MarketMinder

Headlines

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.


EU Proposes Mandatory Power-Demand Cut and Tax on Profits

MarketMinder’s View: After last Friday’s emergency EU summit to address energy shortages yielded much disagreement, the European Commission is preparing a new package of proposals for member states to debate. The more contentious plans, including a proposed cap on the price of Russian natural gas, now appear to be off the table. Instead, the commission is pursuing mandatory energy conservation during peak hours, a windfall profits tax on energy companies and “a limit on the price of electricity generated from technologies such as renewables, lignite or nuclear.” As the article notes, even this slimmed-down package faces a tough road, as member states’ competing interests likely make a broad agreement difficult. Encouragingly, however, previous plans to shore up liquidity in energy markets and help power providers deal with astronomical margin calls were so popular with EU member states that they are “now being worked on separately.” Detaching them from the less popular initiatives should help speed them up, providing some welcome relief to markets. As for the rest, while they create winners and losers and may prove counterproductive, slowing down the process gives markets more time to assess and price the situation, helping reduce the likelihood of a sudden, unexpected shock.

UK Economy Grows More Slowly Than Expected Amid Cost of Living Crisis

MarketMinder’s View: This is an overall fair assessment of UK GDP’s 0.2% month-over-month growth in July, which followed June’s -0.6% contraction. June’s result included some downward skew from the late Queen’s Platinum Jubilee, which added an extra bank holiday. As a result, many expected a month with a full allotment of working days—plus major international sporting events—would deliver a nice rebound. Instead, growth missed expectations. But it wasn’t all bad news. The main drag was utilities, which declined as higher prices incentivized households to conserve energy. Meanwhile, services output rose 0.4% m/m, and the decline in retail activity eased substantially to just -0.1%. Should Parliament approve Prime Minister Liz Truss’s proposal to freeze energy prices through the next two winters, it would prevent another huge increase from detracting from discretionary spending this autumn and beyond. (Not that we are advocating the policy, taking sides in a political debate or ignoring the bill’s potential unintended consequences, which we discussed last week—we are assessing this from a pure GDP math standpoint.) That doesn’t guarantee the UK avoids recession, and as the article notes, a Q3 GDP contraction is possible as the country pauses normal life to mourn and honor their late Queen. That would meet one commonly used definition of recession. But that possibility has been well known and widely discussed for months, even before the added public holiday in September, likely sapping its surprise power over stocks.

Fed’s Exit Puts World’s Biggest Bond Market on Shakier Ground

MarketMinder’s View: This piece recycles an old fear: that the Fed’s decision to raise the amount of assets it lets roll off its balance sheet to $95 billion per month will disrupt bond markets, wreaking havoc in the financial system and even raising the risk of a US bond default. The underlying assumption is that the Fed is the primary source of demand in Treasury markets, and that as it pulls back there will be no buyers to step in, reducing liquidity and sending long-term interest rates higher. Liquidity issues in September 2019 are allegedly evidence of this. But in our view, that claim doesn’t quite square with the facts. While there were some hiccups in money markets that month, the Fed had announced the end of its balance sheet runoff that July, and in August it had resumed reinvesting the proceeds of all maturing bonds in its portfolio—implying other plumbing problems triggered the bond market wobble, and the Fed eventually addressed those with some tweaks to its repo program. The article alleges those tweaks were a resumption of quantitative easing bond purchases, which is just plain inaccurate per the Fed’s own statements at the time. As for the present, the Financial Industry Regulatory Authority reports $439.4 billion worth of Treasurys with maturities between 5 and 10 years changed hands in the week beginning 8/29/2022, the most recent on record. That is over four times the Treasury’s planned monthly roll-off, in just one week. So we daresay there is plenty of demand out there to make up for the Fed playing less of a role in the secondary market. Note, too, that the newly issued bonds represented the vast majority of this trading volume, which suggests there are plenty of buyers for newly issued debt, defying the claim that the Treasury won’t be able to refinance maturing bonds. Lastly, we would be remiss not to remind readers that while the Fed’s plans are widely known and likely pre-priced by now, letting market forces take more hold of long rates helps steepen the yield curve. That is an economic plus.

