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: This article argues Italy’s debt—already high before the lockdown whacked GDP growth and the fiscal response sent deficits surging—is unsustainable, with spiking interest rates and default prevented solely by the ECB’s buying its bonds. It goes on to argue that “authorities” are now calling for Italian citizens to chip in and buy debt, which would put more of it in residents’ hands, theoretically making it less susceptible to foreign investors fleeing. We agree that Italy has a high debt-to-GDP ratio by global standards—135% entering 2020, forecast to hit 170% this year. But questions about its sustainability are overwrought, in our view. For one, countries pay debt with tax revenue, not GDP. Entering 2020, Italy’s interest payments amounted to 12.4% of tax revenues, down from a peak of 43% in 1993. If it didn’t default then, why would it now? As for the ECB’s role, it owns only about 15% of Italian debt, and its QE program is already under legal challenge in Germany. Yet Italy’s 10-year rates are at only 1.84%—a far cry from the 7.64% they hit in 2011, amid the eurozone sovereign debt crisis and a small fraction of the 13.6% they were at on this date in 1990. Finally, considering the average maturity of Italian debt is about seven years, it seems to us yields would have to rise much higher—and stay there for years—for trouble to arise. (Yield and debt data are from FactSet and Oxford Economics.) Last, as for who those “authorities” calling for “ordinary Joe” to buy Italian debt are, it seems this article cited only one actual politician: Matteo Salvini, who leads the opposition party in government, making the call seem as much about domestic politicking as anything.
MarketMinder’s View: After weeks of debating how EU institutions should help member-states deal with the financial fallout from COVID-19, on Monday, French President Emmanuel Macron and German Chancellor Angela Merkel “called for the creation of a 500-billion-euro ($543 billion) recovery fund able to offer grants to the countries and regions hardest hit by the coronavirus crisis. [They] also said they were proposing to authorize the European Commission to borrow money on financial markets in the European Union’s name, while at the same time respecting EU treaties.” While it is uncertain if the European Commission will agree to such a proposal, it is significant because this is the first time Germany has agreed to raise debt jointly with other EU or eurozone nations, which effectively amounts to a fiscal transfer from stronger nations to weaker ones—an issue leaders have long been at loggerheads over. Since the euro’s creation, many voters in more fiscally stalwart nations have argued they shouldn’t have to pay for poorer countries they see as fiscally irresponsible. It wouldn’t shock us if this argument were to reappear this time. As for the proposed €500 billion recovery fund, it may provide a lifeline for those hit hardest by the economic shutdown, but it wouldn’t be a cure-all. The biggest economic relief would be a return to something like normalcy, in our view. Though European economies are slowly returning back online, when exactly that will happen across the board—and how it will compare to investors’ expectations—remains to be seen.
MarketMinder’s View: Fed Chairman Jerome Powell dropped by “60 Minutes” last night, and his warning that the economic recovery “could stretch through the end of next year” has garnered all manner of headlines, including this one. We aren’t here to agree or disagree with his comments or to try to argue his more positive statements about how now differs from 2008 are more meaningful. Rather, we simply point out that saying recovery could take a while isn’t really an earthshattering statement and doesn’t mean this downturn is uniquely awful. After the last recession, GDP and employment took a few years to regain their pre-recession levels. From that standpoint, returning to prior economic highs by next year’s end would be relatively speedy. Moreover, significant improvement on the medical or economic fronts shouldn’t be necessary for stocks to recover from this bear market, as stocks generally move before widely expected events. A vaccine won’t sneak up on anyone, as today’s coverage of the latest developments on that front shows. A second wave prompting another round of lockdowns is a potential headwind, but the probability isn’t knowable now. Hence, we don’t think the mere possibility should factor much into investment decision-making today.
