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: IHS Markit’s final December eurozone manufacturing purchasing managers’ index (PMI) hit 55.2—a tad below the December “flash” reading of 55.5, though still up from November’s 53.8. (Readings above 50 imply expansion.) The primary reason for ongoing manufacturing activity: Factories have largely remained open across the eurozone even as countries implemented new COVID-related restrictions. Another notable nugget: “New orders increased amid strong demand for German goods and in part reflecting a temporary spike in British demand prior to the end of the Brexit transition period.” Now, keep in mind many eurozone nations implemented new lockdown measures in December in response to rising COVID cases—likely weighing on services, which comprise the lion’s share of eurozone economic output. However, as recent flash PMI readings have shown, the impact on business activity hasn’t been as dramatic as it was last March and April. In our view, that is some evidence of society’s adjustment to COVID life—a reality stocks processed months ago.
MarketMinder’s View: We don’t share this article because consumer sentiment among our neighbors to the north reveals more than the US or elsewhere. A sentiment survey simply provides a snapshot of respondents’ feelings at one point in time. That said, we do think it is evidence rising optimism isn’t just an American phenomenon—our coverage of headlines worldwide points to stirring animal spirits elsewhere, too. As a Bloomberg economist notes, “Optimism has not been derailed in the face of rising Covid-19 transmissions. Households are generally on board with restrictions, income support is broadly available, and vaccine news has been positive.” As we head into the new year, monitoring sentiment will be critical, in our view, as widespread optimism suggests a narrowing gap between expectations and reality.
MarketMinder’s View: Here is a nifty roundup of UK business leaders’ reactions to the UK-EU trade deal. While we don’t think a no-deal scenario would have been the negative some quoted here think, the new agreement brought some clarity—a positive. The pharmaceuticals industry captures the reality all businesses faced before the UK formally left the EU: “Drugmakers have long been preparing for Brexit by stockpiling more medicines to ensure there are no shortages of vital drugs and by planning alternative supply routes away from the busy Dover to Calais straits. The industry is confident that medicines will reach patients come 1 January and beyond, but says some things are out of its control, such as delays at borders due to new customs and border checks.” Said simply, UK firms have prepared for a long time, and though they anticipate some bumps, business won’t come to a screeching halt. Sounds like reality is set to turn out better than most anticipated to us. For more, see our 12/24/2020 commentary, “Today in Brexit, Day 1,644.”
MarketMinder’s View: Please note, MarketMinder doesn’t make individual security recommendations—any firms mentioned herein are part of a broader theme we wish to highlight. That theme: the widespread optimism surrounding China’s equity markets after a banner 2020. Many experts think China will continue leading the global recovery, stirring investor excitement about Chinese initial public offerings (IPO) expected in 2021. This follows a stretch in which, “In the year to Dec. 30, Chinese companies have sold more than $279 billion of stock, up 72% compared with 2019, according to Dealogic. That tally includes initial public offerings, secondary listings, and follow-on stock and convertible bond deals. It covers mainland markets, as well as offshore share sales in Hong Kong and the U.S.” Now, we aren’t saying hype over future IPOs means investors are euphoric about China already. Some pockets of skepticism remain. But if the wall of worry were huge, this article would be peddling fear over a Chinese stock bubble instead of cheer over strong returns and hopes for more to come. Expect to see more of this type of article as sentiment heats up—not just regarding China, but globally. Abundantly cheerful commentary that doesn’t spend much (if any) time dwelling on risks will be one sign of euphoria’s arrival when it happens. In the meantime, burgeoning optimism isn’t reason to avoid Chinese stocks, in our view, as animal spirits can swirl for a while before a peak. But hype and popularity shouldn’t be your thesis to own.
MarketMinder’s View: Please note, MarketMinder’s analysis is politically agnostic—we favor no party or politician and examine policy solely for its potential economic and market impact. Moreover, we don’t make individual security recommendations—the companies here illustrate a broader point. This article highlights our viewpoint that vaccine development shouldn’t be your thesis to own a pharmaceutical company. As this article illustrates, several big pharmaceutical firms plan to raise prices on more than 300 drugs in the new year. “The hikes come as drugmakers are reeling from effects of the COVID-19 pandemic, which has reduced doctor visits and demand for some drugs. They are also fighting new drug price cutting rules from the Trump administration, which would reduce the industry’s profitability. … The increases come as pharmaceutical companies like Pfizer are playing hero by developing vaccines for COVID-19 in record time. The hikes could help make up for lost revenue as doctors visits and new prescriptions plummeted during the global lockdown.” This reality acknowledges a simple truth: Vaccines aren’t hugely profitable, and companies need to make money to fund research and development for other treatments. As for the titular political pressure, regulatory changes in any space are worth monitoring, though we suggest waiting to see if campaign promises actually materialize into new laws before acting. Now, none of this means pharmaceuticals stocks can’t do well from here, but your thesis to own any company should be much broader than a widely discussed development. For more, please see our 8/24/2020 commentary, “The Best Way to Play the Vaccine Races? Don’t."