New Tax on Stock Buybacks Would Have Raised Over $8 Billion in 2021, Study Says

MarketMinder’s View: Here is more evidence the new tax on stock buybacks is highly unlikely to end the practice or dent corporate profits: It “would have raised about $8.4 billion from the biggest publicly traded U.S. companies if it had been in effect last year, absorbing the equivalent of nearly a half-percentage-point of net income overall, a new analysis finds. The financial impact would have been similar to raising the combined effective tax rate for the companies to 17.95% from 17.56%, according to financial data firm S&P Dow Jones Indices, which analyzed the buybacks for companies in the S&P 500 index.” Note, too, that 2021 was a banner year for buybacks, which hit a full-year record $881.7 billion, according to a separate report from S&P Dow Jones Indices. Now, those figures are averaged across the S&P 500, and some companies will have larger tax bills than others. This article dives into some of those company-specific details, and as always, MarketMinder doesn’t make individual security recommendations. But overall, this shows the tax is probably just one small factor companies will weigh as they consider their buyback plans, and it is far from the only variable affecting the long-term cost/benefit analysis.

Businesses Shut, Events Cancelled and Rates Decision Delayed After Queen’s Death

MarketMinder’s View: As Britain and the world continue mourning Her Majesty Queen Elizabeth II and honoring her many decades of public service, UK businesses and national institutions are making some adjustments. Mostly, we just highlight this as an FYI for those who keep a close eye out for economic data and central bank moves: The Bank of England is delaying its upcoming interest rate decision until after the national mourning period, but the Office for National Statistics will continue releasing economic data. The UK stock market has remained open but will likely close the day of the funeral, presuming it is designated as a public holiday, and some pending industrial actions have been canceled. Beyond this, with so many businesses closing voluntarily to mark this solemn time, it won’t surprise us if there is some impact on September’s economic data. But that is merely something to keep in mind down the road, not a thing to dwell on now, as we all pay our respects. 

Brussels Backs Off Russian Gas Price Cap After Putin Threat

MarketMinder’s View: At today’s energy summit, EU leaders abandoned a proposed price cap on Russian natural gas after Vladimir Putin threatened to retaliate by shutting off all Russian gas flows to the Continent. So, for the time being, it looks like one contributor to the risk of severe energy shortages has eased. But there is still potential for some unintended consequences: “Ministers asked the European Commission to draw up more detailed plans to cushion the blow to households by targeting the excess profits of fossil fuel giants and non-gas electricity producers that are capitalising on soaring energy prices. The EU’s executive arm was also instructed to prepare proposals for a broader price cap, not just targeting Russia … .” Both of these could lead to shortages downstream, as both could discourage investment and conservation. There is a robust history of wartime price controls, however well-intended and beneficial for some, leading to rationing and longer-term disruptions. We think markets are well aware of this risk and have been pricing it into European stocks to a large degree, but we think investors benefit from being cognizant of it all the same. On the bright side, EU leaders are also moving forward with plans to support energy derivatives markets and help power providers deal with fast-rising collateral requirements and steep margin calls, which should help quite a bit. So overall, we still think this package is a mixed bag, but the more clarity investors get, the better. For more, see Wednesday’s commentary, “What to Make of the European Commission’s Winter Plan.”

