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: Citing statistics showing Americans are cutting back on credit card debt and boosting their savings rate (which rose from 8.0% to 13.1% in March, per the BEA), this article argues “hunkering down also poses a risk to the recovery in an economy dominated by consumer spending. A so-called V-shaped recovery can't happen if consumers are sitting on the sidelines.” While we don’t know what the economic recovery will look like, backward-looking data won’t shed much light about the future, either. In our view, the type of recovery hinges on when COVID-related restrictions on commerce lift and how comfortable businesses and consumers are returning to normal activities. While preliminary loosening in some areas hints the process will be gradual, much remains uncertain. What matters for markets in the meantime, in our view, is how expectations square with reality. Given widespread forecasts like this one for an ultra-slow return to growth, expectations don’t seem optimistic currently. If this remains the case, even a gradual economic recovery needn’t forestall the bear market’s end, in our view. For more, see last Friday’s commentary, “What Recovery Pessimism Means for Stocks.”
MarketMinder’s View: The claim here: With about $3 trillion in new Treasury issuance scheduled over the next few months, supply could overwhelm demand. The alleged consequences: Investors will demand higher yields or, in an extreme scenario, the Fed would step in directly, leading to debt monetization and the inevitable comparisons to Weimar Germany. As fantastical as these scenarios sound, we urge investors to focus on probabilities, not possibilities. First, as noted here, the likelihood of demand waning is quite low, thanks in part to the fact “[Treasury] yields are still positive, which is appealing in a world with $11 trillion of debt carrying negative yields, including in Germany, Japan and most other major economies.” This demand also stems from Treasurys’ reputation as a stable, high-quality asset—i.e., “money good”—which isn’t likely to change anytime soon. Exhibit A: current Treasury yields. If something fundamentally changed about US sovereign debt for the worse, markets would likely reflect that information. For more on the US’s benign debt outlook, check out our 4/24/2020 commentary, “What Rising Deficits Mean for US Debt.”
MarketMinder’s View: This piece does an overall nice job showing that “worst since the Great Depression” doesn’t mean “as bad as the Great Depression.” That was a multiyear slump when, as the Fed yanked money out of the economy, industrial production halved and estimates of unemployment hit 25% (the official statistic didn’t exist back then). Unemployment now may be the worst since that era, but as the article demonstrates, the downturn’s causes are worlds different, and it isn’t likely to be anywhere near as long. “As in the Depression, today’s collapse is global. But the scale is smaller, Gita Gopinath, chief economist at the International Monetary Fund, said in a briefing last month. The IMF estimates the world economy shrank about 10% during the Great Depression, versus an expectation of about 3% this year and an expected return to growth next year. Advanced economies shrank about 16% in the Depression, compared with about 6% forecast for this year. A series of severe policy mistakes around the world exacerbated the length and severity of the Great Depression. Central banks tightened monetary policy to maintain the gold standard, which no longer exists. The result was severe deflation, which increased the value of debt and lowered incomes.” Meanwhile, governments were slashing spending, not supporting struggling businesses and households. The policy response this time has been about 180 degrees opposite. So while this period is indeed painful for many, it isn’t a 1930s repeat.
MarketMinder’s View: Trade war, that is, and the article argues a Biden presidency would merely take the Trump administration’s tariffs and tariff threats and run with them, so this isn’t as political as the headline implies (though, as always, we urge you to turn off your political biases when assessing market-related news and remember we are politically agnostic). Neither we nor anyone else has any idea whether any administration will transform tariff chatter into tariff action, though some of the scenarios posited here seem just a bit far-fetched, to say the least. For instance, the Treasury can’t seize or cancel China’s US Treasury holdings, as that would run afoul of a little document called the Constitution. As for the broader fear of new tariffs impeding a global recovery, that strikes us as the typical looking-for-the-next-shoe-to-drop mentality that accompanies the depths of bear markets and extends into the recovery. Trump’s recent threats seem more like attempts to reinvigorate his voter base than anything, particularly considering he is trailing in most polls presently. Whether they amount to more than talk—and are more than symbolic in scale—remains to be seen. That pundits are searching high and low for negatives is an encouraging sign, as it pertains to sentiment, though we aren’t anywhere close to being able to know if the rally since March 23 is a new bull market.
