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: As the title alludes, this piece explores the plusses and minuses of a new breed of ETFs known as “defined outcome” funds, which mute short-term losses but limit gains over a 12-month period. “Here is how a defined-outcome fund works: Managers buy and sell combinations of derivative instruments, known as options, tied to the performance of a stock index like the S&P 500. These options allow the fund to limit any one-year loss in the index, while capturing some or occasionally all of any gain for the year. After a year, the ETF resets, with new option positions and gain caps. If market volatility is higher when the reset occurs, the cap will be higher, allowing shareholders to capture bigger gains, because volatility is a main component of an option’s price.” One fund profiled later in the article had about half the magnitude of last year’s bear market decline … and only half the S&P 500’s full-year gain. As also noted herein, there are vast differences in the construction of these funds, meaning they will respond quite differently to volatility than others. Now, if your goals, cash flow needs and time horizon necessitate a strategy with less expected volatility and, as a result, lower returns than an all-stock portfolio, we think there are better, much less complex ways to achieve this—ways that don’t involve picking funds that reset once a year and whose potential volatility and return is a function of the past year’s returns. That is too backward looking and, in our view, convoluted. We agree with the folks in this article’s final few paragraphs who pointed out that a simple blended portfolio of stocks and bonds is likely the best way to go for these folks. There is no need to get fancy.
MarketMinder’s View: That would be UK November GDP, which shrank -2.6% m/m. In a sign of today’s optimism, this piece does a nice job of picking over the data and finding the rational silver linings. For one: “[N]ot only was November’s 2.6pc contraction less than half the 5.7pc that economists had pencilled in, it was nothing like as severe as the falls witnessed in March and April. That is extremely encouraging. It suggests that many businesses have adapted well to lockdown conditions.” Plus, as the piece goes on to explain, the contraction stemmed primarily from the UK’s huge services industry, which was hit hardest by lockdowns. With vaccines rolling out rapidly across the country, reopening shouldn’t be far off, enabling a swift recovery. “Though lockdown hasn’t been without its suffering for those that have lost jobs or their businesses, many households have never been so flush. As we saw after the first lockdown ended, consumers can’t wait to get out and spend. The same goes for UK plc. Companies were quick to batten down the hatches, and although debt levels are high, so too are corporate cash piles. Some will take the prudent approach and repay borrowings but many will be desperate to invest. And amid the palpable gloom it is worth remembering what happened when the economy emerged from the wilderness the first time around. Close to two-thirds of output was recovered in the following three months.” That is no doubt encouraging, although we think stocks are likely looking even further beyond this future.
MarketMinder’s View: This is a ginormous load of so what? China has nearly 1.4 billion people, more than three times the US population. If their GDP doesn’t eventually outstrip the US’s, something is very wrong. Plus, last we checked, where a country sits on the global GDP leaderboard means nothing for market returns, domestic growth, wealth creation and all the things that matter to everyday life. With all that said, however, we are as skeptical of this as we are all long-term forecasts, which could easily be upended by variables no one can envision today. Just because China’s technocrats want to double GDP by 2035 doesn’t mean it will actually happen. What if labor-intensive manufacturing continues fleeing to Vietnam, Bangladesh, Mexico and Africa? What if the government has to concentrate even more on deleveraging instead of enabling credit-fueled growth? These and many other “what-ifs” make long-range forecasting dodgy. Our advice: Think as markets do, and don’t try speculating about life beyond the next year or two. Everything beyond that is a guess, not actionable analysis.
MarketMinder’s View: Those funds are known as “thematic ETFs,” and—as the name implies—are funds built around a theme (e.g., working from home, environmentalism, veganism and a host of others) rather than a sector or industry. As with many trendy, niche investments, it is important to be aware of the risks: “Investing in only a slice of the market, instead of the entire market, lowers your diversification and raises your risk. Management fees can be at least 10 times higher than on ETFs that track the stock market as a whole. If a theme appeals intuitively to you, chances are it appeals to millions of other investors too, making a fund’s underlying holdings more expensive.” Beyond that, this piece does a nice job showing why that is a sign of brewing froth in some corners of the market. A new study “found that these funds tend to launch months after a theme has gotten hot—amid a crescendo of media hype and stocks earning eye-popping returns. It takes several months to launch an ETF, according to industry executives. Between the time a compelling theme emerges and an ETF hits the market, the stocks that play off that trend can become dangerously overvalued. That means fund managers are often ‘packaging dreams,’ says Itzhak Ben-David, one of the study’s authors. In other words, investors have a natural tendency to buy at exactly the wrong time, and these funds can make that even worse.” We would add that these funds tend to load up on anything hot that even remotely approaches their given story—like “vegan” funds that own a certain electric vehicle maker whose stock price went parabolic last year. Unless you are taking the phrase “horseless carriage” literally, we just don’t get the connection. For more on that concept, see one of our favorite old “Random Musings on Markets” roundups.
