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: The sensible parts of this are its explanations of what has already happened in currency markets, but where the article veers is in the interpretation of past events—and extrapolating them going forward. Yes, divergence in monetary policy has seemingly led many investors to expect persistently higher interest rates in the US versus the eurozone and Japan. Currencies often move with expectations of interest rates, so that likely has driven the dollar up versus many currencies, including the euro and yen. And, yes, there is good and bad to this, in the sense that it may lower companies’ input costs (potentially slowing inflation somewhat in the process) while possibly making exports more costly. But one shouldn’t overstate the effect. After all, the same company can see headwinds and tailwinds from currency effects, which tend to be pretty fleeting. Further, most large companies hedge for currency swings, muting the impact for good or ill. But above all, the notion that a widely expected raft of additional Fed hikes will make the dollar even stronger while hurting stocks with more overseas revenue exposure assumes markets are pretty inefficient. The expectation of future hikes is likely why, in part, the dollar is up as much as it is. The same holds for the effect on stocks. Finally, citing return differentials between the S&P 500 US Revenue Exposure Index and Foreign Revenue Exposure Index’s returns in a correction as evidence is a little less telling than it may seem. These gauges have huge differences in sector and company composition, with the former being more value oriented than the latter. Additionally, the US Revenue Exposure Index has vastly more defensive stocks in it, given 15.9% of the index is in Health Care and 9% in Utilities, per S&P Global Indices. That suggests that the gauge holding up better than the Foreign Revenue Exposure Index may be less about the dollar and more about which sectors have been in or out of favor during this year’s correction.
MarketMinder’s View: First, please note that MarketMinder favors no party nor any politician, assessing developments solely for their potential market impacts. Following the Irish nationalist Sinn Féin party’s winning the plurality of seats in the election for Northern Ireland’s devolved parliament for the first time, many are speculating an independence referendum push akin to the Scottish National Party’s could be coming. This article takes a broad look at the vote though, providing some pretty sound evidence this isn’t likely. While “[t]he Northern Ireland Act of 1998 requires the British government to allow a border poll ‘if at any time it appears likely’ that a majority would express a wish for the region to leave the UK and form part of a united Ireland,” there are reasons to doubt that is now. For one, “‘… 58 per cent of those voting in these elections voted for either those that support the union or don’t want to see constitutional change.’” Additionally, Sinn Féin’s 27 seats are unchanged from 2017’s election and it holds just 27 of the parliament’s 90 seats. This article spends a considerable amount of time discussing the Northern Irish trade protocol, as this is a headache and key political issue in the region. Yet the reality is, despite those issues, Sinn Féin doesn’t seem to have materially capitalized as much as splinter parties divided up the pro-union vote. Hence, while the vote is interesting, the impacts are likely pretty small, and we don’t expect the United Kingdom to splinter any time soon.
MarketMinder’s View: Over the weekend, Japanese Prime Minister Fumio Kishida announced the country would ban imports of Russian oil and coal, calling it “an extremely difficult decision for a country that imports most of its energy … .” Perhaps. But the thing is, Japan banning Russian oil lacks real teeth, considering “… the country imported only 3.6% of its crude oil from Russia in March, compared to 10.8% of its coal and 8.8% of its gas in 2021.” While Russian coal has a higher share, it is worth remembering coal provides about 32% of Japanese electricity, lower than natural gas’s 39% (data per Nippon). The country has also been trying to replace coal with gas, so it seems rather telling that “Kishida also told reporters in Tokyo on Monday there was no change to the plan for Japan to retain its interests in the Sakhalin 1 and 2 Russian oil and natural gas projects.” These projects are actually ramping up output, so this seems a bit more like a shift in type of imported fuel than a ban on Russian energy.
MarketMinder’s View: This is an interesting piece that we think raises some excellent questions about the all-too-common theory that the Fed’s actions dictate market direction, spurring equity market rallies through allegedly “easy” money, low-interest-rate policies and stoking corrections and negativity when they “tighten.” Along the way, it does mention both some individual stocks and delve into midterm politics, so a dual reminder: MarketMinder doesn’t make individual security recommendations, and we favor no party or politician, assessing political issues and developments solely for their potential market and/or economic effects. With that, consider this stellar snippet: “Among other things, if market rallies are as simple as an ‘easy’ central bank, why is Japan’s Nikkei 225 still well below highs last reached in 1989? Why are European indices so far behind U.S. indices despite the ECB’s allegedly ‘easy money’ policies that have so often mirrored those of the Fed? These questions are never answered. Similarly not answered is why U.S. companies that risk-averse U.S. banks wouldn’t have paid a second of attention to during their much more than uncertain ascendance have their fates so explicitly tied to the alleged stinginess of banks now.” Whether or not you agree with the discussion of possible volatility drivers late in the piece is, in our view, not tremendously important. Raising questions about the common Fed narrative that is so widely accepted as gospel is an uncommon and sensible take.
