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: With rock-bottom mortgage rates incentivizing home buying and mortgage refinancing—and tax-law changes still relatively fresh—we reckon many readers could use a primer on mortgage-related tax breaks—what they are, who qualifies, and what you can get. For instance, yes, you can deduct mortgage interest, but whether this actually benefits you depends on the size of your standard deduction compared to your total itemized deductions, which are limited by the cap on state and local tax (SALT) deductions. “Here are examples provided by Evan Liddiard, a CPA who directs federal tax policy at the National Association of Realtors. Say that a married couple buys a $400,000 home with a 20% down payment, a 3% interest rate and a 30-year fixed rate mortgage. The first-year interest deduction would be about $9,500. If the couple deducts that amount, along with the limit of $10,000 for SALT, they’d still need more than $5,300 in charitable or other write-offs to get above the $24,800 threshold. Many single filers will find it easier to get a benefit. If a single person buys a $250,000 home with 20% down and a 3% interest rate, the first-year interest is about $5,950. If this buyer lives in a higher-tax area and has $10,000 of SALT write-offs, then his total itemized deductions are more than $3,500 above the $12,400 threshold, even without other write-offs.” Read on for more useful nuggets.
MarketMinder’s View: Some good, albeit backward-looking, news for your Friday: “Industrial production in Germany jumped by almost 9pc in June from the previous month, according to official figures, with exports up by 14.9pc. At the same time French production climbed more than 14pc, the Insee statistics bureau said. Production is rising for all types of goods, from food to machinery to transport equipment. Output in both countries remains below its pre-coronavirus levels, but factories have recovered more than half of the yawning gap that opened up during lockdowns. The biggest increases in orders for German goods came from the domestic market, but export demand is also picking up.” Industrial production isn’t bouncing as quickly as it fell, but that isn’t surprising. The national lockdown happened all at once. Reopenings are more gradual, hence recovery is slower. The pace doesn’t matter as much as the eventuality of life getting back to normal and boosting earnings over the next 3 – 30 months—which is where we think stocks are looking right now, not the recent past.
MarketMinder’s View: In addition to being a delightful breath of fresh air about the art of economic punditry, it also offers a compelling case for optimism that the recovery from COVID-19 will go better than most presume. “All my contrarian instincts tell me not just that the Covid hysteria will be largely behind us by early next year, but that the economic rebound may also be somewhat faster than generally assumed. Start with the old truism that just as in a boom things are never quite as good as they seem, nor are they ever quite as bad as they look in the depths of a crisis. Covid is driving some big structural changes in the economy, but I wonder if they’ll be quite as transformational as made out. The idea, for instance, that we’ll permanently give up much social spending and instead choose to stay at home with a bottle of wine and a Netflix subscription strikes me as deeply unlikely. Once the pandemic fizzles out, much of this activity will resume.” So, most likely, will normal office life and the many hospitality businesses it supports—also widely feared to be gone forever after 9/11, only for normal life to return. Add in largely healthy banks, stock and bond markets that are happy to continue funding healthy companies, and higher savings indicating some pent-up demand, and the setting seems ripe for a relatively robust recovery as the virus continues fading.
MarketMinder’s View: Weeks after the US-Mexico-Canada Agreement—the new version of NAFTA—took effect, President Trump has reinstated a 10% tariff on Canadian aluminum imports, claiming America’s northern neighbor was flooding the market and undercutting domestic producers. Whether or not this is true is largely unprovable and mostly beside the point—this all just seems like typical election-year politicking. The last version of the tariff and the accompanying Canadian retaliation didn’t derail either country’s economic expansion, and we doubt things go differently this time. Considering a new trade deal is in effect, the likelihood of snowballing protectionism from here seems minimal. Stocks have also long since proven they can deal with new tariffs like this, too.