MarketMinder’s View: The UK government released its tentative plans to reopen the country, which amounts to non-essential shops reopening on June 1 and, if all goes well, cinemas and pubs returning on July 4. In the meantime, physical distancing guidelines remain in effect, with the public encouraged to wear face coverings whenever they are on public transport or in other crowded places. Overall, this appears to be a gradual approach, much as we are seeing in California and other major economic centers. Yet expectations for the UK’s economic recovery have downshifted to such a degree over the past few weeks that there seems to be very little negative surprise in the reopening timeline. The one potential exception is the requirement for international travelers to enter 14-day quarantine upon entering the country, which effectively kills business travel and international tourism. At the same time, hardly anyone expected either to return to normal within the foreseeable future, so this would seem merely to formalize expectations. Meanwhile, some automakers and other manufacturers are now beginning to reopen factories (consistent with the government’s earlier guidance). While manufacturing is only about 10% of the UK’s economy, prior studies showed it generated about half of the economic contraction thus far, making its return a key to the recovery. We aren’t arguing economic output will surge overnight, but there does appear to be room for things to go perhaps a tad better than most expect, which is generally all stocks should need.
MarketMinder’s View: This basically argues stocks have risen too far, too fast, and are priced for a swift economic recovery that can’t possibly arrive given how gradually economic life is returning to normal. We have a few thoughts about this. One, any statements about what sort of future markets reflect are only ever matters of opinion—not provable fact. The reason for this: Stocks reflect all widely known information, including all forecasts. So yes, they have chewed over economists’ earlier projections for a swift return to normal, but they are also probably quite aware of the much more muted forecasts over the past few weeks, as well as the myriad warnings of a second wave knocking output later this year. The question isn’t whether any of these happen, but how they might square with expectations. The last expansion showed stocks don’t need rip-roaring economic growth. Its GDP growth ended up being the slowest in modern history. Therefore, there is no reason a slow economic recovery (if that is what transpires) must be inherently disappointing this time around, especially if expectations are even more muted.
MarketMinder’s View: In today’s non-COVID news, talks on the UK and EU’s post-Brexit relationship are picking back up thanks to the power of videoconferencing. First up: whether or not to extend the transition period beyond year end, a scenario the UK claims is off the table. Should they not extend it, expect worries of a no-deal Brexit to resurge as the year progresses. The coronavirus may keep dominating markets in the near term, but Brexit rumblings could raise uncertainty and weigh on sentiment later on—something to keep in mind. Our assessment of the larger situation hasn’t really changed. Investors have stewed over the possibility of a Brexit on World Trade Organization trade terms for years now, mostly focusing on the potential negatives. With most still seeing this as abject disaster, the potential for positive surprise seems high. So while there may be a hit to sentiment in the near term, we don’t view this as a potential wallop-in-waiting for a second leg down to the bear market that began in February.
MarketMinder’s View: Did you know that the IRS regulates family loans, including mandating minimum interest rates and requiring documentation? We are betting most people don’t, which could be trouble in the future if you are audited. This is one of the more nuanced and obscure corners of tax law, and we suspect it is perhaps of more interest than usual with so many people affected by the economic shutdown and potentially in need of assistance. We won’t weigh in on whether a family loan is advisable, as it depends not only on your financial circumstances, but also the many intricacies of familial relationships. Always discuss this sort of thing with your tax advisor, too. For those considering it, however, we thought it would be helpful to highlight a few key points to look into. One, the current minimum interest rates: “The IRS’s rate for midterm loans, which run from three to nine years, is 0.58%, and the rate for short-term loans of three years or less is just 0.25%. For loans made now, these are fixed rates that don’t change when rates rise. Lenders are allowed to charge more than the minimum rate.” These interest payments are also taxable, so you will need to report them in your returns and ensure you have full notarized documentation. You may also consider having a third-party administrator manage the loan for you. Again, talk to your tax advisor, as you will likely need professional help to formalize everything. But for those curious about the process, this article is a good starting place.
MarketMinder’s View: This development, which is a terrible hardship for those directly impacted, highlights one unintended consequence of the COVID-19 containment efforts. Hospitals have been forced to cancel most elective procedures, cutting off one of their main revenue sources. Meanwhile, all hands are on deck to treat COVID patients, which is a societal good but also a financial loss for hospitals, as they lose money, on average, for every patient treated. As a result, they are cutting costs any way they can, resulting in about 135,000 job losses for hospital workers. The one silver lining is that overall and on average, hospitals aren’t strapped for capacity in treating COVID cases, so these job losses should have little impact on virus treatment. More broadly, this is more evidence that Health Care in general is neither a defensive sector nor necessarily a “winner” from the virus. Some industries—namely Pharmaceuticals and Biotech—have seen demand hold up well, as it usually does in an economic downturn. But hospitals have always been more sensitive to economic shifts, as people tend not to schedule elective procedures when they are out of work or anticipate tough times for the foreseeable future. COVID’s impact compounds that cyclical negative this time around. So when picking Health Care stocks to invest in, we think it is important to be discerning. For more, please see today’s article, “How to Think About Health Care Stocks Now.”