MarketMinder’s View: As always, we prefer no political party nor any politician, and we assess political developments for their potential economic and market impact only. To that end: The Senate Judiciary Committee passed the bipartisan No Oil Producing or Exporting Cartels (NOPEC) Act yesterday, sending it to the full Senate. If passed, the bill “would change US antitrust law to revoke the sovereign immunity that has long protected Opec and its national oil companies from lawsuits.” While various versions of this bill have failed in Congress over the past two decades, this one is gaining traction because OPEC oil output hasn’t met increased quotas amid high prices and a feared global supply shortage. Theoretically, revoking sovereign immunity would let the US sue these companies for violating anti-trust laws, which Congress seems to think would help strong arm them into boosting output. We are very skeptical, as the enforcement mechanism is far from clear. Moreover, there is a risk of downstream side effects, including retaliatory bills targeting US agriculture for withholding output to support domestic farming. Or OPEC nations could increase the price of oil sold to the US. While we don’t think these consequences are likely to be big enough to wallop global markets, they are worth watching. With that said, however, clearing committee is only the first step. It isn’t yet clear that the full Senate has the votes to pass this bill. Nor has President Joe Biden shown any indication he would sign it. Rather, the White House has warned of unintended consequences. So we will keep an eye on this, but for now, we don’t think it is actionable for investors.
MarketMinder’s View: Our beef here isn’t so much with the economic forecast, as it is entirely possible that Germany is heading for a recession. German stocks are acting as if this is the case, as the DAX has breached -20% (often considered the threshold for a bear market) during this global stock market correction. It isn’t unusual for individual countries to hit bear market territory during a global correction, as sentiment can hit some areas harder than others, but the move is noteworthy all the same. But we are skeptical of the reasoning here, which implies German industrial production’s -3.9% m/m plunge is the start of worse declines to come. As with exports, which also fell in March, much of the decline could be a one-time drop due to March being the first full month with sanctions in effect. We don’t dismiss the supply chain headwinds, including automakers’ difficulty sourcing necessary parts from Ukraine, but China’s reopening—whenever it happens—could help counterbalance this. So could increased demand for aerospace and defense equipment. More importantly, while manufacturing has a larger presence in Germany than many other developed countries, it is still just 18% of economic output, according to the World Bank. Services, which is much more insulated from the conflict, is about 63%. Continued growth there could help offset weakness in heavy industry. Economies are complex, decentralized beasts, and for investors, it is important to look at all parts of the whole—and look forward, as markets do.
MarketMinder’s View: This is an interesting look at how a lot of the froth has fizzled out of one corner of a very speculative market: non-fungible tokens, or NFTs, which are digital assets certified to be unique or in very limited supply. While sales of some NFTs remain strong, people who shelled out mega bucks for some high-profile NFTs last year are having trouble reselling them now. The most striking example: Last year, someone paid $2.9 million for an NFT of Twitter founder Jack Dorsey’s first tweet. “The Dorsey NFT was put up for auction in April by its owner, the cryptocurrency entrepreneur Sina Estavi, who said: ‘This NFT is not just a tweet, this is the Mona Lisa of the digital world.’ Estavi hoped to raise more than $25m from the sale and offered to donate half his takings to charity. When bids reached just $14,000, he pulled the auction entirely.” While this is an extreme case, sales of NFTs overall have leveled off. Overall, we see this as a sign of how sentiment has evolved since last spring. Back then, there were pockets of euphoria, with NFTs being a shining example. That is largely absent now, with no “greater fools” willing to buy big NFTs at even higher prices than the initial buyers paid. The broader investment world has seen a similar retracement in sentiment as stocks’ correction has squeezed out last year’s optimism. In our view, this should help set the stage for a recovery sooner than many seem to anticipate today.