Downsizing in Retirement: Expenses They Didn’t Expect

MarketMinder’s View: If you are one of the many empty-nesters considering downsizing to lower costs and avoid stairs in retirement, this is well worth a read. It highlights the potential pitfalls and unexpected costs people run into, and being aware of these in advance can help you plan and keep your expenses in check. One of the couples profiled here figured they would make a boodle selling their home in a hot housing market—and they did, but not until they spent $20,000 on renovations and took out a bridge loan to finance their move to an expensive retirement community. Another family got caught unprepared when their home sold in just one day: “Two weeks later, they placed much of their furniture in storage and moved to a rental house, where they lived for nine months, at $2,000 a month. In the meantime, they signed a contract for a house that had not yet been built.” Other folks eye retirement communities, only to find that the monthly costs are far higher than they had in the paid-off family home, while some are surprised by closing costs and capital gains taxes—which reduce their expected proceeds from the home sale, altering their budget. So it is vital to look before you leap. Estimate the total costs of selling your home, including renovations, real estate fees and taxes. If you are considering a retirement community, find out not just what the fees are but what they cover, as you might need to pay extra on top of that for gardening services and parking. If you are eyeing a condo, town house or planned community, find out about homeowners association fees. If you are moving to a new state, find out how they tax retirement income. Most importantly, ensure you estimate all your cash-flow needs as accurately as possible and, if you are relying on your investment portfolio to help with retirement expenses, have a realistic view of the long-term returns you will need to sustain those cash flows through your entire retirement. Then make sure your portfolio has the blend of stocks, bonds and other securities that will maximize the likelihood of achieving those returns while balancing your comfort with market volatility.

U.K.’s New Leader Lays Out Sweeping Plan to Cap Energy Prices

MarketMinder’s View: During a somber day in the UK as Buckingham Palace announced that Queen Elizabeth II was under medical supervision and everyone awaited news of her condition before learning of her passing in the evening, Her Majesty’s government (and most loyal opposition) stayed duty-focused. New Prime Minister Liz Truss announced her widely anticipated plans to tackle Britain’s high energy costs, spurring much debate and discussion. “Under the plan, average annual [household energy] costs would be capped at £2,500. Costs for businesses, charities and schools would also be capped for six months, underscoring the extraordinary reach of the program. Ms. Truss announced that the government would lift a ban on hydraulic fracking and grant approvals for new oil and gas drilling in the North Sea, part of a longer-term effort to make Britain less dependent on imported energy. But the new supplies will not flow quickly enough to avert the current crisis — mainly the fallout from Russia’s retaliatory cutbacks in gas supplies to Europe.” Though Truss didn’t share the price tag for her plan, some research outfits estimate a cost of around £100 ($115) billion in the next year for the household portion. While we believe the market is a more efficient allocator of resources than the government, we don’t dismiss the hardships many households and businesses face due to high energy costs—and as with any spending plan, this one will favor some groups over others. As policy experts weigh the plan’s pros and cons, we suggest investors keep a couple of factors in mind. One, many details (e.g., specific support measures for businesses and public sector organizations) remain scant—not to mention the prospect of proposed tax cuts, expected to come later in September, which may add more fodder for chatter. Yet an overlooked factor: A gridlocked Parliament increases the likelihood that many of these proposals end up watered down, so whether you cheer or fear a certain plan, it may end up less sweeping than it appears today. Given all the unknowns still at play here, a wait-and-see approach seems wisest to us. For more, see this week’s commentary, “The Fearful, Snap Reaction to Britain’s New Prime Minister.”

It’s a Housing Slump, Not a Crisis

MarketMinder’s View: While we generally agree with the titular sentiment, this article’s primary argument stems from a misperception, in our view: that real estate drove the 2007 – 2009 recession and bear market (a typically prolonged and fundamentally driven decline exceeding -20%), and since those conditions aren’t present today, investors shouldn’t worry. This piece argues banks created a bunch of complex assets (e.g., mortgage-backed securities [MBS] and collateralized debt obligations [CDOs]) and obliterated lending standards in the lead-up to the subprime mortgage collapse. “It was a virtual daisy chain of leverage, and when people stopped paying for mortgages they shouldn’t have been given the first place, there was a domino-like effect that led to a bailout of some of the country’s biggest financial institutions.” This is a popular narrative surrounding 2008’s financial crisis—but one with holes, in our view. For example, housing prices started declining in 2006, over a year before the financial crisis erupted—a mismatch in timelines. Though housing’s downturn contributed to the crisis, we think the application of the mark-to-market accounting rule (FAS 157) played a much bigger role. Implemented in late 2007, FAS 157 forced banks to value illiquid assets they intended to hold to maturity to fire-sale prices as hedge funds liquidated similar assets. A destructive feedback loop ensued, decimating bank capital and roiling investor confidence. Moreover, the Fed’s Maiden Lane fund—not subject to mark-to-market rules—showed the “toxic assets” discussed in this article turned out to be not-so-toxic, debunking the notion that MBS, CDOs and other securities were inherently the problem. So yes, we think the higher credit standards and improved household finances are noteworthy and agree housing doom is likely a false fear—but that is more because real estate in general isn’t the economic swing factor many think it is. For more, see our recent commentary, “Will a ‘Housing Recession’ Spur Wider Economic Contraction?