MarketMinder’s View: Please note, MarketMinder’s analysis is politically agnostic. We favor no politician or political party, and our focus is solely on politics’ market impact. This article covers a lot of ground, including a discussion about potential policy and a spate of 2021 market forecasts. We won’t speculate on the former, and the latter points to rising optimism (e.g., one analyst even described a positive year as “boring”). Our focus is on the piece’s primary argument: that a “more traditional and normal presidency” under President-elect Joe Biden likely means more bull market ahead, albeit with less volatility and slower gains. We think this ascribes too much market-moving power to a single person—a common investing mistake—and vastly overrates a politician’s personality as a market influence. Yes, the American president is among the most powerful individuals in the world, and we grant that words can cause market wiggles—in the short term. But markets can be volatile for any or no reason. Over the medium to longer term, markets focus on policies, and we think stocks see a gridlocked Congress that isn’t likely to pass sweeping legislation—an underappreciated positive. As for those convinced one party is better for markets than another, consider this tidbit: “From Trump’s Inauguration Day, the annual growth rate for the S&P 500 was 13.8% in his tenure, the same as for President Barack Obama. Their performance is tied, right behind Clinton’s 15.2% growth rate, starting with his Inauguration Day.” Stocks don’t care which party controls the White House, and from an investing perspective, we suggest readers take a similar mindset and refrain from letting their personal political preferences influence portfolio decisions.
MarketMinder’s View: Chinese exports rose to a record $2.3 trillion in 2020—up 3.6% from 2019—the latest evidence of the country’s economic recovery. We won’t bang on about China being the only major economy to grow for the year—the distinction matters less than the preview China provides for the rest of the world. After its relatively brief national lockdown in early 2020, Chinese economic activity ramped up quickly. We think it will be a similar story for other major economies, including the US and eurozone, once the latest COVID restrictions ease—data following last year’s first lockdowns highlighted the pent-up demand in Western developed nations. As for the conclusion speculating about future US-China trade relations, we think numbers speak louder than words: China’s December imports from the US were up 47.7% y/y while exports to the US rose 34.5% y/y. Tough talk and tariffs don’t seem to have turned off trade between the world’s two-largest economies.
MarketMinder’s View: This analysis echoes an increasingly popular theme trumpeted in mainstream financial headlines: Though the economic data will likely be bad over the next couple months, the outlook looks bright—particularly in 2021’s latter half. As summed up here, thanks to vaccines and an abnormally high savings rate, “As a result, in the second half of 2021, a strong US economic recovery is likely to take place. Economic activity is likely to be about 5% above the first half of the year, according to The Conference Board. … When the unemployment rate almost reached 15% in April 2020, few expected it to return to its natural rate of about 4.2% to 4.5% in the foreseeable future. But the unemployment rate should dip below 5% in the first quarter of 2022 and perhaps even reach 4.5% by year's end.” Please note, we aren’t here to argue against this or any forecast, which is an opinion based on a certain set of assumptions. However, this article illustrates how quickly sentiment has shifted from pessimism to optimism. Based on our experience, pundits tend to fret over late-lagging jobs data for a long while—sometimes years after an expansion begins. That so many economists cheer the light at the end of the tunnel today reveals how widespread optimism is. This good cheer can stir for some time, so we don’t think the bull market is in danger of ending in the near future. But with optimism comes a shift from fear to greed—another emotion investors must guard against. For more, see our 1/12/2021 commentary, “What Reactions to the Jobs Report Say About Sentiment.”
