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: 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.”
MarketMinder’s View: China re-imposed strict lockdown measures in its northeastern Jilin province after a recent flare-up in COVID-19 infections: “While the cluster of 34 infections isn’t growing as quickly [as] the outbreak in Wuhan which started the global pandemic last December, China’s swift and powerful reaction reflects its fear of a second wave after it curbed the virus’s spread at great economic and social cost. It’s also a sign of how fragile the re-opening process will be in China and elsewhere as even the slightest hint of a resurgence of infections could prompt a return to strict lockdown.” How countries’ reopening plans progress is worth monitoring, in our view, though Chinese authorities’ responses to new outbreaks aren’t necessarily applicable elsewhere. As we get more information about reopening plans worldwide, how they line up with both ongoing economic conditions and general investor sentiment will likely be key in determining the next bull market’s beginning—whether it has already started or is yet to come. For more on China’s recovery progress and what we think it does—and doesn’t—mean for the rest of the world, please see yesterday’s commentary, “What China’s April Data May Show Global Investors.”
MarketMinder’s View: Taiwan’s April export orders rose 2.3% y/y, their second straight positive month following March’s 4.3% rise. Taiwan’s status as a cog in the global Tech supply chain partially explains why: “The ministry said that massive lockdowns in many countries to battle COVID-19 boosted demand for remote work and online learning, so makers of information and communication devices such as notebook computers and servers enjoyed an 18.6 percent year-on-year increase in export orders in April totaling US$12.49 billion.” As the article also notes, though, demand for other exports, including metal and chemicals, suffered. In our view, these data illustrate a broader theme: While COVID restrictions could buoy narrow economic segments, easing lockdowns is necessary for commerce to flow fully—critical for the economic recovery.
MarketMinder’s View: After leading off by stating many investors—including some famous ones—are bearish, this article argues stocks’ rally since March 23 isn’t justified because valuation metrics (namely, the S&P 500 price-to-earnings ratio and cyclically adjusted price-to-earnings—or “CAPE”—ratio) say so. “The S&P 500 currently trades at a P/E ratio of 23 based on analysts’ consensus earnings for 2020. That’s the highest P/E ratio using analysts’ estimates on record, except for the peak of the dot-com bubble, and well above the P/E ratio of 17 just before the financial crisis in late 2007.” Yet we caution investors against using valuation metrics as forecasting tools. Besides valuations’ normal limitations—the forward P/E ratio provides a sense of sentiment at most, in our view—today’s circumstances have rendered them even less telling. Though a majority of companies have reported Q1 earnings, any forward guidance is, at best, a guess at this point given all the uncertainty surrounding COVID-19 and reopening plans. (CAPE is even more flawed, in our view.) However, this piece does exemplify the dour sentiment prevalent in financial headlines right now. We aren’t saying the bear market is over, as that will be clear only in hindsight, and another downdraft could strike. But rampant pessimism is, counterintuitively, a positive sign for stocks.
MarketMinder’s View: That titular point is based on a survey, explained here: “Only one in five Americans expects overall business conditions to be ‘very’ or ‘somewhat’ good over the next year, according to a poll conducted this month for The New York Times by the online research platform SurveyMonkey. Sixty percent said they expected the next five years to be characterized by ‘periods of widespread unemployment or depression.’” Indeed, many Americans are struggling today as COVID-19 has affected all aspects of life, from people’s health to their employment. We don’t dismiss any of those real hardships. However, what matters for investors considering what to do next is the market impact. In our view, this survey is one of many showcasing how dour sentiment has become today. When pessimism seems to be at its loudest is often when new bull markets begin—tough to fathom, but in our view, critical for investors to be aware of.
MarketMinder’s View: Whether domestic or international, please note MarketMinder is politically agnostic. We believe political bias for any party, politician or ideology blinds, which can lead to investing mistakes. Hence, our analysis focuses solely on political events’ potential market impact—or lack thereof. Outside COVID-specific news, France’s government appears to be facing renewed political gridlock. “Seven lawmakers are splintering from [President Emmanuel] Macron’s La Republique En March[e] (LREM) to join the new ‘Ecology, Democracy, Solidarity’ group, which will count 17 parliamentarians in its ranks. That means Macron’s party now only has 288 MPs, one short of an absolute majority, and down from the 314 Macron had after he redrew the political landscape in 2017.” Now, LREM still has support from the centrist party MoDem, so this latest development doesn’t exactly torpedo Macron’s ability to pass legislation. Yet even with an outright majority, Macron hasn’t exactly been able to rule as he pleased. The president has steadily used up his political capital over the past three years on issues like the “yellow vest” protests and pension reform. Losing his party’s outright majority in the lower house is part of that trend—not surprising for a politician entering the back half of his term in office.
