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: Per the Office for National Statistics, December UK retail sales volumes fell -0.6% m/m—their fifth straight monthly decline. Even if December’s results were skewed down by Black Friday-related seasonal adjustments, which is possible given Black Friday was included in December’s results due to its late timing, the trend here isn’t great. At the same time, we are hesitant to draw big conclusions given Brexit’s influence. While December was part of the holiday shopping season, it also followed a stretch where other reports suggested businesses and households had done some stocking up ahead of the delayed Halloween Brexit deadline. Surrounding the first Brexit deadline on March 29, consumers stocked up beforehand, and retail sales fell in April and May. With so many moving parts, it seems fruitless to divine great meaning, good or bad. So, we will simply point out that retail sales are only part of consumer spending, the majority of which is services—largely absent from this report.
MarketMinder’s View: Headline December industrial production fell -0.3% m/m, partly reversing November’s 0.8% rise, but that drop came mostly from unseasonably warm weather denting utilities output (read: home heating). Manufacturing output rose 0.2% m/m, the second straight monthly increase, suggesting the industry’s soft patch may be starting to ease. US growth doesn’t depend on manufacturing, as most of America’s GDP comes from services, but a factory recovery would likely help sentiment keep warming.
MarketMinder’s View: For the full year, that is. While transaction volumes of office property fell -36% to £11.3 billion in 2019—indeed the least since 2011—“buyers splashed out more than £2.5 billion for office property in the capital in December.” What else happened in December? A landslide general election made a January 31 Brexit under Prime Minister Boris Johnson’s deal a foregone conclusion. As always, we are politically agnostic, with no preference for any politician or party—and no feelings one way or the other regarding Brexit itself. However, this data nugget strikes us as yet another example of falling Brexit uncertainty enabling businesses to execute business plans they have had on ice since the Brexit referendum in June 2016. Now that Brexit is for sure happening at a certain time, with or without Big Ben bonging for the occasion, businesses can move on, and so can UK stocks.
MarketMinder’s View: First, the numbers: Chinese Q4 GDP rose 6.0% y/y, matching Q3’s growth rate and bringing full-year growth to 6.1%, within the government’s target range of 6.0% – 6.5%. This was the slowest annual growth since 1990, which pundits blamed on the “bruising trade war with the United States and sputtering investment,” ignoring that China started slowing years before said trade tiff started. The likelier culprits look like the private sector’s ongoing difficulty accessing credit—as discussed in the article—and simple math. In short, the bigger Chinese GDP gets, the tougher it is to maintain eye-popping growth rates—it is a function of having a huge denominator in the percentage calculation. As for what comes next, we think those anticipating stability will likely prove correct. Not only did monthly data improve, but new loans hit a record high of 16.81 trillion yuan ($2.44 trillion) in 2019. The jury is still out on whether enough of that is getting to smaller private firms, but officials remain focused on ensuring it does. Meanwhile, other anecdotal evidence suggests local governments are availing themselves of recent stimulus, which should add an economic tailwind.
MarketMinder’s View: We highlight this article not to comment on climate change in particular, as the topic largely falls in the realm of sociology—which doesn’t materially affect the factors stocks care about for the foreseeable future. Rather, we think it commits a couple common errors in financial market commentary—namely, using straight-line math to extrapolate today’s conditions into the distant future. Whether you believe climate change should be atop business leaders’ minds today or not, trying to forecast what the world will look like 10, 20 or 30 years in the future is impossible, in our view. Markets don’t look much further out than 30 months—and focus most on the next 12 – 18 months—so we think investors should keep a similar timeframe when considering what stocks will do. Second, while we don’t dismiss natural disasters, they tend to shift economic activity rather than delete it. Their immediate costs are usually too small to create a recession. The notable exception—Japan’s 2011 earthquake—was unrelated to climate change and a unique incident featuring a massive tidal wave and nuclear disaster. In the Australian fires’ case, the latest estimate pegs the cost at just 0.2% of GDP. They are tragic, but they aren’t likely to prove a recession driver.
