as variable as many think, and its larger-than-usual fall this time stemmed from closures of stores and personal services—this piece does sensibly note employment is a lagging indicator, as “job losses often persist for months after a recovery begins.” Since stocks generally move ahead of even “real time” data, the latter don’t dictate markets’ path from here. But they do shape investors’ expectations for recovery, setting up potential surprise or disappointment later depending on how reality measures up. For more, see our 4/15/2020 commentary, “Non-Traditional Data Show What Stocks Reacted To.”
MarketMinder’s View: Here is an informative review of why oil prices have partially rebounded after March – April’s plunge. To summarize: Supply is down as producers reduce output, while demand is recovering as economies begin reopening after COVID-driven shutdowns. “In the US, the world’s largest oil-consuming nation, the same [car usage] data shows road journeys beginning to approach pre-pandemic levels as more states open up ahead of the summer driving season. Road congestion in Beijing is back to normal. … Oil supply is now on course to drop by up to 13 million barrels per day in the second quarter, according to S&P Global Platts Analytics. … The number of rigs operating in America has dropped by 65pc. Crude output has fallen by 1.6m barrels per day from March to a total of 11.5m barrels per day, according to the US Energy Information Administration.” Oil price changes matter to the Energy industry, but in terms of macroeconomic impact, their effect is limited. Rather, in our view, the budding positive data here suggest demand’s recovery relies primarily on reopening progress—the sooner restrictions ease, the better for the global economy.
MarketMinder’s View: This piece posits that the Fed will keep short-term interest rates ultra-low for years on the presumption low rates support employment without risking high inflation. We think this argument commits two critical errors. The first: extrapolating Fed member statements into future monetary policy decisions. In our view, recent comments by Fed Chairman Jerome Powell about the weak link between unemployment and inflation reflect his current views. Yet those views can change in the future—not to mention, his voice is one on a larger committee. Hence, we recommend watching what central bankers do, not what they say. Second, we think this piece also hugely exaggerates the Fed’s influence on employment. Monetary policy decisions may or may not help foster economic growth, but they aren’t the only input—as COVID-19 lockdowns make abundantly clear. Regardless of where the Fed sets the fed-funds target rate, it is highly unlikely to affect business owners’ decisions to hire, retain or lay off employees, which are likely much more about, you know, whether they are allowed to open. While today’s circumstances are unusual historically, this illustrates the fact overall business conditions influence employment—not merely one aspect of monetary policy.
MarketMinder’s View: With global trade flows declining in March and expected to tank in the coming months, this piece explores the possibility of “a rollback in intricate cross-border supply chains.” The reason: The coronavirus and trade tensions between the US and China are forcing “multinationals and policy makers to consider ways to bring production closer to home, safeguard the production of essential goods and reduce their reliance on China as a manufacturing base” in order to lower the risk of lockdowns or natural disasters taking key suppliers offline. Though political barbs over the past couple years have stoked worries about globalization’s retreat, cutting supply chains is easier said than done given the amount of investment and existing relationships supporting the network. Moreover, companies have been diverting production from China to other countries like Vietnam and Thailand for years due to factors like higher labor costs—this isn’t a new trend. Monitoring the state of global trade is worthwhile, since stocks don’t like disruptions to commerce. However, forecasts of globalization’s demise seem premature and more related to political rhetoric than economic reality, in our view.
MarketMinder’s View: According to the latest Social Security Trustee Report, annual outlays will exceed revenues starting next year, and “the Old-Age and Survivors Insurance Trust Fund (OASI), which pays retirement and survivor benefits, will be unable to pay full benefits in 2034.” Moreover, the trustees noted that since their estimates don’t account for COVID fallout—in the form of plunging Social Security payroll taxes—the actual date may end up being sooner. Social Security fears have swirled for a long time, but there are relatively easy fixes Congress can pass. For instance, it could raise the retirement age for people slated to retire over a decade from now, or it could adjust the formula that determines benefits increases in a way that wouldn’t affect current retirees and would give younger workers ample time to plan. Congress could also fund the program with other revenues or tweak taxes to ensure incoming funds match outgoing payments. We aren’t saying one or any of these fixes are the solution—MarketMinder’s focus is on potential market impact rather than policy debate. But Congress has tweaked Social Security multiple times in the past, and given seniors are a key voting bloc, we doubt it would hesitate to do so again when absolutely necessary.