MarketMinder’s View: No, no they won’t—but there is some important context for investors to keep in mind. The local economic impact of China’s latest lockdowns is well known, as is the likely regional spillover. Stocks have dealt with headlines warning of closed cities, factories and ports for several weeks now, making the impact on other nations’ exports to China a foregone conclusion. Pundits have also warned of the effect on supply chains and factories’ ability to source parts from China. In our view, these stories bear much of the blame for the sentiment plunge that renewed global stocks’ correction (sharp, sentiment-fueled drop of -10% to -20%) last month. But, crucially, we also have a strong playbook showing what happens when restrictions lift: a quick economic rebound as consumers unleash pent-up demand and factories race to fulfill backorders. That is what happened after China’s initial 2020 lockdowns. It happened when the US, Europe and Japan reopened from their lockdowns. Whenever China lifts restrictions this time, it seems logical to expect the same, which likely renders the speculation about permanently destroyed demand and activity a mite overstated. We aren’t dismissing today’s problems, but stocks look 3 – 30 months out, and within that window, we see strong potential for reopening in China to help reality beat today’s dim expectations.
MarketMinder’s View: During the height of the pandemic, financial headlines often speculated about COVID-driven paradigm shifts. The labor market was a popular focus, and we read many thought pieces arguing COVID-influenced retirements would permanently alter the US workforce. As this article discusses, though, reality is turning out to be a bit more complicated. “An estimated 1.5 million retirees have reentered the U.S. labor market over the past year, according to an analysis of Labor Department data by Nick Bunker, an economist at Indeed. That means the economy has made up most of the extra losses of retirees since February 2020, a Washington Post analysis shows. Many retirees are being pulled back to jobs by a combination of diminishing covid concerns and more flexible work arrangements at a time when employers are desperate for workers. In some cases, workers say rising costs — and the inability to keep up while on a fixed income — are factoring heavily into their decisions as well.” Though the piece touches on some sociology and is heavy on anecdotes, we think it nicely illustrates the myriad personal reasons why early retirees are going back to work. Some have resumed working out of necessity due to financial hardship, and we feel for them. But others have come back to the labor force because they want to—their job gives them fulfillment or a sense of purpose. For some, it gives them more fun money to spend as they see fit. We think that is worth keeping in mind whenever financial experts present macroeconomic trends in broad brushstrokes.
MarketMinder’s View: As the West tries to wean itself off Russian oil, many worry about the implications for global energy prices—e.g., would an EU embargo lead to a glut of Russian supply with no buyers, creating a shortage in global markets? In our view, that concern was a mite overstated since buyers exist outside Western sanctioning nations, and this piece highlights one of them. “India’s purchases of Russian crude have soared since the conflict’s start, rising from nothing in December and January to about 300,000 barrels a day in March and 700,000 a day in April. The crude now accounts for nearly 17 percent of Indian imports, up from less than 1 percent before the invasion. Last year, India imported about 33,000 barrels a day on average from Russia.” Note, too, that while India has purchased Russian oil for domestic consumption, Indian refiners are also using the crude to make petroleum products, including diesel and jet fuel, to sell overseas. “While Europe may be moving away from crude purchases from Russia, it is eager to buy the same oil after it is refined in India — one of the conundrums in crimping Moscow’s energy revenues. India’s exports of diesel and other refined products to Europe, where they are in short supply, reached 219,000 barrels a day, a new high, in March, before falling back in April as demand in India surged.” Now, the bad news is that this explains part of the reason why sanctions aren’t as effective as many think, which means the impact on Russia is smaller than Western leaders aim for. But also, from a pure economic viewpoint, the India example illustrates their limits: They can create winners and losers, causing some economic dislocations. But they seldom cause economic activity to completely dry up.
MarketMinder’s View: German factory orders fell -4.7% m/m in March, worse than the median Bloomberg estimate of a -1.1% drop. Statistics agency Destatis noted weak demand abroad drove the decline: Foreign new orders dropped -6.7% m/m, with non-euro area orders down -13.2%. Now, the report wasn’t universally bad—eurozone new orders did rise 5.6% m/m—but otherwise, there is little to cheer. The Economy Ministry pinned the weak demand on war-related uncertainty—yet another headwind to go along with cost pressures and supply chain bottlenecks. The report doesn’t include a country-level look, but if yesterday’s export data are a hint, Russian sanctions could underpin a good chunk of the big drop in non-eurozone orders. We don’t dismiss the economic challenges facing Germany. But for investors, this is likely old news. Forward-looking stocks have likely pre-priced economic weakness: The MSCI Germany is down -20.9% year to date, nearly twice as low as global stocks’ -10.9% decline (per FactSet). March factory orders add some color on Germany’s economic struggles, but they likely don’t reveal much new information to stocks. Keep that in mind as other German and eurozone data roll in over the coming weeks—and headlines warn of their implications.