Japan Upgrades Q2 GDP as Easing COVID Curbs Lift Spending

MarketMinder’s View: Per its revised estimate, Japan’s Q2 GDP grew 3.5% annualized (0.9% q/q on an inflation-adjusted basis), better than the 2.2% initial reading. “The growth suggests domestic demand rebounded modestly after the government removed pandemic-related curbs on activity in the first quarter. It was driven in part by a pickup in capital expenditure and a smaller decline of inventories such as cars, the data showed. Private consumption, which makes up more than half of the country's GDP, grew 1.2%, the data showed, revised up from an initial estimate of a 1.1% increase. Capital spending rose 2.0%, also revised up from a preliminary estimate of a 1.4% rise and more than a median market forecast for a 1.8% expansion, largely due to stronger software investment.” These figures echo trends from other major economies (e.g., a boost in demand tied to easing COVID restrictions), so nothing here is groundbreaking. But considering all the negatives peppering financial headlines today, from high energy costs to ongoing Chinese lockdowns, data globally have pointed to a more nuanced reality—and stronger-than-expected growth out of the world’s third-largest economy adds to that mixed picture. With recession fears dominant, a global economy that muddles along can qualify as a positive surprise.

A Red-Hot Job Market Supports a Soft Landing

MarketMinder’s View: Jobs data tend to receive a lot of attention in any market environment. These days most pundits fixate on how the Fed may interpret—and therefore act on—the latest labor trends. This article views the August jobs report in an optimistic light, arguing strong jobs growth is a positive because, “… adding jobs this fast actually makes a soft landing in the labor market more likely than if growth had already decelerated. It gives the Fed more of a cushion to slow things down without the economy falling apart.” Translation: The Fed has room to continue tightening since hiring trends imply the economy isn’t close to recession, which also gives them more runway to shift to accommodative policy if things turn sour. We see two big misperceptions. One: that the jobs market reveals the current state of the economy. Jobs are late-lagging economic indicators, reflecting investment decisions businesses made months ago. Since they follow growth, jobs can’t indicate whether expansion continues or recession looms. Our second issue: treating monetary policy as an all-powerful and precise economic tool. The Fed’s decisions influence lending and therefore money supply, which can affect economic growth and thus jobs—but the impact tends to hit the economy at an undetermined lag (anywhere from 6 – 18 months). Rate hikes are but one of a multitude of variables businesses consider before hiring. While we acknowledge the tone here is a bit more cheery than most other analyses, investors should base their outlooks on forward-looking criteria—and jobs aren’t too helpful on that front. For more on the August jobs report, see this week’s commentary, “Jobs and the Pessimism of Disbelief.”

Why the Euro’s Weakness Is a Big Deal

MarketMinder’s View: Why is the US dollar strengthening against the euro? This Q&A article, which we found a mixed bag, attempts to answer that question. On the sensible side, “The US Federal Reserve has been more aggressive in hiking interest rates in its battle against inflation. While the US central bank has raised key rates by a combined 225 basis points since March, the European Central Bank (ECB) has so far executed only a 50-basis point. ‘The money would go to the place with a higher yield,’ Carsten Brzeski, chief economist for Germany and Austria at ING, told DW. The US dollar is also benefiting from its safe-haven appeal. Amid all the gloom and doom and uncertainty around the global economy, investors are taking comfort in the relative safety the dollar offers, being less exposed to some of the big global risks right now.” However, the article’s focus on concerns ranging from expensive imports for eurozone households to added difficulties for ECB monetary policy implies a weaker euro is inherently a negative. Yes, everything else equal, a weaker euro makes imports—e.g., for oil and gas—more expensive, but it can also attract global travelers and property buyers to the eurozone while increasing export revenues if companies keep prices constant overseas. These effects often cancel out—a normal part of doing business internationally—not to mention they typically hedge currency risks to minimize their operational impact. As ever, what matters for markets’ direction moving forward is surprise power. Given how highly anticipated potential central bank rate moves are—and the alleged risks (like dollar strength) from those—reality seems set to shock far less than stories featuring foreign-exchange fear suggest.