MarketMinder’s View: Italy’s recent political brouhaha has awakened an old eurozone ghost story: worries about high debt loads’ impact—both domestically and across the region—in certain eurozone countries, including Italy, Spain and Portugal. The concerns raised here don’t resemble the fears of 2010 – 2013, when fears of default and countries exiting the common currency were rampant. Instead, the debate centers on the current debt rules—and whether they need updating: “France and Italy have argued that a return to the EU's rules that aim to limit debt at 60pc of GDP and the deficit at 3pc is unimaginable in the post-Covid era. … New rules could give countries more leeway for pro-growth spending but will be politically difficult to pull off. Aiming for targets on interest costs rather than debt levels, allowing for more time to reach targets, and looser rules in exchange for certain conditions, such as economic reforms, have been mooted by Brussels watchers.” Now, this discussion will likely be just that—words—for the foreseeable future, so we don’t anticipate much market impact. However, it is a reminder the eurozone’s broader debt management debate remains part of the very long-term backdrop. In our view, structural factors may grab headlines, but they matter less to stocks than the economic, political and sentiment factors influencing investor demand over the next 3 – 30 months—important for investors to keep in mind.
MarketMinder’s View: Please note, MarketMinder is politically agnostic, favoring no party or politician anywhere. Our analysis of political events focuses solely on their potential economic or market ramifications. Former Italian premier Matteo Renzi pulled his Italia Viva party from Italy’s four-party coalition government today after opposing its plans for disbursing EU relief funds. As a result, an unruly coalition lost its ruling majority. “It was not immediately clear what [Prime Minister Giuseppe] Conte, or his main allies, the 5-Star Movement and centre-left Democratic Party (PD), would do. One possible scenario would be for the coalition parties to try to renegotiate a new pact with Italia Viva, which would almost certainly open the way for a major cabinet reshuffle, with or without Conte at the helm. If the coalition cannot agree on a way forward, President Sergio Mattarella would almost certainly try to put together a government of national unity to deal with the health emergency, which has killed 80,000 Italians. If that failed, the only option would be a national vote.” That said, Renzi, “... left open the possibility of rejoining the cabinet if his demands for a policy revamp and greater accountability were acted on.” Far be it from us to speculate on anyone’s intentions, but it is possible this is classic politicking. Regardless, markets are well aware Italy is no stranger to unstable government. With COVID already dominating lawmakers’ attention, big legislative change seems unlikely in Italy any time soon—a reality Italian and European stocks have generally been fine with.
MarketMinder’s View: The economic forecasts discussed here are opinions, and our interest isn’t in whether or not they will prove correct. Our focus is on what these estimates say about sentiment, which shapes investor expectations, and those seem to be coalescing around a near-term eurozone economic contraction as the winter lockdowns bite. “The scene is set for a second straight quarter of falling gross domestic product. That would echo the downturn at the start of 2020, even if less severe ... Bloomberg Economics now says the euro-area economy will shrink about 4% in the first three months of 2021, based on ‘pessimistic’ assumptions about how long restrictions will last. It previously forecast growth of 1.3%.” While a renewed contraction isn’t great news, widespread expectations for it suggest surprise power is basically nil—a noteworthy change from a year ago. The shocking suddenness of the global economy shutting down as governments sought to contain COVID-19 caused last year’s bear market—stocks had to fathom the economic destruction in a matter of weeks, well before any official data confirmed the damage. COVID lockdowns today have little surprise power and aren’t likely to cause a similar market plunge. If eurozone GDP contracts again in Q1, it wouldn’t be unexpected at this point. In our view, markets are looking ahead to eventual recovery and a post-COVID world. Also important for investors to keep in mind: Recoveries don’t occur in a straight line, and stocks don’t need them to.
MarketMinder’s View: This is a smorgasbord of inflation fears old and new. It argues higher prices may be coming in 2021 for a multitude of possible reasons: new “fiscal stimulus” packages, courtesy of a Democratic White House and Congress; an accommodative Fed, whose new monetary policy framework allows for higher inflation; a big uptick in money supply; supply-chain bottlenecks; rising commodity prices; and pent-up demand sparking a consumption boom, leading to higher prices. That is a lot—and most of it is speculation, in our view. As this piece also acknowledges, recent history shows inflation has been benign despite the persistence of many of these same projected fears. We think all of this overcomplicates what inflation is: a monetary phenomenon (which the article briefly mentions). Yes, M4 money supply—the broadest measure—has surged recently, but lockdowns have kept most of it from changing hands quickly. If money isn’t moving quickly through the system, you won’t get much inflation. Now, inflation could pick up later—worth monitoring, in our view—but the inflation targets shared at the article’s conclusion are more educated guesses than destiny. For investors, rising inflation needn’t derail stocks, which can do great during the early stages of higher prices. It is when inflation gets too hot, prompting central bankers to act and raising the risk of error, when trouble arises. For more, see our 4/29/2020 commentary, “Why the COVID Response Likely Won’t Ignite Inflation.”