MarketMinder’s View: The golden cross is a popular technical indicator, and it forms when an index’s 50-day moving average crosses above its 200-day average—supposedly a super-bullish sign. Its evil twin is the death cross, a supposedly bearish indicator that flashes when the 50-day average crosses back below the 200-day. Neither is predictive—past performance, which underpins them, never is. A golden cross confirms a rally has happened, but what comes next rests on forward-looking fundamentals. Further, this article focuses on a golden cross that formed in the Dow Jones Industrial Average, a broken, price-weighted gauge of 30 US stocks. We are bullish for fundamental reasons—namely, the strong likelihood of corporate earnings rising over the next few years as the virus fades—not because of what any index—even correctly constructed ones—did over the past 50 or 200 days.
MarketMinder’s View: Please note MarketMinder doesn’t make individual security recommendations. Rather, this article provides a timely reminder about a broader theme: Not all stock market indexes are equally useful. The Dow Jones Industrial Average may be the most well-known stock index, but its flaws disqualify it as a useful resource for investors, in our view. For one, the Dow holds 30 randomly selected US stocks with a big weighting in the Industrials sector—not sufficient to represent broader American capital markets or its diverse, services-led economy. Two, the Dow is a price-weighted index—and this article shows the follies of that approach via the implications of Apple’s stock split: “After Apple’s stock split is complete, it will have about 17.3 billion shares outstanding. Another Dow component, Travelers, has about 250 million shares outstanding. This means that each dollar change in Apple’s stock price would translate into a value change almost 70 times as large as a dollar change in Travelers’ price. In an S&P index fund, a dollar Apple change would count to almost 70 times as much as a dollar Travelers change. But in a fund tied to the Dow — notice that I’m not saying ‘indexed to the Dow’ — a dollar change in either stock price would count the same.” In our view, investors are better off ditching the Dow for a more diverse, market capitalization-weighted index—like the S&P 500 or, better still, the global MSCI World Index—to track markets.
MarketMinder’s View: Those planning to take Social Security within the next few years may feel motivated to speed up their timeline due to concerns that the novel coronavirus will impact the program’s health, reducing payouts if they delay. If you fall in that camp, this article offers some wise counsel to consider before acting. Namely, Social Security is likely to undergo some changes, regardless of COVID-19 or not. “With benefits on pace to be reduced at some point in the mid-2030s, Congress, educators and think tanks already are studying (and arguing about) ways to ‘save’ or stabilize Social Security. Among them: means testing for benefits; raising the ‘full retirement age’ (when a person is first eligible for unreduced benefits); raising the payroll tax; changing how benefits are taxed; and changing how cost-of-living adjustments are calculated.” We don’t know which (if any) of these reforms will be enacted, but the decision likely won’t be made overnight. It also seems likely, as noted here, that more of the burden will fall on younger workers rather than those currently receiving benefits. Regardless, we do think it makes sense to regularly review your retirement plan to ensure it is aligned with your investment goals and objectives. If something has changed, updates may be warranted.
MarketMinder’s View: Headlines have fixated on major currencies’ relative strength and weakness recently, so we suppose it was only a matter of time before an old fear returned: a potential currency war (also known as a competitive devaluation). As this article argues, Europe may be sitting pretty right now, but if the US and UK weaken their respective currencies (e.g., via interest rate cuts), the euro will strengthen. This will then make eurozone exports more expensive and less attractive, hindering the export-heavy economy’s recovery—and the eurozone won’t have much recourse. However, this logic relies on the misperception that a weak currency is always and everywhere an economic positive. True, a weak currency makes exports cheaper, but it also makes imports more expensive—so for consumption-heavy developed nations tied to the global economy, the result is largely a wash. In our view, pundits’ ongoing hunt for reasons to doubt any economic recovery illustrates a broader point: Sentiment is dour worldwide—a key ingredient in early bull markets.
MarketMinder’s View: Here is an interesting look at the experiences of some young, first-time investors. While we don’t recommend extrapolating a handful of individual cases to be representative of an entire demographic, “Gen-Z” investors seem to be behaving similarly to their older counterparts—both the good and bad. As noted here, some younger investors gravitate towards names they know and products they use; others are testing out different strategies after educating themselves on some basic investing principles; and, yes, some are chasing heat and treating investing like gambling. Though we don’t buy the narrative that new, naïve investors are irrationally inflating the market rally, we do think young people learning about investing—including making their own mistakes—is a positive long-term development. Discovering the magic of compound growth and the power of capitalism is useful knowledge for the long-term investors of tomorrow. For more, see Christopher Wong’s column, “Have Markets Gone Young, Wild and Free?”