MarketMinder’s View: Far be it from us to dampen anyone’s enthusiasm, but Taiwan’s 3.7% year-over-year export jump in Q1 (the titular resilience) doesn’t suggest the country is somehow immune to the global economic contraction stemming from COVID-related shutdowns. That positivity stemmed entirely from a gangbusters February, before lockdowns took effect in the developed world. March exports were negative, despite the big positive contribution for high-tech goods and components. With shutdowns still disrupting global supply chains, it is questionable how long that positive contribution will last.
MarketMinder’s View: COVID-19 and last October’s sales tax hike continue to weigh on Japanese economic data. Though slightly better than expected, March’s -6.0% y/y household spending drop was the largest since March 2015—and the data series’ sixth consecutive decline. As this piece notes, April data will likely also be dismal, considering Japanese lockdowns started later than those in the West. A recession in the world’s third-largest economy seems inevitable, considering GDP fell in Q4 as October’s sales tax hike pulled consumption forward into Q3. However, this isn’t a surprise to investors, who have been hearing about the high likelihood of Japanese recession for months now. What matters more for Japanese stocks, as with their global counterparts, is the downturn’s duration, not its depth, and how that squares with expectations. Regardless of the answer, we suspect COVID-related matters will likely be the predominant influence over Japanese stocks for the foreseeable future.
MarketMinder’s View: Germany, the eurozone’s biggest economy, has been slowly allowing more and more businesses to operate—first with small shops reopening in late April, now with restaurants and hotels set to reopen in the coming weeks. This article highlights a new requirement German states must implement: “Regional authorities will have to draw up a plan to reimpose measures for any county that reports 50 new cases for every 100,000 inhabitants within a week. Those restrictions could be applied only to a facility such as a nursing home, if the outbreak is concentrated there, or to the whole area.” In our view, this illustrates an important reminder about reopening plans: Though headlines focus on federal guidelines, local governments often hold the most sway over daily life. This is also true in the US, where states’ COVID responses vary considerably. All these policy conditions and timelines influence investors’ expectations. How reality ends up squaring with those expectations will be key in determining the bear market’s end.
MarketMinder’s View: As the title notes, China’s April exports fared much better than expected, though April imports fell -14.2% y/y—worse than expectations for -11.2%. A deeper dive shows healthcare equipment drove monthly export growth: “The exports of such medical supplies — that includes 27.8 billion face masks and 130 million protective suits — could have boosted headline export growth in March and April by as much as 2.7 percentage points from a year ago. Factories were also likely fulfilling a backlog of orders as Chinese workers gradually headed back to work after an extended lockdown from late January.” Yet as several economists noted here, the gains are likely to be short-lived given plunging demand in major economies across Western Europe and the United States. Two Chinese purchasing managers’ indexes (PMIs) already reflect this, with export orders dropping in April. Though China was the first to reopen its economy following its COVID containment effort, flagging external demand will weigh on the country’s growth prospects—unlikely to change until the global economy begins opening up again.
MarketMinder’s View: Though we have a couple quibbles—namely, eurozone banks are in much better shape compared to where they were during the 2011-2013 regional recession—this article succinctly points out central banks’ limitations when it comes to “stimulating” the economy. For example, the ECB’s targeted longer-term refinancing operations (TLTROs)—essentially, a program that allows banks to borrow from the ECB at discounted rates, so long as the banks lend the funds to businesses and consumers—aren’t hugely popular, even after the ECB sweetened the terms. The primary reason: Banks aren’t finding it worth their while. “First, they [banks] need to find profitable uses for the ECB’s cash—tricky in a shrinking and uncertain economy where businesses are at increasing risk of default. The prospect of losing capital outweighs a gain of a few tenths of a percentage point in interest rates. … Some banks may also worry about the stigma of relying too heavily on the central bank’s cash, which will eventually be withdrawn. Investors and regulators closely scrutinize banks’ funding sources, especially during a crisis.” This is similar to why quantitative easing was so ineffective, in our view—the program ultimately disincentivized banks from lending (due to a flatter yield curve). Though many seem to believe central bankers possess the ability to control the economy by flipping a couple of switches, reality is a wee bit more complex.
MarketMinder’s View: If you enjoy reading about breakthroughs in capital markets—or if you are simply looking for a COVID-19 palate cleanser—give this piece about the UK Municipal Bonds Authority (MBA) a read. The UK muni market lags woefully behind other countries like the US and Germany due in part to long-running legal issues and politics. The MBA sold its first bond this past March, and some muni market observers are optimistic about the market’s future given the likely high demand to take on quasi-government credit risk—as noted here, “no local authority has defaulted on a debt since the establishment of the first one, the Corporation of London, in 1067.” We aren’t saying investors should seek UK muni debt just because it is new—your personal investment goals and needs should always dictate your portfolio’s asset allocation. But in terms of global capital markets, this development could be a “win-win evolution.”