MarketMinder’s View: China’s rubber-stamp parliament is finally convening for its annual session, whose main significance for investors is typically the announcement of the government’s official growth targets. This year, the target was the subject of much speculation, given COVID-19’s impact on China and its trading partners and the fact most economists expect only meager full-year growth. But rather than set an actual target, which would amount to a guess given the number of uncontrollable variables—like when its trade partners reopen their economies—the government simply announced a raft of fiscal stimulus measures to shore up economic stability, its chief aim. As well as tax cuts and assistance for struggling households, the program includes a $140 billion bond issuance to fund massive infrastructure investments. As a percentage of GDP, the program is on par with the government assistance provided in 2008 and 2009, which helped China’s economy weather the financial crisis without a recession. We aren’t arguing the results will be the same this time around, given Chinese GDP has already contracted sharply, but massive fiscal assistance as the country waits for its overseas customers to get back online is another point against a prolonged downturn in the world’s second-largest economy, in our view. As for the growth target’s absence, the target was always just an arbitrary construct that fueled fears China’s statistics agency was cooking the books to give the appearance of meeting it. In a weird way, scrapping it adds transparency and lets the market form its own expectations.
MarketMinder’s View: With today’s news that the UK’s budget deficit hit a record high in April, debt fears are all over the place. This piece, though a little policy-prescriptive in places, does a nice, concise job of putting those fears in perspective: “… even after the biggest surge in borrowing we have seen outside of a war, the Government’s payments on debt interest as a share of revenues have barely budged, at 3.6pc.” That figure is the lowest in decades, as the accompanying chart shows, due to years of low interest rates enabling Her Majesty’s Treasury to refinance its debt stock at ever-cheaper rates. They can still do so today, thanks to rates being at generational lows up and down the yield curve. Three-year gilts even fetched negative yields at auction this week. We aren’t saying the UK is immune to a debt crisis for all of space and time, but it doesn’t appear to be a risk investors need to fret over the foreseeable future.
MarketMinder’s View: Shocking no one, UK retail sales fell -18.1% m/m in April, with brick-and-mortar shop and clothing sales plunging as grocery stores did ok and online spending soared. With garden centers and DIY stores now starting to open, retail sales have a reasonably good chance of stabilizing in May, and many economists expect the worst is behind us. However, we don’t expect chatter about the demise of UK retail to fade anytime soon, particularly with the Office for National Statistics’ report showing 14% of stores reporting zero—yep, zero—sales in the month. That statistic, in our view, illustrates the economic importance of enabling businesses to re-open and shows why the downturn’s duration, not its magnitude, likely matters most. Simply, businesses can’t begin to recover until their doors open, no matter how much time small business assistance programs buy.
MarketMinder’s View: Barring something big happening this afternoon, Argentina will miss a $500 million interest payment due to foreign bondholders, notching its ninth default. This was widely expected even before the payment first came due a month ago, opening a 30-day grace period for the government to negotiate with creditors. Local markets reflected it long ago, and returns throughout Emerging Markets more broadly indicate investors understand Argentina’s problems are unique and local, not a trigger for contagion. What markets likely care more about from here is whether the government can come to a relatively quick agreement on a debt swap or ends up stiffing creditors in a protracted court battle, as past administrations did, shutting off the country’s international financing access for years. That led to runaway inflation as the central bank printed money to finance government debt issued in pesos, one of the many economic troubles plaguing the prior Peronist regime. Mostly, to us, this saga underscores just how backward-looking index reclassifications are. MSCI upgraded Argentina from Frontier to Emerging Markets a couple of years ago based on former President Mauricio Macri’s progress on restoring the country’s economic and financial credibility. Now we are seeing how quickly that credibility can fade, which may yet cause the country to receive a return ticket to Frontier Markets. So consider this a reminder to always weigh forward-looking factors when making investment decisions, rather than presuming index upgrades mean perma-prosperity.
MarketMinder’s View: Echoing the Fed, BoE and ECB, the BoJ announced a new program aimed at increasing lending to small businesses hurt by COVID-19 containment efforts. As with similar programs in the West, this isn’t stimulus—rather, it is a replacement for revenues lost while much of the country is shuttered. A backstop or bridge loan, not a boost. Regardless of whether its efficacy matches, exceeds or trails other countries’ success, buying time is only a temporary substitute for the real economic salve: re-opening businesses.