MarketMinder’s View: Get beyond the colorful charts, large numbers and complex-sounding models, and this article’s argument is straightforward: Central banks have been propping up the decade-long bull market, and if they don’t step in with more liquidity this year, stocks may suffer. In our view, this is one of the bull’s longest-running misperceptions. Yes, stocks rose as central banks implemented “stimulative” measures like quantitative easing (QE) and interest rate cuts. But don’t presume coincidence means causation. For example, if QE’s created reserves actually stimulated anything, we should have seen a surge in lending as those reserves backed new loans—yet the data show loan growth slowed while QE was in place and most new reserves were parked as excess, not required (which they would be if backing lending). For a more recent example, the Fed didn’t start cutting rates until July 31 last year—at that point, the S&P 500 was already up 20.2% (Source: FactSet, S&P 500 Total Return Index, 12/31/2018 – 7/31/2019). Simply, stocks haven’t needed central banks’ help to climb over the past 10 years, and they don’t need any assistance to rise further this year. P.S.: The Fed isn’t launching a new stimulus package. It is increasing short-term Treasury purchases in order to stabilize bank funding markets, a normal operation the bank did for decades before 2008. “Stimulus” would be long-term asset purchases, which remain on ice. For more, see our 12/31/2019 commentary, “No, the Big 2019 Wasn’t All About Rate Cuts and a Tariff Truce.”
MarketMinder’s View: This pithy article shares two helpful investing reminders. The first: always know what you are buying. Take the concept of “value” investing, which typically seeks to find stocks that are cheap according to your preferred metric. As noted here, one research outfit counted 3,168 ways that qualified as a “value” investment strategy. If you are looking for a certain approach, make sure you look beyond the title. The second helpful tidbit: Remember humans are behind every investment decision, regardless of how technical or sophisticated it sounds. “The pitch for factor investing is that academically-sourced drivers of returns—such as quality, value and momentum—can be systematically harvested without much human skill. But … human decision-making, with all its biases and blindspots, is everywhere. And they can profoundly influence returns. Apart from picking a signal, humans decide how to weight each stock. They have to choose whether to short an index or individual names, how to treat sector biases and when to re-balance the portfolio …” Don’t let clever marketing keep you from doing your due diligence.
MarketMinder’s View: In light of the US and China signing “phase one” of their trade deal on Wednesday, we found President Trump’s recent comments interesting. “‘China is helping us with a lot of the things that they can be helping us with, which you don't see in a deal, but they have been very, very helpful with respect to Kim Jong-un, who has great respect for President Xi,’ Trump said, referring respectively to North Korea's leader and Chinese President Xi Jinping.” Take every politician’s words with copious grains of salt, but we have long suspected President Trump’s tariff tiff with China was less about economic policy and more about politics. In part, it seemed like Trump tied trade talks to working out a denuclearization deal with North Korean despot Kim Jong-un. China’s involvement is basically a prerequisite, and while nothing has materialized yet, the pattern of ratcheting up tariffs and proclaiming some superficial wins is noticeable. In our view, this is a reminder for investors that political calculus matters just as much—if not more—than economic considerations in recent “trade war” rhetoric. For more, see our 7/2/2019 commentary, “G-20 Yields More Evidence Trump's Tariffs Aren't All About Trade.”
MarketMinder’s View: US retail sales ended 2019 positively, rising 0.3% m/m in December. Growth was broad-based, as “Every major group except auto dealers and department stores reported stronger sales.” While December sales get eyeballs as pundits ascertain how retailers fared during the all-important holiday season, we think the longer-term trend matters more. For the year, retail sales were up 5.8%, and on a monthly basis, they fell just twice in 2019. This subset of consumer spending has been faring well for a while—more evidence of the US’s solid economic footing.
MarketMinder’s View: Before we dive in, please note that MarketMinder doesn’t recommend individual securities. In our view, the ones mentioned here touch on a broader theme we wish to highlight: Mega-cap growth stocks tend to outperform as the market cycle matures. While that is to be expected, in our view, this article frets over the allegedly troublesome implications of a few companies “dominating the stock market.” Namely, the warnings here include individual stocks surpassing a 4% weighting in the S&P 500 and a handful of stocks driving the majority of last year’s returns. We think these fears are wide of the mark. Crossing an arbitrary index weighting threshold says nothing about a company’s underlying fundamentals and how it will perform in the future. Second, in a bull’s later stages, market breadth—the proportion of stocks outperforming the overall market—typically dwindles. That doesn’t mean the bull is over—it is a normal part of the sentiment evolution driven by the types of stocks investors buy later in a bull. These investors are usually more risk averse. They may have missed much of the bull to this point and tend to target firms they see as known quantities—big firms with widely recognized brands and fast earnings growth. That favors mega-cap stocks. It also means fishing for hidden, depressed small-cap gems, as some analysts cited here suggest, isn’t likely to prove a great approach, in our view. For more on growth trends, please see our 10/10/2019 commentary, “Stocks’ Value Season Hasn’t Arrived Yet.”