MarketMinder’s View: Tariff fears may seem so 2018, but they are back in headlines today. The reason: Many tariff exclusions on $360 billion of Chinese goods are set to expire at midnight on Thursday, leaving US importers to pay a tax ranging from 7.5% to 25%. However, even if exemptions aren’t extended, we don’t think tariffs are a major headwind for US companies. One, this deadline isn’t a surprise. Businesses have been aware of Chinese duty developments for the past couple of years, and many have adjusted accordingly. One example noted here: “Mr. Trump has wielded tariffs to protect some American industries from foreign competition and encourage others to move their supply chains from China. The tariffs have partly accomplished those goals, though most companies have moved operations to other low-cost countries like Vietnam or Mexico, rather than the United States.” Moreover, while tariffs will raise some companies’ costs, they still don’t pack the punch to derail global commerce. American businesses navigated recent tariff episodes fine, and despite even more challenges in today’s COVID-restricted world, we think they will likely continue finding ways to remain profitable.
MarketMinder’s View: Not a whole lot of economic data out on 2020’s final day, but the widely watched weekly US jobless claims report had a couple of positive nuggets. Initial jobless claims fell by 19,000 to 787,000 in the week ending December 26—the second straight week of improvement. Continuing claims also improved. Now, we wouldn’t be shocked if jobless claims picked up again due to the latest COVID shutdowns and Congress’ extension of federal unemployment aid. Meaningful improvement in jobs data likely won’t happen until COVID is a bad memory—and backward-looking labor indicators will confirm the recovery at a lag. But for now, we won’t pooh-pooh a faint silver lining to wrap up this year.
MarketMinder’s View: Please note MarketMinder doesn’t make individual security recommendations. The sole purpose of companies referenced here is to illustrate a larger theme gaining prominence: With IPOs surging this year, comparisons with the late-1990s and early-2000 dot-com bubble’s formation are mounting. “Companies raised $167.2 billion through 454 offerings on U.S. exchanges this year through Dec. 24, compared with the previous full-year record of $107.9 billion at the height of the dot-com boom in 1999, according to Dealogic.” Now, this isn’t exactly an apples-to-apples comparison—the stock market is also bigger today than in 1999—but from a high level, the enthusiasm surrounding IPOs suggests optimism is increasingly widespread. However, that doesn’t necessarily mean sentiment will spill over into full-fledged euphoria seen at bull market peaks tomorrow—animal spirits can stir for a while. Consider this well-known anecdote: Former Fed head Alan Greenspan remarked in December 1996 that “irrational exuberance” appeared to be taking over markets. But stocks didn’t roll over until March 2000. We suggest investors monitor sentiment’s development in the coming months and track how expectations align with reality—acting now is premature, in our view.
MarketMinder’s View: This article highlights an issue some fear: Who will buy the coming “flood” of Treasury bonds tied to COVID relief spending—and what interest rate will they charge? Specifically for investors: “Treasuries serve as a key benchmark for other types of debt, meaning a rise in US government borrowing costs could cascade across the broader fixed-income landscape. Higher yields also represent one of the main risks for the equities market, analysts have said.” Now, we don’t agree with the general thesis that rising rates are inherently bearish, as the outlook for stocks depends on a host of things—including why rates rise. Our interest here is more with the observation that plenty of buyers exist, including banks, pension funds, insurance companies and foreign buyers—particularly in countries whose sovereign debt rates are lower (and even negative). “Foreign buyers are set to absorb some of it, despite playing a much smaller role in the market in recent years. At 35 per cent, their ownership of Treasury debt is at its lowest level in nearly 20 years, Fed data show. A chunk of the buying is likely to come from Japanese investors given that their domestic government debt holdings are guaranteed to make a loss if held to maturity, said Olivia Lima, a rates strategist at Bank of America. Banks are also expected to follow up a record year of Treasury demand with another burst of buying. Mr Barry forecasts $200bn for 2021, with an additional $175bn coming from pension funds and insurance companies.” Given the voracious global demand for high-quality debt today—and considering Treasurys’ status as “money good”—we don’t think investors should worry about a shortage of buyers forcing Uncle Sam to pay more to entice demand.