MarketMinder’s View: Here is a scam that appears to be picking up steam, and while the focus is on UK victims, we think all MarketMinder readers benefit from being aware. “The Financial Conduct Authority (FCA) is warning people to beware of people posing as investment advisers and offering to help them set up new schemes via online meeting platforms. They ask their victim to share the screen and enable remote access - which hands over control of their device and, potentially their bank account. … Remote access software is a legitimate tool for services like IT support to troubleshoot problems without being in the room. But scammers are increasingly hijacking this familiarity to lure victims into granting access to more than just a picture of their screen.” As one victim here described, a seemingly legitimate investment company offered her the chance to earn big returns—all she had to do was download remote access software and let the company handle the rest. Unfortunately, the bad actors used that access to drain the victim’s pension fund. While it may sound obvious to refrain from giving anyone a direct path to your personal information, fraudsters can dupe even the most seasoned investors with tantalizing opportunities. Remember, healthy skepticism is a strong first defense against bad actors, so if an offer sounds too good to be true, chances are high that it is.
MarketMinder’s View: This delves into some sociology upfront, which we suggest readers put aside because the article runs through a bunch of interesting (albeit narrow) tidbits on US rental supply and demand—a widely watched financial topic. On the housing front, “Currently there are 811 thousand multi-family units under construction. This is the highest level since May 1974! For multi-family, construction delays are probably also a factor. The completion of these units should help with rent pressure.” However, rental vacancy rates, while not as tight as last year, are still under pressure as apartment demand exceeds supply, with developers still struggling to build more units—in part due to the many shortages (e.g., materials and labor) across the global economy. Some of these factors are contributing to elevated inflation and will likely continue to this year. But as the chart at the end indicates, rental rates are starting to decelerate. So the article concludes: “My suspicion—based on all of the above data—is rent increases will slow over the coming months.” Not exactly relief, and we sympathize with those suffering through rising living costs, but for markets coldly evaluating economic conditions over the next 3 to 30 months, inflation looks more likely to slow than speed up as supply shortages ease—though it likely stays elevated longer than we initially expected. Markets seem to recognize this, too: 10-year Treasury yields, while at 3-year highs around 3%, remain historically low even with inflation at 40-year highs.
MarketMinder’s View: As this article provides a specific stock example, we remind readers MarketMinder doesn’t make individual security recommendations. The company mentioned serves only to highlight a broader theme, which is to answer the titular question: “the biggest reason the stock market goes up over time is because the economy grows and corporations earn more money. In 1928, earnings per share for the S&P 500 was $1.11 while corporations paid out $0.78 per share in dividends. ... By the end of 2021, those numbers [were] $197.87 and $60.40, respectively. This means over the past 94 years, earnings on the U.S. stock market have grown at an annual rate of 6% while dividends have grown 5% per year. Being an investor in the stock market means you get to take part in the profits and cash flows of corporations. You get to benefit from their innovation, investment and growth.” Underpinning this, in our view: productivity improvements and technological progress. Driven by the profit motive, companies generally attempt to economize—i.e., do more with less—to increase their earnings. This in turn can free up capital to pursue other growth initiatives—and greater profits. Crucially for investors, there isn’t a limit to businesses’ resourcefulness or how much earnings—and stocks’ returns—can grow over time. By and large, we think corporations have proven remarkably adept at supplying solutions to meet their customers’ demands. As that demand grows, so do the earnings prospects of corporations providing answers. But as the article notes, many underestimate this process, in part because it can involve huge booms and busts—progress doesn’t occur in a straight line. It isn’t easy, but stocks’ long-term returns are investors’ reward.
MarketMinder’s View: Is bonds’ role in a diversified portfolio undergoing a sea change? “Through Monday, the S&P 500 was down 13% for 2022 and the Bloomberg U.S. Aggregate bond index—largely U.S. Treasurys, highly rated corporate bonds and mortgage-backed securities—was off 10%. That puts them on track for their biggest simultaneous drop in Dow Jones Market Data going back to 1976. The only other time both indexes dropped for the year was in 1994, when the bond index declined 2.9% and the S&P 500 fell 1.5%.” Those returns have many questioning bonds’ ability to hedge portfolio risk, though we think the rarity in which stocks and bonds endure comparable declines argues the opposite. It happens, but unless this becomes a permanent market phenomenon, we don’t think bonds’ primary role in a portfolio—i.e., dampening overall portfolio swings for investors needing stable cash flow—is in jeopardy. Note, too, bonds needn’t offset stock moves or even be void of short-term volatility to be beneficial. Nor are “volatility” and “negativity” synonymous. In our view, bonds’ job in a portfolio is to swing less than stocks overall and on average, which they have. For more on why it is premature for investors with blended portfolios to ditch their fixed-income allocation, please see our 4/7/2022 commentary, “How to Think About Bonds’ Rocky Q1.”