MarketMinder’s View: On the one hand, this article points out the titular “old-fashioned indicators”—e.g., ISM’s manufacturing purchasing managers’ index (PMI), Dow Theory and the Cass Freight Index—may not be very representative of the modern global economy, considering services and consumption drive output for most major economies. As noted here, “Strategies reliant on signals sent from America’s industrial underbelly had a particularly awful showing. While millions of people remain employed by the old economy, devotion to indicators tied to its health has been something less than a route to riches during the latest leg of the bull market. Analysts are asking whether American industry has evolved so far away from plants and machinery over the last three decades that once-tried-and-true investing signals are losing their pull.” That said, we caution investors against using any single metric—whatever it covers—as rationale for an investment decision. No magic indicator will tell you where the economy or markets are headed next. Instead, we think investors should consult a swath of data and remember stocks are leading indicators and generally look ahead to the next 3 – 30 months—so investors’ decisions should similarly be forward-looking.
MarketMinder’s View: “German growth for 2019 fell to 0.6% — down from the 1.5% growth rate logged in 2018 and significantly lower than the 2.5% rate in 2017.” Yes, this was Germany’s weakest annual growth since 2013, but it isn’t terribly shocking given last year’s global manufacturing recession weighed on Europe’s biggest economy. Also, economic growth ebbs and flows, and slowdowns aren’t recessions—nor do they automatically portend one. More importantly for investors, stocks don’t move in lockstep with GDP. What matters more for stocks is how expectations square with reality. The dour reaction expressed here suggests sentiment still underrates reality, which we think benefits German and eurozone stocks.
MarketMinder’s View: Are green shoots in the eurozone’s beleaguered manufacturing sector sprouting? November’s “Industrial production grew 0.2 percent on month, in contrast to a 0.9 percent fall in October. ... Among components, capital goods and energy output advanced 1.2 percent and 0.8 percent, respectively. Partially offsetting these monthly increases, production of intermediate goods and durable consumer goods fell 0.5 percent and 0.8 percent, respectively.” Industrial production is volatile month-to-month, so it is too early to say whether the Continent has gotten past its manufacturing slump. Also, eurozone services—which dominate Continental economic output—remain expansionary. Still, industrial improvement could boost sentiment as folks remain more dour about the eurozone’s economic prospects than warranted, in our view.
MarketMinder’s View: After President Trump and China’s chief trade negotiator Liu He signed today’s phase-one US-China trade agreement—a deal “that would ease some U.S. economic sanctions on China and have Beijing step up purchases of American farm products and other goods”—many are talking about what the deal doesn’t resolve. “It leaves in place tariffs on about $360 billion in Chinese imports [and] Beijing’s retaliatory tariffs affect more than half of American exports to China.” Meanwhile, it “would do little to force China to make the major economic changes such as reducing unfair subsidies for its own companies that the Trump administration sought when it started the trade war by imposing tariffs on Chinese imports in July 2018.” In our view, this highlights how tariffs and trade threats from both the US and China have more political implications than major sweeping economic ones. Both sides can claim a minor victory while arguing they will act tough on the next phase of the deal—though, conveniently, there is no timetable for that. For investors, don’t miss the fact trade hasn’t exactly stopped despite the ongoing tensions: “Chinese exporters responded to Trump’s tariff hikes by shipping goods to the United States through other countries and by stepping up sales to Asia, Europe and Africa. The government reported double-digit gains in 2019 exports to France, Canada, Australia, Brazil and Southeast Asia.” Even without the tariff dodges, all existing and threatened tariffs applied maximally would only amount to 0.4% of the IMF’s 2019 world GDP estimate—unlikely to meaningfully knock global growth and stocks.
MarketMinder’s View: Last year, “[Chinese] exports to the U.S. plunged 12.5% even as overall shipments rose 0.5%. The trade balance tells a similar story, with China’s surplus with the U.S. dropping 8.5% to almost $296 billion even as its overall surplus rose more than 20% to about $422 billion.” This suggests “China’s exporters wasted no time finding alternative markets” as they sought to avoid US tariffs—illustrating businesses’ ability to soften duties’ impact. The back end of the article speculates about the long-term fallout from ongoing trade tensions, ranging from the effect on China’s “global supply chain dominance” to US/China bilateral trade’s dropping “as much as 40%.” Take long-term forecasts with a grain of salt, but some points to consider: Companies have been diversifying their supply chains in recent years—this isn’t a new trend. Moreover, as the past few years have shown, trade among the world’s largest economies hasn’t plummeted despite the tariffs and harsh rhetoric. Unless something changes—always possible, though it doesn’t appear probable at the moment—trade doesn’t look like it will fall off a cliff any time soon. Moreover, even if global trade falls, it wouldn’t be the first time during this bull market, and the prior trade pullback didn’t cause a bear.