MarketMinder’s View: The titular agreement carries some sociological overtones, which this article touches on, and which we urge investors to set aside as cold-hearted markets generally do. The investment pact opens up access for European firms in some Chinese economic sectors, including air transport, telecom cloud services and some financial services. On the flipside, China won some concessions on investment in the manufacturing and energy sectors. However, the pact’s enforcement mechanism doesn’t exactly ensure rigid compliance: “A political committee is designed to ensure the agreement is honoured, with arbitration panels to rule on disputes, leading to potential sanctions. A panel of experts will draw up a report, with input from civil society, to ensure ecological and labour commitments are met.” Moreover, the agreement must go through a long ratification process on the EU side, and several key groups have already voiced concerns, so nothing is changing immediately. Any boost for the EU and China will be gradual and, for markets, unsurprising. More broadly though, with so much attention on geopolitical friction, we think this shows world trade and investment aren’t retracting—global ties are more resilient than many appreciate.
MarketMinder’s View: The UK and Vietnam signed their free trade agreement on Tuesday, “which will for Britain replace the existing EU-Vietnam Free Trade Agreement (EVFTA) ... Trade between Vietnam and Britain has risen by an average of 12% a year over the past decade to reach $6.6 billion last year, and the deal will help boost Vietnam’s exports of garments, footwear products, rice, seafood and wooden furniture, [Vietnam’s trade ministry] said.” UK-Vietnam trade isn’t huge, but it is part of a notable trend: With the UK about to leave the EU, it has snagged new agreements with non-EU countries, including Japan, Canada and Turkey. Far from isolated from the global economy, the UK is making new—and in some cases freer—trade deals.
MarketMinder’s View: This article largely echoes what we told you early this month—that the University of Michigan’s Consumer Sentiment surveys tallying expectations and confidence by political party flip-flopped post-vote. Republicans went from confident to pessimistic, Democratic respondents the reverse, which, as this piece notes, got more extreme in December. It is the mirror image of what happened after 2016’s vote. Yet this piece takes this a step too far in trying to argue that this is different than the past, noting a four-point gap between Republicans and Democrats, “In 1980, when Ronald Reagan first won the presidency….” But that poll was taken in June 1980, not post-vote. Michigan researchers didn’t consistently ask respondents for their political party affiliation until after 2016’s election. So while it may be true that folks are more politicized today, we can’t know that from this survey. It may also be true the survey is more politicized than it was because it asks regularly now. Ultimately, it is worth remembering that sentiment surveys like this aren’t predictive. The best purpose it serves for investors, to us, is as a reminder that your politics shouldn’t determine your economic and market outlook.
MarketMinder’s View: This isn’t a shock, but the European Research Group—a very pro-Brexit group within UK Prime Minister Boris Johnson’s Conservative Party—is recommending its members vote in favor of passing the trade deal reached on Christmas Eve. This group torpedoed several efforts by Johnson’s predecessor, Theresa May, to complete a Brexit accord, so we guess it is noteworthy that they are standing behind this trade agreement. But ultimately, with just two days to go before Brexit concludes, their decision to back this instead of delivering a shock no-deal for New Year’s was widely expected—and, with most of the Labour party behind it, the deal would likely have passed with or without them. Anyway, this is a small step toward completing the deal, but that is about it.
MarketMinder’s View: This article seems very confused about what is and isn’t relevant for investors. It argues that central bankers’ long-term bond buying puts them in a quandary because they exchange reserves (on which they pay a low rate of interest) for long-term, fixed-rate debt. If inflation perks, central bankers would ordinarily hike short-term interest rates that usually move parallel to interest payments on banks’ excess reserves. If they did that now, it is theoretically possible central banks’ payments could exceed their receipts on the long-term bonds purchased, incurring losses. Normally, central banks hand profits to governments based on net interest received, but this would require the reverse—or could forestall them from hiking rates to counter inflation. Eek! Except there are some mitigating factors. For one, there is little sign (beyond a widely known base effect’s impact on inflation calculations) that inflation will tick up materially in 2021. Two, the Fed and other monetary authorities do not have to hike interest payments on excess reserves while they raise short-term rates. Three, this all presumes the Fed doesn’t start unwinding its balance sheet and asset purchases before inflation comes. Four, it is a debate over government accounting entries. So, contrary to the closing passage, we don’t think this is worth your energy watching in 2021.
MarketMinder’s View: Set aside the politicized headline for a moment and consider this article from Down Under, which explores a point that we made frequently earlier this year, during the depths of the lockdown-induced contraction: While there was widespread talk of this downturn equaling or exceeding the Great Depression, duration was key to assessing the damage. “But one lesson we’ve learnt this year is that, with recessions, what matters most is not depth, but duration. Normally, of course, the greater depth would add to the duration. But this is anything but a normal recession. And, in this case, it’s the other way round: the greater depth has been associated with shorter duration.” Furthermore, it goes on to note: “Whereas normal recessions are economies doing what comes naturally after the authorities hit the brakes too hard, the coronacession is an unnatural act, something that happened instantly after the flick of [a] government switch.” So while lots of people want to credit “stimulus” with the fast recovery in the global economy and employment—and this article does a bit of that, too—this downturn’s speed and unnatural nature actually explain it most of all. With no excess to work through, the economy was primed for growth the minute governments lifted lockdowns. Perhaps government aid did tide over needy individuals and businesses, but that is about it.