MarketMinder’s View: This piece posits the US economic recovery depends on the unemployment benefits boosted by the CARES Act, and if Congress doesn’t renew those benefits, bigger troubles loom—especially since consumer spending accounts for a large part of economic output. We acknowledge millions of workers may be in a tough spot should lawmakers fail to renew that lifeline, and some of the anecdotes here exemplify those hardships. However, from an investing perspective, stocks aren’t focused on present-day economic conditions. Rather they are looking ahead to the next 3 – 30 months, and early on in bull markets, we think they are fathoming the long end of that timeframe and far future earnings. Stocks aren’t disconnected from today’s reality—they are instead considering a future in which society has found a way to manage to live with (if not outright moved past) COVID-19. As for whether or not Congress will renew (either in full or partially) unemployment benefits, we don’t believe political decisions are predictable, but Washington does have a tendency to wait to the last minute or even after the deadline before reaching a deal. For more, see our 7/22/2020 commentary, “Considering the CARES Act ‘Cliffs.’”
MarketMinder’s View: “The volume of retail sales in the 19-nation bloc increased month-on-month by 5.7 per cent in June, according to seasonally adjusted figures from Eurostat - after a record 20.3 per cent jump the previous month. The May figure was revised upwards from a previously reported 17.8 per cent. Compared with the same period of the previous year, euro zone retail sales were up 1.3 per cent in June.” While backward-looking, retail sales’ V-shaped return to pre-pandemic levels highlights that economic recoveries depend largely on governments’ easing of COVID restrictions, which allows consumers and businesses to operate with some sense of normalcy. Thanks to the eurozone’s reopening progress, in-store shopping for clothing and footwear led growth. Meanwhile, “online purchases and mail orders dipped after four months of growth, suggesting consumers were beginning to return to the high street rather than relying on home deliveries.” From a forward-looking investing standpoint, we found the following interesting: “Economists question whether the rebound will last, attributing a substantial part of the rise to a release of pent-up demand.” Fair enough—it would be unreasonable to expect torrid growth to continue, especially with some new localized lockdowns and folks’ largely having caught up with delayed purchases. Even so, these doubts are more evidence of a phenomenon we call the Pessimism of Disbelief—dour sentiment that dismisses any positive news as fleeting. This is common in new bull markets, and it usually isn’t a self-fulfilling prophecy.
MarketMinder’s View: A one-month US dollar selloff has stirred concerns about the greenback’s prospects as the world’s dominant currency—a false fear, in our view. For one, that titular slide likely represents a post-bear market return to normalcy following investors’ flight to safe haven assets (e.g., the US dollar). Two, the dollar’s preeminence is still well-entrenched based on the data: “For the world’s central bankers, the dollar remains the reserve currency of choice by far. The dollar’s share of global central bank reserves stood at around 62% in the first quarter, compared with about 20% for the euro and 1.9% for the yuan, according to the International Monetary Fund. Foreign holdings of U.S. Treasuries, considered among the world’s safest investments, rose to $6.86 trillion in May. Past concerns about the dollar’s top-dog status, including those that cropped up after Standard & Poor’s in 2011 downgraded its credit rating of the United States, have proven short-lived, due in part to the lack of a credible replacement.” Note: Though this article argues the US benefits from the dollar’s dominance, we think this is overstated. Simply, the world prefers the dollar because America provides the deepest, most liquid capital markets and Uncle Sam’s creditworthiness is unmatched. Meanwhile, related fears over mounting debt and inflation seem misplaced to us. Debt levels may be rising, but servicing that debt looks manageable for the foreseeable future. Similarly, money supply has surged in recent months, but this seems tied mostly to one-time emergency lending and liquidity provision—unlikely to repeat and drive runaway inflation. For more on why the dollar’s demise isn’t imminent, please see our 7/31/2020 commentary, “Putting the Greenback’s Recent Slide in Proper Context.”