MarketMinder’s View: Setting aside the political overtones, as we always encourage readers to do, this is a rather good look at how trade rhetoric often deviates from reality. In this case, China has had verbally frosty trade relations not just with the US, but with Australia and South Korea—two of its largest trade partners. Yet bilateral trade hasn’t suffered. “Last year’s trade diplomacy stand-off centered around claims that China was using customs checks to impose a soft ban on Australian coal exports, but in the end trade volumes for that commodity rose about 21% from a year earlier in the 12 months through March. … That’s even been the case with the likes of South Korea: Its shipments to China increased by 11% during 2017 despite bad blood engendered by a highly public dispute over a U.S.-supplied missile shield system.” We think the article’s conclusion nicely sums up why: “Still, whenever leaders bicker it’s worth remembering that the real ties between nations are among people and businesses, rather than diplomats and presidents. At that level, the relationship still remains hearteningly warm.” Keep this in mind as tough trade rhetoric inevitably heats up on the US presidential campaign trail, with both parties talking tough on China, likely driving fears of protectionism hurting stocks.
MarketMinder’s View: Yes, as this article argues, if you rely exclusively on interest and/or dividends to fund the cash flow you need to meet expenses, the historically rock-bottom interest rates on Treasurys and a wide range of other high-quality bonds could have you in a bind. After all, at this time in 2010, a newly issued 10-year US Treasury note would have paid you 3.5% (or $30.50 per year in interest per $1,000 face value bond). Today? 0.625%, or just $6.25 in annual interest income per bond. (All figures here from Treasury Direct’s auction results from mid-May auctions in both years cited.) These falling rates also spill over to corporate bonds, municipals and, yes, annuity rates. To us, this highlights a couple of key factors: One, rather than use investment income (interest and dividends) to fund your needs, we think it is better to target total return and use a combination of dividends, interest and sale proceeds. That puts you in the driver’s seat versus the fun guys over at the Fed. Two, it also highlights the importance of maintaining flexibility in retirement through the combination of an accurate budget showing you where you can easily cut costs and a cash buffer sufficient to tide you over at least a few months, in the event markets don’t work in your favor for a short time.
MarketMinder’s View: Here is an interesting piece covering why even free-wheeling hedge funds and venture capital firms aren’t plowing money into Biotech and Pharmaceuticals firms seeking a coronavirus treatment or vaccine. In short, it is a speculative bet that isn’t assured to bring big profits even if the firm has success. As the article notes, if you invest in a firm seeking a treatment and another company finds a vaccine, the market has suddenly become quite limited for your company’s product. Further, there are many companies, universities and non-profit developers pursuing a vaccine, making it near impossible to know who will succeed. Finally, there is a huge, looming issue: Will a firm producing any of these drugs be able to sell it at a profit? Given political pressures, that seems like a darn good question for investors to be asking if they plan on investing based solely on a company’s prospects for treating the coronavirus. The risk, as one investor quoted herein put it, is that “The general public is throwing money at headlines,” which isn’t a great investment thesis. For more, see our 5/8/2020 commentary, “How to Think About Health Care Stocks Now.”
MarketMinder’s View: Value stocks, which dominated returns versus their growth counterparts in the 2002 – 2007 bull market, have overall lagged dramatically since the global financial crisis ended in 2009. This article argues the cause of value’s current lag—which is dramatic thus far in 2020—is due to mean reversion. We don’t buy it. There is a repeat cycle that has occurred throughout history, with smaller, value-oriented firms leading early in bull markets and larger, growth-oriented firms late. This is because value stocks, contrary to the depiction herein as safer, are actually more cyclical and economically sensitive. As a result, they tend to get pounded during bear markets—see this year with questions. Meanwhile, growth-oriented firms tend to be less exposed to cyclical swings and have greater long-run earnings visibility. The upshot: Early in bull markets, when value stocks are deeply depressed, they are like a coiled spring waiting to bounce high. As this bounce wanes, growth typically takes the lead. So it was in 2009 – 2020’s bull market, too, with value overall leading from 2009 through about 2012. Now, if the recent rally proves to be the start of a new bull market—which we can’t know yet—it will be quite atypical in that growth has led. But that wouldn’t shock us given the fact this bear market didn’t begin with the usually gradual grind into recession and was instead far more sudden. For more, see our 4/27/2020 commentary, “What Underlying Trends Say About This Bear Market.”