MarketMinder’s View: “The United Kingdom announced a new post-Brexit tariff regime on Tuesday to give it leverage in trade talks, maintaining the European Union’s 10% duty on cars but cutting levies on tens of billions of dollars of supply chain imports. … Britain said the regime would apply to countries with which it has no agreement and removes all tariffs below 2%.” This provides some high-level clarity on the UK trade front, but in the near term, it offers more talking points to UK and EU trade negotiators. Talks have seemingly hit an impasse, and with a meeting coming up in June, we wouldn’t be surprised if dire rhetoric over a possible no-deal Brexit and the resulting imposition of WTO terms of trade (a de-facto modest increase in EU/UK tariffs) heats up. But even in the event this happens, that outcome has been dissected for years, likely sapping surprise power. All today’s news does is sap it still more by providing a touch of clarity to the potential UK tariff regime. Brexit-related uncertainty could always spring up and knock sentiment in the short term, but in our view, not much here is likely to shock UK or EU companies.
MarketMinder’s View: We are of two minds on this article. Before diving in, set aside the electoral politics herein, which is basically needless and politicized speculation about how politicians may or may not couch data. Beyond this, the article helpfully demonstrates how base effects—skew from comparing a data point to an earlier outlier—can lead to extreme results, painting an incomplete picture without proper context. For example, the titular increase in air travel is a month-to-month comparison. Considering COVID restrictions decimated travel over the past two months, any improvement would likely yield a big boost in percentage terms on a monthly basis—despite the fact actual activity is down dramatically. On the other hand, we don’t think “avoiding annualized numbers for now” in favor of comparing “incoming information with whatever the same data showed before the crisis” is necessarily better or more accurate—it is just another perspective. Year-over-year numbers may shed light on the extent of the economy’s recovery or contraction, but shorter time periods can better highlight recent trends and hint at turning points—potentially useful information, in our view. Finally, note: Much of this reads like skepticism towards any potential recovery because it is coming off a low base. But that is a common sentiment among pessimists early in recoveries. We aren’t saying the nascent rebound means growth is now underway, but you should prepare to hear complaints about base effects overstating growth for a long time to come.
MarketMinder’s View: Investor surveys provide a snapshot of sentiment, and this widely tracked one suggests dour expectations remain widespread. “In the May 7 – 14 poll, 68% of investors called the rebound in equities a bear-market rally, or a short-term and fast bounce in stocks before they fall to new lows. Only a quarter believe that equities have entered a new bull market. Just 10% of the surveyed fund managers expect the economic recovery to be V-shaped, or quick and sharp, in contrast with 75% who predict a U- or W-shaped rebound that will take longer. On the bright side, global growth expectations surged in May, with a net 38% of fund managers predicting the world economy will strengthen over the next 12 months, according to the BofA survey.” Even that “bright side” seems rather glum, indicating many think an economic recovery will take a while. Now, that may be the case—we don’t know what the eventual recovery will look like. From an investing perspective, though, history shows bull markets begin amid rampant pessimism. Whether stocks’ rise since March 23 is a bear market rally or the start of a new bull market will be clear only in hindsight, but the increasing prevalence of dour expectations is an encouraging sign, in our view. For more, see our 5/8/2020 commentary, “What Recovery Pessimism Means for Stocks.”
MarketMinder’s View: “Housing starts tumbled 30.2% to a seasonally adjusted annual rate of 891,000 units last month, the lowest level since early 2015. The percentage decline was the biggest since the government started tracking the series in 1959. … Permits for future home construction plunged 20.8% to a rate of 1.074 million units in April, the lowest level since January 2015.” Though dismal, these figures aren’t terribly surprising. Record declines in various gauges of commercial activity have been par for the course in April, and COVID-related restrictions’ toll on new home construction was already apparent from housing starts’ -18.6% annualized March drop. One notable takeaway: “Though many states considered homebuilding as essential … disruptions to building material supply chains likely weighed on activity.” We think this underscores shutdowns’ destructive impact even on “exempt” industries. The sooner restrictions lift, the sooner businesses and consumers can resume normal activity and commerce, buoying the economy.
MarketMinder’s View: While rising pollution isn’t exactly what most people would call good news, the fact is pollution is often a byproduct of economic activity. Hence, the news China’s “Ministry of Ecology and Environment (MEE) said concentrations of hazardous airborne particles known as PM2.5 rose 3.1% in April to an average of 33 micrograms per cubic metre in 337 cities across the country, the first year-on-year increase since December” is potential evidence the country’s economy is recovering from the COVID-19 lockdown that paralyzed economic growth in Q1 and caused pollution levels to plummet. Take this observation with an appropriate amount of salt, though, as gauges like these are very limited, imperfect snapshots of economic activity. So it is here, as Chinese officials noted resuming industrial activity likely only partially caused April’s pollution spike, given “straw burning in the three northeastern provinces of Jilim, Heilongjiang and Lianining had increased by eight times compared with the same period last year, and sandstorms had also caused air quality to deteriorate in some regions.” That said, this tidbit is consistent with other evidence China is on the path to recovery from its shutdown.