MarketMinder’s View: In keeping with other data confirming the economic benefits of relaxing COVID restrictions, the IHS Markit/CIPS UK services purchasing managers’ index (PMI) hit 56.5 in July—returning to expansionary territory after June’s 47.1 and a far cry from April’s record low of 13.4 (readings above 50 indicate expansion). Moreover, “IHS Markit said that the higher levels of activity were ‘overwhelmingly linked’ to the easing of the UK’s coronavirus restrictions and a subsequent increase in demand from customers.” While PMIs gauge only growth’s breadth, not its magnitude, rising business activity in a sector accounting for nearly 80% of GDP is a positive development. This doesn’t necessarily mean economic activity will continue unimpeded. Local closures could weigh on growth—Scotland recently locked down the city of Aberdeen, for example—though more damaging, draconian national lockdowns aren’t assured, either.
MarketMinder’s View: COVID restrictions and lockdowns are political decisions, which make them unpredictable, in our view. However, while many seem to presume broad lockdowns are inevitable should a second COVID wave occur, this isn’t set in stone. In Switzerland’s case, “Drastic national steps, which included closing shops and schools, were launched in March after Switzerland saw how the pandemic had hit other countries, the minister [Swiss health official Alain Berset] said in the interview. While this made sense for some parts of the country like Zurich and Geneva, in hindsight other regions might not have needed such steps, Berset said. ‘Fortunately, we have learned so much in the meantime that we can take a more differentiated approach to a possible second wave.’” Take politicians’ words with plenty of grains of salt, but governments have thus far responded with more targeted approaches—which aren’t as economically damaging—in response to recent outbreaks.
MarketMinder’s View: 2020’s stock market roller coaster has been disorienting for many—and if you are in or near retirement, perhaps frightening, too. This article does a bang-up job of explaining why investors with longer-term growth needs likely benefit from holding on. “Selling out of stocks can provide short-term relief amid periods of economic or market anxiety, but it’s immediately replaced with another nagging worry: Is it time to get back in? And when the market begins to show signs of life and you’re hemming and hawing, it often recovers very quickly, often in the space of just a few days and weeks. So, there can be a huge opportunity cost in trying to time the market. Even in the late stages of the current bull market, I was still hearing from investors who had never gotten off their defensive crouch from the last bear market.” Then, regarding whether to exit stocks when retirement is nigh: “There’s no one-size-fits-all advice, but generally not. That’s because retirement for many of us will last for 20 or 30 years or even longer. That means that you absolutely need the growth potential that stocks can provide.” We would add one more basic, albeit often overlooked, point: Remember your long-term investment goals if you are considering making portfolio changes. Those objectives, rather than your feelings, should drive your investment decisions. For more, see our 7/10/2020 commentary, “On the Re-Entry Debate.”
MarketMinder’s View: With the economy still officially in recession and unemployment rates at record highs, why are stocks rising? As this piece pithily explains, stock market returns don’t reflect the state of the entire economy. “The most visible and economically vulnerable industries are also among the smallest, based on their market-capitalization weight in major indexes such as the S&P 500. Markets, it turns out, are not especially vulnerable to highly visible but relatively tiny industries. … Department stores may have fallen 62.3% [year to date through July], but on a market-cap basis they are a mere 0.01% of the S&P 500. Airlines are larger, but not much: They weigh in at 0.18% of the index. The story is the same for travel services, hotel and motel REITs, and resorts and casinos. … And the sectors that do matter? Consider just four industry groups — internet content, software infrastructure, consumer electronics and internet retailers — account for more than $8 trillion in market value, or almost a quarter of total U.S. stock market value of about $35 trillion.” Indeed—while we don’t dismiss the hardships of those who have lost jobs, income or businesses, it is important to put these in broader economic and stock market context. We would add another reason why stocks often seem callous to current economic woes: Early in bull markets, forward-looking stocks shift their focus to the long end of the 3 – 30-month window they typically pre-price—anticipating an eventual economic recovery and its effect on corporate earnings.