MarketMinder’s View: After two years’ trying, Spain’s “ruling” leftist minority coalition government between the center-left Socialists and far-left Podemos finally passed a new budget to replace the center-right Popular Party’s, which had been rolled over since 2018. As the headline notes, it includes an array of tax hikes, which this article does an excellent job detailing. It also uses the words “watered down” (or forms thereof) many times in the course of describing how this bill relates to earlier proposals. For example, the 2 and 3 percentage point increases in high-earner tax rates were initially supposed to kick in at €130,000 and €140,000 in income, respectively. Now? “The government has included a two-point rise in tax rates for earned income exceeding €300,000 a year, and of three points for capital income above €200,000.” Similarly, the budget includes watered down corporate tax reforms—including the scrapping of a 15% minimum rate. As for the Google and Tobin taxes (aka a tax on financial transactions) noted herein, should they take effect, we would expect Spanish advertisers and heavy equity traders to see their costs rise, as companies pass along the charges. All in all, we think this is a testament to how coalition governments are frequently fractious, moderating legislation even when the parties are loosely ideologically aligned.
MarketMinder’s View: As always, we are politically agnostic, favoring no politician or party, and we assess political developments solely for their potential market impact. Which, in this case, is likely minimal. President Trump’s decision to sign last week’s COVID assistance bill in time to avert a government shutdown tomorrow might help sentiment a tad, but government shutdowns aren’t inherently bearish, and while new rescue funds undoubtedly help households and businesses in need, a recovery doesn’t hinge on them. Similarly, while delays in disbursal of these funds are a setback for struggling households and businesses, markets are looking beyond the next two weeks, to a time when COVID is old news and life is largely back to normal. Stumbling blocks along the way were always inevitable. Mostly, we see the resolution of this saga as one less thing for investors to stew over. For more, see our 12/23/2020 commentary, “An Early Christmas Gift From Congress?"
MarketMinder’s View: There is a fair amount of sociological commentary and criticism of various organizations here, and we as always prefer to stay above the fray. Everyone is entitled to their own opinions and forecasts. But, this piece does shed light onto how economic forecasts come about—namely, they depend on the inputs into whatever model the forecaster uses. In the case of Brexit, most of those models incorporated potential disruptions from Brexit, including more friction in trade between the UK and EU, without incorporating potential long-term positives. That is why they were so uniformly negative. Now that those disruptions appear to be much milder than initially feared—and positives like new trade deals outside the EU are starting to enter the calculation—think tanks are revising their forecasts higher. Now, that doesn’t mean these new long-term forecasts are destined to come true. All have their flaws. But the saga shows why investors should take doom-and-gloom forecasts with a grain of salt and not just take the results as a given. Instead, investigate how those forecasters arrived at their conclusions and what information or possibilities they might not be accounting for.
MarketMinder’s View: This is a limited snapshot of professional investors’ sentiment, but it is actually a lot more optimistic than the headwinds and first couple of paragraphs suggest. The investors surveyed may expect stocks’ returns during President-elect Biden’s first term to trail returns during President Trump’s four years, but that doesn’t mean they expect negative returns. Actually, this group is penciling in above-average returns for next year. Now, this class of professional investors is just one part of overall investor sentiment, but the increased optimism is noteworthy as 2021 dawns. At the same time, it seems pretty clear that some lingering pessimism is still shading their expectations. That seems particularly true as it pertains to potential tax changes under Biden, which are recurring fears when a Democrat takes office. Such fears usually fade in Democratic presidents’ inaugural years as reality proves more benign than feared. Anyway, their presence is a good sign that euphoria isn’t yet here.
MarketMinder’s View: Record-high margin debt isn’t inherently bearish or a sign of euphoria. But margin debt does tend to spike at euphoric peaks, so a rapid rise will be something to watch for over the next several months. In the meantime, we present this as a shining example of heat chasing and what generally not to do. Securing a margin loan and using the proceeds to buy options is the textbook definition of speculating, which we would consider incompatible with retirement investors’ long-term goals. If you are investing to help meet your financial needs once you are no longer working for a living, then tactics that could result in losing more than your initial investment are unwise, in our view. But the more sentiment warms, and the more success stories like this hit the wires, then the more tempting it will be to throw caution to the wind and chase heat. Prepare for this mentality now and repeat after us: Fear of missing out isn’t a good investment rationale.