MarketMinder’s View: The titular “when” is when, as a result of stay-at-home orders, you are working in a different state than normal, perhaps because you live in one state and work in another (e.g., New Jersey residents who work in Manhattan), or maybe you opted to ride out the pandemic by telecommuting from a secondary residence. All complicate state taxation, making it vital to check residency rules and ensure you aren’t running afoul of them and document where you are working and when. You will also need to check IRS and state guidance on how shelter-in-place rules affect residency and taxes owed, which so far appears to be a tangled web of uncertainty. For instance: “New Jersey has said that it will not impose a tax on the income of people who usually work in another state but are now working from home. But this is not broadly the case. New York has not issued guidance on what it might do, said [the head of US wealth advisory for JPMorgan’s private bank]. He added that New York could continue to tax residents of other states who normally worked in New York but were now working from home. Likewise, the city could continue to tax residents of New York State who typically work in Manhattan.” So if you are working in a state you don’t normally work in, keep your ear to the ground and stay in close contact with your tax advisor.
MarketMinder’s View: There is some rather charged political commentary here, which we recommend readers put aside. MarketMinder’s analysis is intentionally non-partisan, as we favor no politician nor any political party—rather, our focus is solely on economic and market impact. The article’s thesis posits stocks’ rally since March 23, coupled with the potential for a quick jobs recovery and sharp GDP rebound later in the year, may convince policymakers the economy is in better shape than perceived, thus discouraging the push for further financial support from Congress and the Fed. Besides the latter misperception—reopening the economy will do more for businesses than any additional government fiscal response, in our view—we think this is emblematic of the type of sentiment common early in a bull market recovery. In a phenomenon we call the pessimism of disbelief, pundits regularly ignore good news or, as in this example, couch it as bad. We aren’t calling the rally since March a genuine recovery and have no way to know whether it is—more downside could await—but this type of argument is an encouraging sign, in our view. For more, see our 5/8/2020 commentary, “What Recovery Pessimism Means for Stocks."
MarketMinder’s View: US initial jobless claims totaled 2.981 million in the week ending May 9, the eighth straight week of claims in the millions. As noted here, 36.5 million people have filed for unemployment benefits since mid-March. Though some of this reflects application backlogs due to the “unprecedented wave of applicants,” some economists fear a “second wave” of layoffs may have started. The staggering weekly figures show the severity of the sudden economic downturn—to say nothing of the personal hardships the numbers don’t show. With states’ reopening plans varying across the board, we wouldn’t be shocked if national labor data were to remain historically bad for a while. But as difficult as these numbers are to stomach, we think it is critical for investors to separate their views of the labor market and stock market. Though headlines often conflate the two, jobs usually lag economic growth; stocks, in contrast, lead it. The former will likely start improving well after the recovery has begun. For more, see our 5/11/2020 commentary, “Stocks and Unemployment’s Relationship Hasn’t Changed.”
MarketMinder’s View: We agree entirely that it is important to consider future Social Security income when calculating how much cash flow you will need to take from your portfolio throughout your retirement—which is in turn a critical factor in determining which asset allocation is best for your needs. But this piece goes one step further, mentally accounting for Social Security not as annual cash flow, but as a lump sum portfolio component—akin to a large fixed income position. For instance, to back up the titular claim, this article presents some numbers crunched by the Social Security Administration, which are based on someone who will turn 65 next year and receive the average Social Security benefit of $1,500 a month: “If you’re a male, the value of that $18,000-a-year benefit when you begin drawing it is $200,910. If you’re a female, the value is $218,085—the female benefit is higher because women typically live longer than men.” The problem with this line of logic is that counting Social Security as an asset rather than a future income stream could lead to flawed asset allocation decisions. The mix of stocks and bonds you own should depend on your goals and needs, including the cash flow you require. But if you mentally account for Social Security as a couple hundred thousand dollars set aside, it could lead you to allocate your investment portfolio in a way that doesn’t align with your needs. So by all means, use some of the tools in the second half of the article to estimate your future Social Security cash flows, as these will be critical to your overall cash flow planning needs, and go through the mental exercise of determining when to start taking payments, which the article also outlines (and talk to your tax professional). But we suggest stopping there as it pertains to Social Security and remembering that national averages, while helpful, are only a starting point and may not match your situation. For more, see our 7/26/2019 commentary, “When to Start Social Security? Some Basic Considerations.”