MarketMinder’s View: As more time passes, we expect to see more analyses dissecting policymakers’ actions during 2020’s February and March market turbulence—adding to the debate of what worked and what didn’t. This longish article explains how and why the Fed ensured central banks—and by extension, businesses—globally retained access to dollars during March’s liquidity scare. “The Fed supplied most of the money abroad via ‘U.S. dollar liquidity swap lines.’ In essence, it lends dollars for fixed periods to foreign central banks and in return takes in their local currencies at market exchange rates. At the loans’ end, the Fed swaps back the currencies at the original exchange rate and collects interest. By stabilizing foreign dollar markets, the Fed’s actions likely avoided even greater disruptions to foreign economies and to global markets.” The article then discusses the myriad ramifications of the Fed’s decisions, from the impact on foreign policy (e.g., Turkey wasn’t able to access dollar loans) to the dollar’s role in financial markets (e.g., its safe haven status during a crisis). These are all interesting developments, though they lack much of a near-term market impact. Still, for investors, we see a couple noteworthy nuggets here. First, US taxpayers aren’t on the hook for these “loans.” “The swaps are structured so that the Fed’s foreign counterparts bear the risk of loans going bad or currency markets moving the wrong way.” Second, we think monitoring both the near-term and longer-term effects of the Fed’s actions is worthwhile. Though the Fed arguably stabilized some segments of the market during March’s volatility, they also arguably rattled investor sentiment with their surprise announcements. For more, see our 5/28/2020 commentary, “Inside the Debate Over the Fed’s Extralegal Mandate Expansion.”
MarketMinder’s View: This article provides a decent discussion of why negative interest rates—a monetary policy tool in which central banks charge interest on excess reserves held at the central bank in an effort to spur lending—are likely counterproductive. “Our banks are far better capitalised than they were in 2007-8, which will support lending. So it seems unwise to throw against that a systemic risk as well as a squeeze on profits. … Research into Sweden's recently-ended experiment [with negative rates] also found that banks were less likely to pass on the negative rates over time. From a behavioural economics perspective, the focus turned to preserving cash rather than embracing risk – classic loss aversion – when interest rates were negative rather than zero.” We don’t think negative rates are catastrophic, although they probably crimped economic growth in the eurozone, Sweden and other experimenters. However, they behave like a tax, which doesn’t encourage more lending. We won’t speculate on whether the BoE will pursue negative rates, but if it did, it would likely be a mild headwind only. For more, see our 5/15/2020 commentary, “Much Ado About Negative Rates.”
MarketMinder’s View: According to the Fed’s July survey of senior loan officers, banks are tightening access to credit. “From commercial real estate to credit cards and autos, institutions are getting tougher on giving out money compared with the second quarter, even though demand also has decreased across most categories. … ‘Major net shares of banks that reported reasons for tightening lending standards or terms cited a less favorable or more uncertain economic outlook, worsening of industry-specific problems, and reduced tolerance for risk as important reasons for doing so,’ the survey said.” This isn’t great news, but we don’t think it is surprising, either. Banks ramped up lending in March and April in response to both the Fed and the government’s lending programs. However, as FRED data show, month-over-month US bank loan growth contracted in June and July—likely reflecting some of those programs’ expirations. While loan officer surveys don’t perfectly predict future lending, they indicate banks are still cautious and prefer limiting lending to the most creditworthy. In our view, more clarity about potential state and local responses to future COVID outbreaks would help—as would a steeper yield curve, which incentivizes lending. However, while fast lending growth would be a positive, we don’t think this new bull market needs rip-roaring economic growth to march on.
MarketMinder’s View: In today’s personal finance segment, this piece explores one piece of estate planning that may go overlooked: designating the distribution of your retirement money upon your death as either per stirpes or per capita. From a high level, per stripes means, “… if your primary beneficiary dies before you die, their next of kin inherits your money.” In contrast, per capita means your money will go only to your primary beneficiaries. The examples shared here illustrate how things could go awry should unexpected circumstances arise (e.g., a primary beneficiary passes before the account holder). This article provides some more insight, but if you have questions about your personal situation, be sure to consult with the appropriate financial and/or legal professional.