MarketMinder’s View: When the economic fallout from COVID restrictions began to manifest, politicians in America and Europe pledged businesses would get funding to stay afloat. Yet reality is proving to be more complex. This article highlights some of the issues facing Europe: “When it comes to actual loans, banks in Italy have processed and approved requests for around €13 billion ($14.3 billion). That is far below the €300 billion the government is making available.” The reason for the disconnect: “No matter how much money is thrown at them [banks] by governments, there is a limit to how much risk they can take.” Banks play a critical role in developed economies and create most new money. They provide credit to businesses and individuals, who can then use that capital to spend and invest as they see fit. However, banks aren’t charities. Lending involves risk, from potential loss to legal liability. As explained here, “… in Italy, bankers can be held legally responsible for the decision to issue the guaranteed loan and can potentially face criminal sanctions if the credit turns bad.” Given these disincentives, many banks are reluctant to lend to anyone but the most creditworthy. In our view, this is a timely reminder why investors should be skeptical when politicians make grandiose promises: What they say doesn’t always align with what will happen.
MarketMinder’s View: We have a few quibbles with this argument, particularly with the advocacy for ongoing financial support from policymakers to “speed along the recovery.” While fiscal and monetary measures may provide lifelines for those struggling, they aren’t a prerequisite for a recovery or a boost-in-waiting—rather, they replace lost income and revenue in the immediate term. More critical to the growth outlook, in our view, is the timing of reopening the economy and allowing normal activity to resume. That aside, this piece sensibly argues why the current economic downturn’s severity doesn’t necessarily mean the economy itself has fundamentally changed for the worse. “Instead, we literally flipped a switch and told companies to close. You can’t feign surprise at layoffs in the leisure and hospitality sector when restaurants and entertainment venues are all shuttered overnight. You can’t expect retail sales to do anything other than plummet if activity is limited to only a narrow class of essential providers. Hard as it might be to accept, the depressed data is a feature of policies enacted to slow the spread of Covid-19. It is not a bug.” This hasn’t been a typical economic pullback, but for stocks, what matters more now is the downturn’s duration and how it compares with investors’ expectations. That development will play a big role in determining the start of the next bull market.
MarketMinder’s View: Japan’s April exports are the latest data illustrating the economic fallout from lockdowns in the US and Europe. “Ministry of Finance (MOF) data on Thursday showed Japan’s exports fell 21.9% in April year-on-year as U.S.-bound shipments slumped 37.8%, the fastest decline since 2009, with car exports there plunging 65.8%.” In value terms, Japanese exports have contracted on a year-over-year basis for the past 17 months, so flagging external demand—previously related to a global manufacturing rough patch—isn’t a new development. But March and April’s figures (-11.7% y/y and -21.9% y/y, respectively) highlight how suddenly demand cratered due to COVID-related economic lockdowns. We believe demand will rebound as countries gradually reopen, though Japan was one of the last major countries to impose virus restrictions, and several non-COVID domestic economic headwinds still linger—a reminder nations’ recoveries won’t look exactly the same.
MarketMinder’s View: Here is a nifty primer about the National Bureau of Economic Research’s Business Cycle Dating Committee (BCDC)—the arbiter of US recessions—and it determines business-cycle peaks and troughs. Rather than the popular definition (two consecutive quarters of contractionary GDP, also called a “technical recession”), the BCDC defines a recession as “a significant decline in economic activity (that) spreads across the economy and can last from a few months to more than a year.” Besides GDP, the BCDC incorporates measures from private-sector GDP estimates to industrial production and consumer spending metrics. Importantly for investors, the BCDC isn’t seeking to forecast future business conditions, and their conclusions come at a considerable lag. “In the time since its creation in 1978, the BCDC has formally announced the business-cycle peak anywhere from five to 11 months after the fact. Announcements of the trough month also come well after the fact: anywhere from nine to 21 months.” Considering stocks are leading indicators, waiting for this as an all-clear signal risks missing a good chunk of the start of the next bull market, in our view.
MarketMinder’s View: In our global coverage of the financial news, we have seen increasingly more pundits and experts argue economic recovery will take a long time. As colorfully described here, “The bad news is that a return to pre-crisis levels of activity is a long way off and, as things stand, will be measured in years rather than months. There is more chance of spotting a yeti in the Himalayas than there is of a sighting of the V-shaped recovery.” We aren’t arguing today’s purchasing managers’ survey data signal a big rebound is afoot. Nor are we forecasting the economic recovery’s beginning or shape. From an investing perspective, though, articles like this suggest sentiment is becoming increasingly pessimistic. When many predict a long, painful road ahead, negative surprise power starts whittling away, too. Counterintuitively, that is a positive sign for stocks, in our view, although we still think it is premature to declare the bear market over. For more, see our 5/8/2020 commentary, “What Recovery Pessimism Means for Stocks.”