MarketMinder’s View: In some non-COVID news, the World Trade Organization’s (WTO) Director-General Robert Azevedo is stepping down a year before his term’s expiration, prompting some to mourn the supposed demise of global trade. Though this article echoes some of that sentiment, it also points out that the gradual liberalization of global commerce was never a smooth path. Contending political interests muck up deals; big regional trade agreements take years to complete and come with protectionist characteristics; supranational bodies born to facilitate trade fall by the wayside (see the WTO’s predecessors, including the International Trade Organization and the General Agreement on Tariffs and Trade). Despite recent seeming drawbacks—including the ongoing US-China trade tiff and UK-EU Brexit negotiations—global trade has trended upward over the past decade (per CPB Netherlands Bureau for Economic Policy Analysis’s World Trade Monitor). In our view, companies driven by global growth will have more to say about the future of global trade than organizations like the WTO.
MarketMinder’s View: This article asks an interesting, though academic, question: Are social distancing measures producing unmeasured economic contributions? The analysis here equates social distancing to a pill that keeps COVID-19 away, arguing, “A pharmaceutical company that produces a $25 pill is said to add billions to G.D.P. By contrast, collective efforts to produce an equivalent outcome through social distancing are treated as though they have no value.” In our view, the thrust of this argument overstates what economic data like GDP can tell us. More importantly, however you categorize social distancing measures’ impact, and regardless of how those measures affected public health (something we may never know definitively), COVID-19 restrictions still destroyed economic activity, causing businesses to cease operations and workers to lose jobs. Stocks reflected this reality before any official economic data confirmed it. What matters more for future economic activity is how soon businesses and consumers can begin operating again—not whether government policy’s contributions get added to GDP.
MarketMinder’s View: COVID-19 has stoked fear on multiple levels, from health concerns to the impact on livelihoods. As this article describes, scammers are taking advantage of many folks’ newfound need to navigate government programs or work from home, which may leave them exposed to data breaches compromising their finances. While straightforward, the basic tips shared here offer important reminders for how you can protect yourself, including: making sure websites you use are legitimate, especially when entering personal identification or credit card information; double-checking calls from your bank really are from it and not a robocaller spoofing your bank’s number; not opening emails or links from unknown senders; and keeping your home network security up to snuff. Read on for more details, and also please see our 4/17/2020 commentary, “Tips on Protecting Yourself From Coronavirus Ne’er-Do-Wells.”
MarketMinder’s View: We found this article a mixed bag. On the sensible side, it points out some of the inherent limitations of price-to-earnings (P/E) ratios, which currently signal stocks are at their most expensive since the 2000 dot-com bubble. Yet trailing P/E ratios, as noted here, will tell you what just happened—not helpful for determining where forward-looking stocks will go next. As for forward P/E ratios, which depend on analysts’ earnings forecasts, COVID-19 has turned those typically educated estimates into guesses at best. However, the contention here that the cyclically adjusted P/E ratio (also known as CAPE) is more informative about the future is off, in our view. CAPE has even more problems, like bizzarely inflation-adjusting the past 10 years of earnings data. What happened in 2010 doesn’t seem particularly relevant to today’s COVID-driven economic downturn. That aside, we agree with the conclusion that “valuation tools are only as smart as their users”—as tempting as it may be, no metric will flash brightly when the bear market is over. For more, please see our 4/21/2020 commentary, “Don’t Expect P/Es to Signal the Low.”