Junk-Loan Defaults Worry Wall Street Investors

MarketMinder’s View: As this article mentions some specific companies, please note that MarketMinder doesn’t make individual security recommendations. They serve only to highlight a broader theme: On top of the panoply of fears already weighing on markets this year, some worry a credit crunch now looms. “Defaults on so-called leveraged loans hit $6 billion in August, the highest monthly total since October 2020, when pandemic shutdowns hobbled the U.S. economy, according to Fitch Ratings. The figure represents a fraction of the sprawling loan market, which doubled over the past decade to about $1.5 trillion. But more defaults are coming, analysts say. Interest payments on the loans float in lockstep with benchmark interest rates set by the Federal Reserve. The higher the central bank raises rates, the tighter the squeeze on companies that borrowed when rates were close to zero.” Some Wall Street analysts now see leveraged loans as the “canary in the credit coal mine,” as evidenced by a spate of reports and forecasts fretting how weak earnings combined with potential Fed interest rate hikes will lead to credit-rating downgrades and tighter financing. The upshot: Companies will struggle to get funding or repay debt, which will hurt economic growth. But this possible scenario isn’t a given, as recent history shows. We heard a similar argument back when the Fed was hiking rates in 2018, and as we said the last time we looked at leveraged loans, any spike in losses probably wouldn’t lead to wider credit trouble, much less topple the economy. Credit spreads widened in 2018, too—and then subsided without incident. The past isn’t predictive, but it can illustrate how purported trouble spots don’t necessarily manifest as initially feared. Also, as the title here implies, “junk-loan defaults” wouldn’t be surprising. For example, ‘regular’ junk bond yields (as measured by the ICE BofA US High Yield Index, via the St. Louis Federal Reserve) have been rising this year. Forward-looking markets are likely pre-pricing a bunch of factors discussed here, including default risk. Another important point the article acknowledges: “To be sure, most borrowers don’t have to repay their loans for several years, giving them some financial breathing room. Even among the companies at greatest risk, about 75% of their loans mature in three years or more, according to Fitch.” Put it that way and this becomes less an imminent credit crunch and more a sign that the pessimism of disbelief is strong today—conditions that fuel early bull markets, in our view.

Chinas Economy Takes Hit From Global Slowdown as Exports Weaken

MarketMinder’s View: China’s August exports slowed to 7.1% y/y while imports barely grew at 0.3% (both in US dollars). Before reading too much into China’s trade slowdown, which one economist here ascribes to a “weakening global outlook,” we suggest bringing a couple caveats and exceptions to the fore. “Exports were also impacted by China’s extreme weather and Covid outbreaks last month. Some factories in Sichuan province were forced to shut because of power outages, while virus outbreaks prompted lockdowns in places like Yiwu in the eastern province of Zhejiang, a major manufacturing and exporting hub. ‘China’s export growth is retreating to its more normal levels after two years of exceptional growth,’ said Lu Ting, chief China economist at Nomura Holdings Inc. ... China’s exports to Russia surged 26.5% on-year in August, as Chinese brands filled a gap left by departing Western companies. Exports to Taiwan contracted for the first time since January 2020, as China halted some trade in early August in retaliation to the visit of US House Speaker Nancy Pelosi to the island.” Instead of extrapolating last month’s crosscurrents, we would note that Chinese exports remain above pre-pandemic levels (per FactSet)—and imports far exceed 2019 levels—evidence of the world’s second-largest economy’s domestic demand as well as broader global demand. Now, some of this may reflect prices (in dollars) more than volumes, but that isn’t unique to China, and the world overall has demonstrated resilience to rising prices and currency swings. We don’t dismiss the economic headwinds China faces, but a more resilient global trade picture than most expect is emerging, in our view.