MarketMinder’s View: This is a long article, and some sections wade into academic, sociological and geopolitical waters. Though interesting topics, we share this piece because it raises some notable points about China’s economic recovery. “For 2020, China’s economy is expected to account for 16.8% of global gross domestic product, adjusted for inflation, according to forecasts by Moody’s Analytics. That’s up from 14.2% in 2016, before the U.S. and China entered a trade war. The U.S. is expected to make up 22.2%, virtually unchanged from 22.3% in 2016. China’s 2020 increase in its share of global GDP—1.1 percentage points—is its largest in a single year since at least the 1970s.” Despite recent trade frictions, China’s ties with the world aren’t only growing, but rising to record levels. Yes, some of this is COVID-related, as China is projected to be the only major economy to grow in 2020. But for investors, ongoing growth in the world’s second-largest economy spurs demand worldwide—a positive for the global economy.
MarketMinder’s View: This article argues the pandemic has once again highlighted shortcomings in the measurement of GDP and inflation data, resulting in inaccurate tallies of growth and mistaken conclusions about the economic impact of historical events. It argues that real-time data (think: credit card swipe activity, TSA passenger counts, foot traffic and Google trends) proved their superiority last year and that investors need to heed them over broad national accounts. Look, we are sympathetic to this view to an extent. GDP does present a limited view of economic activity, failing to capture the value added by household activities, some digital businesses and assets and more. Inflation data are also imperfect, although this is less significant of a problem in the developed world, as the Billion Prices Project—a high-tech daily survey of prices across the US and other nations—referenced herein, proves. But the superiority of real-time data is a dubious assertion. For one, there is very little history to these series to use, making it near impossible to put current readings in context. Two, many of them aren’t seasonally adjusted. Three, things like foot traffic and internet trends don’t tell you if money is actually changing hands. In our view, all economic data are flawed in different ways. It is up to the user to understand those limitations and consider them before drawing conclusions.
MarketMinder’s View: For roughly the last 12 years, many investors have latched onto a narrative suggesting the US dollar will lose its status as the world’s primary reserve currency and, absent this status, central banks and other institutions will shun US Treasury bonds, sending rates skyrocketing and rendering our debt unaffordable. Last year, these fears emerged once again, as data showed the dollar’s share of global central bank reserves ticking lower. This article does a fairly effective job showing why these fears are no more accurate today than they were in 2009. The dollar officially comprises 60.5% of global central bank reserves, but this understates reality because it doesn’t factor in indirect exposure via derivatives and other securities. As noted herein, “Most central banks don’t break down their holdings in depth, but the unusually transparent Reserve Bank of Australia does. It held around $6.8 billion in U.S. dollar-denominated securities as of June, an amount that almost triples when its derivatives exposure is taken into account. Its roughly $3.7 billion in yen reserves is cut in half after the same calculus.” Of course, we never believed the notion that the dollar’s reserve-currency status was at risk, nor do we think it keeps America’s debt affordable. It is the other way around: America’s high-quality debt, liquid markets and ability to service its bonds are why they are highly sought after.
MarketMinder’s View: With Brexit concluded, you could be forgiven for thinking economic negotiations and talks between the UK and EU were over. But like any two major sovereign nations with deep trade ties, they are likely to continue in the background for pretty much all of time. The next round: discussions on financial services, with the aim of crafting a Memorandum of Understanding on cross-Channel financial regulation. The UK is aiming to obtain a broad ruling of regulatory equivalence from the EU, which would allow London’s big banks to return to trading and soliciting Continental investment banking business from British soil. These discussions will likely garner significant media attention in the coming weeks, but it is worth remembering that most major financial institutions already adapted to Brexit by establishing a beachhead in the EU to operate from. The stakes here, contrary to the reporting herein, are pretty low.