MarketMinder’s View: Q1 UK GDP fell -2.0% q/q, its worst reading since Q4 2008. All output sectors detracted, with the UK’s mighty services sector down -1.9% and household consumption falling -1.7%. Looking at March alone, monthly GDP fell -5.8% m/m—illustrating the severity of the economic damage due to the government’s decision to cease commerce to contain COVID-19. Considering the closure didn’t officially begin until after mid-March and is only now starting to ease a teensy bit, Q2 economic data may end up even worse. Yet as bad as these numbers are, they represent the magnitude of the damage—a reality people are aware of worldwide. For investors, we think what matters more is the duration of this institutionally induced economic shutdown. The UK government announced its gradual reopening plan earlier this week, so monitoring how this progresses will be critical in determining how reality squares with increasingly dour expectations of the economy’s near-term prospects.
MarketMinder’s View: While there are no direct market takeaways here, we raise this roundup because how governments respond to potential “second wave” COVID outbreaks will likely play a big role in shaping investor expectations of the near-term economic outlook. After recent outbreaks in Asia, “China is now testing millions of people to catch new infections. South Korea has dispatched several thousand police officers in a renewed push for contact tracing.” How will other gradually reopening countries like Germany—or states in the US—react should infections increase anew in the coming weeks and months? We don’t know, and myriad possibilities make for a lot of investor uncertainty. As difficult as today’s fluid situation is, we believe avoiding knee-jerk decisions and tracking how successful—or not—countries are with their reopening plans is the sensible move right now. For more, please see our 4/28/2020 commentary, “What Would a ‘Second Wave’ Mean to Markets?”
MarketMinder’s View: Plunging energy prices (-10.1% m/m) outweighed rising food prices (1.5% m/m), leading to the titular monthly contraction, while core inflation (which strips out more volatile food and energy prices) slipped -0.4% m/m, reflecting “sharply lower prices for apparel, motor vehicle insurance, airline fares, and lodging away from home.” Nothing here is hugely surprising, highlighting COVID’s impact on consumer demand headlines have discussed for weeks. In our view, more short-term deflationary readings are possible as COVID fallout constrains certain categories of consumer spending and firms slash prices to unload excess inventory. Yet these historic drops in prices don’t mean entrenched deflation looms. Rather, they reflect the economic lockdown’s fallout, not a sudden decrease in the country’s money supply. With the Fed providing plenty of liquidity, the risk of capital drying up isn’t high at the moment. Reopening the economy and allowing businesses to operate as normal would be the biggest boost, but whenever that happens, businesses and consumers will likely have access to capital. For more, see last week’s commentary, “Falling Prices Don’t Mean Falling Stocks Ahead.”
MarketMinder’s View: A day after the UK government released its roadmap for gradual economic reopening, Chancellor of the Exchequer Rishi Sunak announced a four-month extension of a program paying “80% of furloughed workers’ wages up to £2,500 per month, until the end of July. … The chancellor also said that from August employers would need to ‘share with the government the cost of paying salaries’ in an indication that the level of state support would gradually taper away.” The article goes on to outline the brewing political battles over who will foot the bill. We won’t try to project that outcome, but regardless of how it shakes out, this announcement gives market participants more information about policymakers’ reopening plans and hints at politicians’ willingness to extend assistance when those reopenings happen more slowly than they initially anticipated. That, in turn, shapes investor expectations—key to follow, in our view, when gauging sentiment.
MarketMinder’s View: First, MarketMinder doesn’t make individual security recommendations, and we don’t advise any particular action with the stocks referenced here. This article argues environmental, social and governance (ESG) investing strategies’ higher relative returns during the bear market that began in February “suggests that ESG has staying power,” with record inflows to ESG funds the alleged evidence that defies predictions “investors would abandon the practice for higher returns in times of turbulence.” However, myopically focusing on a couple months of outperformance during this downturn doesn’t validate it as a permanently superior strategy, in our view. Consider: “The equity funds that earned the highest returns overall, the data showed, were largely ones that heavily invested in big technology companies,” which, thanks to their size and growth qualities, have held up better during this bear market. Likewise, Energy, which many ESG funds often shun, has lagged. Extrapolating ESG’s overlap with recently outperforming categories into future leadership in other market environments seems like an error to us. Instead, we view this simply as a lesson in looking beyond labels to see what is truly driving performance, good or bad.