Putin Threatens to Abandon Grain Deal Further Squeeze Energy Supplies

MarketMinder’s View: This article gets into some geopolitical developments upfront, and as always, MarketMinder’s analysis is nonpartisan and focused on the potential economic and market impact only. Here is the thing about the titular “squeeze”: “The practical effects of Mr. Putin’s threat remain to be seen. Early Wednesday, oil prices hit their lowest levels since before the Ukraine war despite Mr. Putin’s comments. Futures for gas at a trading hub in the Netherlands, the benchmark in northwest Europe, fell 4%. Since the war started, Russia has relied on surging prices to make up for the fall, in volume terms, of exports of oil and gas. A sustained retreat in energy prices would scramble that calculus and further squeeze Russia’s economy.” Russian oil is still making its way to global markets, contributing to supply and falling prices since March. Even if the West isn’t directly purchasing as much of it, other countries in Asia and elsewhere are. The same goes for grain. Russia may have more of a chokehold on Black Sea shipping routes—hence Russia’s threat not to honor its pact allowing grain shipments through Ukraine’s ports there—but here, too, its grip is slipping: “Shipments through the grain corridor have accelerated in recent days. After exporting 1 million metric tons of food products in August, Ukraine’s ports shipped another 1 million metric tons in just one week as of Sept. 4. Those deliveries add to millions of metric tons of grain Ukraine has exported via rail, trucks and smaller ships.” These trade frictions aren’t great, but as we are witnessing, they have mostly reshuffled commodity exports, not deleted them altogether. Blockages to in-demand goods usually don’t last too long as resourceful businesses find workarounds, which we think is a better-than-expected outcome than many initially believed and an underappreciated positive for global markets.

British Investors Are Selling Shares Faster Than They Did After Brexit

MarketMinder’s View: According to data from research firm Calastone, UK investors yanked a record £1.9 billion ($2.2 billion) from equity funds in August, boosting holdings of cash and “… bond funds, adding £820m to managers who specialised in fixed income. Investors typically turn to high-quality bonds when markets are volatile.” It goes on to discuss the alleged threats to equities from high inflation that is expected to keep accelerating from here. But, oddly, it fails to note that cash and bonds are even more directly threatened by inflation, as it erodes the purchasing power of cash and fixed interest payments. In addition, inflation expectations often sway yields, so if investors broadly expect UK inflation to keep surging, they may demand higher yields to compensate for that. Since bond prices move inversely to yields, that would be trouble for UK bonds. Furthermore, fund flows’ basic utility is very limited: They are a coincident indicator showing the state of sentiment. The fact investors yanked money from funds is a sign sentiment is very low, which is counterintuitively bullish for UK stocks that aren’t even down very much this year to begin with.

Fed’s Long-Sought Neutral Goal Proves Elusive and Moving Target

MarketMinder’s View: This article features a great deal of handwringing over estimates of the “neutral rate”—the theoretical fed-funds target range that would neither stimulate growth and inflation nor stifle growth and spur deflation. As it correctly notes, no one really knows what that rate is, making this an entirely academic exercise. That is doubly true today, considering the Fed isn’t aiming for the neutral rate right now, if officials like Fed Chair Jerome Powell are to be taken at their word. They are aiming to slow demand, which would be restrictive, not neutral. Regardless, though, most of the objections and issues here surround currently high inflation rates, arguing that “neutral” must be far higher than the Fed’s 2.5% long-term estimate. This makes little sense. For one, the Fed’s estimate is long-term, not about 2022. Two, again, the Fed isn’t aiming for neutral right now. And third, inflation rates are backward looking. Monetary policy hits the economy at an uncertain lag of anywhere between 6 – 18 months. Using a backward-looking rate to assess policy’s future impact seems wrongheaded to us, especially considering there are increasing signs that suggest inflation may—just may—be coming off the boil. Commodity prices are down, supply chain issues have improved and money supply growth has slowed dramatically, per Fed data.

Energy Crisis: Why Has Russia Cut Off Gas Supplies to Europe?