MarketMinder’s View: We highlight this article because it does a good job illustrating some of the key differences (and limitations) between China’s domestic stock exchanges—referred to as “A-shares”— and developed countries’ stock markets. “It has been almost impossible during the past few decades to find a credible correlation between the performance of the Chinese stock market and any measure of growth prospects or profitability. Monthly surges or drops of 10-20 per cent or more occur far too often to suggest any relation with normal economic volatility.” Thus, speculation—frequently about potential government intervention—rules, rewarding “those who are good at interpreting government signalling, recognising shifts in liquidity and, above all, quickly discerning or even setting off changes in market consensus.” Now, the practical implications here for investors are minimal, considering most American investors who invest in mainland Chinese companies will do so via ADRs, traded on US exchanges. Whether A-shares are a good buy at any given time, therefore, is largely beside the point. But this article does show why A-shares aren’t the best tool to gauge whether China’s economy is on the verge of a hard landing that would destabilize global markets.
MarketMinder’s View: This piece notes that while hot inflation fears are largely absent today, prices could surge unexpectedly, as in the 1970s—supposedly something investors should keep in mind. While we suppose anything is possible, this misunderstands what drives inflation. As the late great economist Milton Friedman explained, inflation stems from monetary forces—too much money chasing too few goods. Not the unemployment rate or wage growth or other common misperceptions. Moreover, today’s monetary conditions shed light on inflation’s near-term path. Presently, broad money supply growth is accelerating but still modest, and bank lending isn’t surging. In this benign environment, with flattish yield curves globally, sky-high inflation seems like a distant possibility.
MarketMinder’s View: This is an overall fair description of why gold’s investment appeal is exaggerated. First, its annualized returns lag US stocks’ by a wide margin. Why: “Gold is a commodity. It's a physical object that doesn't change or produce anything over time. … Those 500 companies [the S&P 500] were hard at work producing value for shareholders while the hunk of gold was just sitting in a vault.” Gold is also far more volatile—and preparing for a worst-case scenario in which the yellow metal substitutes for paper currencies means bearing the additional costs and inconveniences of purchasing and storing physical gold. Finally, as noted here, if your personal investment situation requires assets that dampen short-term volatility, fixed income is a better way to go, in our view. For more, see our 6/26/2019 commentary, “Why Gold’s Glitter Shouldn’t Catch Your Eye.”
MarketMinder’s View: Labeling China as a currency manipulator always struck us as dubious, considering that phrase implies a country is artificially weakening its currency while a big pile of evidence suggested China was doing the opposite. To us, the move seemed like a symbolic negotiation tactic aimed at getting China to compromise in the ongoing trade tiff. Removing China from the currency manipulator list as President Trump and China Vice Minister Liu He prepare to sign Phase One of a US/China trade deal on Wednesday seems to suggest that presumption was correct—a reminder not to read too much into grand pronouncements like this. It wouldn’t surprise us at all if we saw similar symbolic threats from both sides if talks over Phase Two stall. As this saga shows, they are sound and fury with little substance.
MarketMinder’s View: We highlight this not to weigh in on anything specific to climate change, but rather, because it is a pretty good look at the unintended consequences likely to arise if central banks stray too far into sociological concerns—be it climate change or some other political matter. If these issues became part of a central bank’s official remit, which the ECB is presently ruminating over, you inevitably get what a banker interviewed here calls “target conflict”—as in, what happens when monetary conditions dictate Course A, but climate policy dictates Course B? “‘Either way sooner or later you get the situation of a target conflict and regardless which way they decide they will lose credibility,’” he explains. Outgoing BoE Governor Mark Carney, who added climate change to the central bank’s stress test criteria (a topic for us to discuss another day), seemingly agrees. “Carney cautioned on Thursday that rate-setters’ success on monetary policy in taming inflation means the Bank is under growing pressure to tackle other issues too, including the transition to a net zero carbon world. ‘Calls for the Bank to solve broader challenges ignore the Bank’s carefully defined objectives,’ he said. ‘And they often confuse independence with omnipotence.’” In our view, all of this amounts to politicizing central banks on a much more meaningful level than politicians’ simply criticizing central bank policy. It increases the risk of a climate-related monetary policy error catching investors by surprise, potentially creating problems for stocks down the road.