MarketMinder’s View: This is an interesting look at how French government economists have used alternative sources to estimate economic activity after COVID-related restrictions went into effect. “The most useful tool proved to [be data from] France’s bank card association, which under the exceptional circumstances granted the agency access to the anonymised information. That helped inform [INSEE’s stats head Jean-Luc] Tavernier’s team not only that locked-down French consumers were spending far less on a day-to-day basis than in previous years but also which sectors were the hardest hit.” While it remains to be seen how closely these more timely, albeit narrower, gauges will track broader national metrics, non-traditional data can provide a nearly real-time look at how different parts of the economy are faring. Still, for investors, these data reflect what just happened and will still generally lag stocks—the ultimate leading indicators.
MarketMinder’s View: Please note MarketMinder doesn’t make individual security recommendations. The ones mentioned here serve only to illustrate a broader point, which is the risk of prolonged lockdowns: permanently shuttered businesses. This piece shares several anecdotes of companies having to either reduce workers’ hours or, in some cases, lay them off due to the COVID-driven economic shutdown. “Plenty of layoffs that just a month ago were labeled ‘temporary’ are now tagged ‘indefinite’ or ‘permanent.’” This is tragic for those affected. However, as tough as the business environment is right now, labor data reflect troubles businesses have already been enduring, not new problems. Importantly for investors, they won’t tell you where the economy is headed next. That depends more on the progress countries make in reopening their economies. Brace for Friday’s April jobs report, which will likely see a historic unemployment spike, but even if the numbers look stunningly bad, markets have been anticipating them for weeks now. As awful as current layoffs are, what matters for stocks is the likely path for businesses over the next 3 to 30 months and how that squares with expectations.
MarketMinder’s View: We recognize Sweden’s less strict approach to COVID-19—“keeping most schools, restaurants and businesses open and relying on a voluntary approach to social distancing”—may be controversial. But as with all things touching politics, we highlight this only for market and economic analysis. “Official figures show the country’s economy shrank by just 0.3pc in the first three months of 2020, a far smaller decline than most forecasters and its central bank expected. The Riksbank had pencilled in a drop of between 0.8pc and 1.8pc. The smaller scale of the fall contrasts with record slumps seen elsewhere across the Eurozone over the quarter as governments imposed much more stringent measures.” Sweden isn’t unscathed, with slumping external demand knocking exports, and Q2 data could end up weaker given most of the global economy remains closed. This is also why, as tempting as it is to call Sweden a pure control group from an economic perspective, there is just too much outside influence from closures everywhere else for it to be a valid comparison or basis for calculating the precise economic impact of stricter containment efforts elsewhere. It can offer only the very vaguest of hints.
MarketMinder’s View: This is a nifty primer on monetary financing, in which “a country increases spending and at the same time creates the money needed to pay for it. That typically happens via central banks, which can either buy the bonds sold by a government to cover gaps in its budget—or simply offer an overdraft, so that no bonds need to be issued in the first place. In either case, it’s often said that the effect is to ‘monetize the debt,’ because policy makers have turned what would otherwise have been debt into money instead.” While debt monetization tends to invoke economic basket cases like Argentina and hyperinflation, that isn’t what is happening now. The BoE, the most prominent central bank alleged to be dabbling in monetary finance, extended the Treasury’s overdraft account—but the Treasury must repay by year-end. Rather than permanent monetary financing, it gives the Treasury more time to issue new debt. Moreover, the BoE performed similar measures in 2008, and no disaster resulted. While debt monetization is a risk worth watching for, there is a big difference between many developed economies today and Weimar Germany of the 1920s or Venezuela today.
MarketMinder’s View: “The Institute for Supply Management’s survey of non-manufacturing companies plummeted to 41.8% in April from 52.5% in March. … The ISM’s business-activity index for service companies fell to the lowest level since the institute began its survey in 1997. New orders and employment also sank to or near all-time lows.” Readings below 50 signal contraction, and the April report reflects a steep decline across US services industries. One input, supplier deliveries, buoyed the headline number—yet rather than a positive, this reflects supply chain disruptions tied to COVID-19 business restrictions. As one economist quoted here observes, “This is a terrible report, but no more terrible than is already obvious from the temporary closure of businesses due to the lockdowns.” Since stocks look ahead, data illustrating already obvious past developments—even if negative—seldom move markets beyond the potential immediate hit to sentiment. What will affect stocks over a more meaningful time from here, in our view: Whether businesses can reopen and commercial activities return to some sort of normalcy sooner or later than expected.