MarketMinder’s View: This piece mentions a couple of individual securities en route to discussing the latest revelations in Europe’s energy saga, so we remind you that MarketMinder doesn’t make individual stock recommendations and we are sharing this piece solely for the broader theme. Namely: “‘Problems in pumping arose because of the sanctions imposed against our country and against a number of companies by Western states, including Germany and the U.K.,’ Kremlin spokesman Dmitry Peskov told reporters on Monday, according to Russian state news agency Interfax. Asked whether pumping gas via Nord Stream 1 was completely dependent on the sanctions and that supplies would resume if these were lifted or relaxed, Peskov replied, ‘Of course. The very sanctions that prevent the maintenance of units, which prevent them from moving without appropriate legal guarantees, which prevent these legal guarantees from being given, and so on.’” As many suspected, it seems increasingly clear that Russia is using gas exports to Germany and Europe as leverage in a quest to end the sanctions slapped on it in response to Russian President Vladimir Putin’s vile invasion of Ukraine. This is adding to long-simmering fears of European energy shortages this winter, which could roil business and economic activity if they occurred. However, for markets, it is important to consider not only whether something is good or bad, but how much of that is likely reflected in stocks already? In our view, given the longstanding nature of European energy worries, we suspect stocks reflect these worries to a great extent. And, considering many countries in Europe are ahead of schedule in filling gas reserves and are establishing new supply relationships for use further out, it seems likely to us that stocks may excessively reflect this fear, setting up a relief rally when reality proves better than feared.

How to Handle Required Withdrawals From Retirement Accounts

MarketMinder’s View: Here is a solid piece addressing a common retiree financial planning question during market downturns: How can retirees above age 72 or those required to withdraw from inherited retirement accounts best deal with required minimum distributions (RMDs) in a down market? Many investors think you have to sell and withdraw cash, a problem when markets are down as you are therefore locking in declines on the portion withdrawn. Furthermore, after a decline, the RMD is likely a bigger percentage of your account than at the start of the year, since RMD amounts are based on prior yearend values. But for folks who don’t rely on their RMDs to fund living expenses, this article offers a convenient solution we have long noted: You can satisfy your RMD by transferring stock in kind from your IRA to a taxable brokerage account. That means you don’t have to worry about selling when markets are low, and you don’t have to worry as much about when best to do it, either. Actually, in our view, if you are transferring stock to satisfy your RMD, it is arguably better to do it sooner versus later to ensure the transfer value (which will fluctuate) is sufficient to meet the RMD amount.

Wall Street Is in Denial Over the Economy

MarketMinder’s View: In the course of arguing that stocks are ignoring inflation risk by focusing too much on retail sales and nominal corporate earnings without factoring in how inflation is eroding these items, this piece mentions some individual companies—and as always, MarketMinder doesn’t make individual security recommendations. We just see a few small holes in the overall argument. For one, the piece neglects to mention that monthly personal consumption expenditures are at all-time highs and rising when adjusted for inflation. Yes the growth rate is much slower than retail sales, which are never inflation-adjusted, but you can’t argue that consumption is floundering. Inflation-adjusted spending on goods has mostly bounced sideways, which explains some of the Consumer Discretionary earnings disappointments that this article dwells on, but spending on services—the majority of the total—is growing apace. Plus, goods’ stagnation has more to do with consumers returning to normal shopping habits after a big spike in goods spending when COVID lockdowns first ended. Moving on, while the article argues stocks are irrationally focused on nominal corporate earnings, we just don’t buy it. It makes zero sense to adjust corporate earnings for inflation since it affects companies’ costs as well as their revenues. If sales are growing enough to overcome rising costs in an inflationary environment—especially considering producer prices are rising faster than consumer prices—we fail to see how this is anything other than good. If anything, adjusting this for inflation would muddy the waters, as it would probably deflate costs too much and exaggerate profits. Lastly, by dwelling on stocks’ immediate reactions to corporate earnings reports, the article seemingly forgets that stocks are forward-looking. Markets move on probabilities for the next 3 – 30 months, while earnings announcements reflect what happened months prior—a reality stocks will have long since lived through and priced in. For more, see last week’s commentary, “Q2’s GDP Revision Offers a Check-Up on Corporate America.”