MarketMinder’s View: Have recent initial public offerings (IPOs) of special-purpose acquisition companies (SPACs) caught your eye? We wouldn’t be shocked if they had, considering these firms—which go public to raise money for a later merger with a private entity—accounted for about half of 2021’s IPOs, which the financial press increasingly celebrated as optimism grew toward yearend. If they have, read this article. It will share, in scathing form, all the reasons you shouldn’t dive headlong into the SPAC space. A couple of points herein really resonated with us: Because you don’t know what company the SPAC will seek to merge with, you don’t know what you are getting. Further, this can complicate building a portfolio around the SPAC, as you have no clue what sector, region, industry or style the security will eventually represent. Look, we have long argued that IPO actually stands for “It’s Probably Overpriced.” But when you don’t know what you are buying, how can you even assess that?
MarkeMinder’s View: Look, we aren’t inherently for or against Bitcoin, but we are compelled to point out a simple fact: Bitcoin’s exceptional volatility, which this article highlights by noting it fell -25% over the weekend. In our view, if you are investing for the long term to fund your retirement needs, something as volatile as this—which routinely exceeds stocks’ volatility by orders of magnitude—probably isn’t consistent with your goals. Something with that much short-term volatility is a tool for speculation, not an investment, and we think that holds whether or not regulators get more involved. Plus, as the article highlights, Bitcoin is quite illiquid, and it is moving largely on sentiment. If you want to take a flyer on it anyway that is your prerogative, but we don’t think it is wise to take funds from a diversified investment strategy to do so. Let your long-term goals and needs, not your speculative whims, drive your retirement investing.
MarketMinder’s View: While this highlights some fine observations about markets’ efficiency, it strikes us as an overall confusing take on the last week—and the market’s rally since last March. For one, it seemingly disregards that last year’s bear market was stocks’ way of pricing in the deep economic contraction to come—the very one this article implies stocks have dismissed. Two, setting aside all political biases and opinions—always critical when assessing politics’ impact on stocks—we would make the simple point that markets are efficient, and people have discussed and feared political unrest for months now. Arguing that last week’s events were the tip of an iceberg that hasn’t yet been priced in basically argues markets aren’t at all efficient. In our experience, it is much more likely that stocks coolly assessed the situation and focused on what matters most for corporate profits over the next 3 – 30 months on the political front: policy, and whether legislative risk soared. Given the deep divisions in Congress, we don’t think it did, which overall reduces political uncertainty until 2022’s midterm elections at least. Now, we do agree warming sentiment has influenced returns lately, but calling that a bubble that ignores all risks strains credulity when there are still deep pockets of widespread skepticism. US politics is still one of those pockets.
MarketMinder’s View: As always, MarketMinder is neutral on all things political, and we favor no politician nor any party globally—and neither do stocks. But political events like elections can affect markets, as they generally determine the likelihood of radical legislation. So this look at the upcoming leadership contest for Germany’s governing CDU party ahead of this autumn’s general election is handy for investors, as it shows the party’s relative disarray. None of these candidates appears to have the popularity or political capital of outgoing Chancellor Angela Merkel, whose hand-picked successor flamed out after just two years. However this and the general election go, barring some radical last-minute shift, Germany appears to be on course for more gridlock with various factions jockeying for influence. That status quo has been fine for German stocks, and its extension is part of the overall quiet political backdrop we think is likely for stocks this year.
MarketMinder’s View: We aren’t saying new Tech regulations—whether through a rewriting of Section 230 of the Communications Decency Act or other means—are at all likely. But considering both parties appear to have some incentives to push change, as this article shows, the debate is worth watching. Usually, legislative change of this magnitude plays out slowly, giving investors plenty of time to assess the situation and act if necessary, and given how fractured Congress is right now—on partisan and intraparty levels—it seems likely that competing interests and disagreements would result in legislation being heavily watered-down, if not outright torpedoed. But there is also a small chance we could see a SarbOx-style rally around something ill-advised if enough people from both parties find it politically expedient. Again, not a reason to be bearish on stocks—or Tech and Tech-like stocks—now. But if investors get euphoric and ignore rising regulatory risk later this year, that is something to keep a very, very close eye on.