MarketMinder’s View: Please note, MarketMinder isn’t for or against any policy or regulation; we aim simply to assess their potential economic or market impacts—or lack thereof. Also, specific companies this article mentions are for illustrative purposes only, as we don’t make individual security recommendations here. Disclaimers out of the way, given the prominence proposed Tech regulations have received in the press over the years, we think this article highlights why they don’t always pack the punch many think. In this case, the UK appears unlikely to give its newly installed Tech regulator much enforcement teeth. “The [UK] government’s new legislative programme is not expected to include a bill to provide statutory underpinning to the digital markets unit that is based within the Competition and Markets Authority, said people briefed on the situation. Without the legislation the UK tech regulator will not be able to set rules for leading internet companies and impose fines on them for breaking those rules. The government announced plans to set up the digital markets unit in 2020 and said it would be given powers to devise codes of conduct for tech companies and fine those that did not comply up to 10 per cent of annual turnover. The unit was established in ‘shadow form’ last year and is operating with around 60 staff, but has no powers beyond the Competition and Market Authority’s existing capabilities.” While monitoring regulations and their potential unintended consequences is worthwhile, this is a timely reminder ballyhooed rules don’t always take their initially proposed form—politics can water them down. For more on why policies aimed at Tech often fail to land as feared, please see Research Analyst Larissa Murray’s 12/18/2020 column, “Much Ado About Digital Taxes.”
MarketMinder’s View: If adopted, how much will the EU’s proposal to ban direct purchases of Russian oil matter? Beyond rearranging who buys what in global markets, the ban plan would take effect gradually and grant exemptions to countries most affected (e.g., Hungary and Slovakia). Meanwhile, Russian gas continues flowing to Europe. As the article notes: “Russian oil may be an easier target than gas, analysts say. ‘The oil system can reconfigure itself,’ said Oswald Clint, an analyst at Bernstein, a research firm, adding that oil was ‘a very deep, liquid and fungible market’ served by thousands of tankers.” So, instead of Europe, Russian oil could go to China and India (perhaps at a discount), freeing up supplies elsewhere. Also, non-sanctioning countries could turn around and sell their purchased oil—or refined products from it—to EU countries sanctioning Russia. Now, added trade friction comes with costs, but a) markets largely reflect these already and b) workarounds, although not ideal, probably steer the European and global economy away from worst-case scenarios. Yes, it is possible an EU Russian oil ban could “derail the economic recovery,” but it isn’t assured given readily available options, and the risk is well-known—it isn’t sneaking up on markets. For more on why, please see yesterday’s commentary, “Three Quick Hits on Energy.”
MarketMinder’s View: This article serves two purposes, in our view. One, it is a stark warning to potential buyers about the risks and volatility in the market for non-fungible tokens (NFTs, digital assets certified to be unique or in very limited supply). Two, it shows how much sentiment toward NFTs, which was borderline frothy not long ago, has retrenched. Consider: “The sale of nonfungible tokens, or NFTs, fell to a daily average of about 19,000 this week, a 92% decline from a peak of about 225,000 in September, according to the data website NonFungible. The number of active wallets in the NFT market fell 88% to about 14,000 last week from a high of 119,000 in November. NFTs are bitcoin-like digital tokens that act like a certificate of ownership that live on a blockchain. … That lack of interest isn’t unique. Interest in NFTs measured by the number of searches for the term peaked in January, according to Google Trends, and has fallen roughly 80% since then.” We have nothing against NFTs, but it is worth remembering that all investments are a balance between risk and reward. In the past two years, we have a lot of evidence that—at least as of now—NFTs may occasionally offer big returns (sometimes for the producer more than the buyer) but with big risk.
MarketMinder’s View: “Low winter inventories and record high natural gas prices in Europe already had two-thirds of U.S. [liquefied natural gas, or LNG] cargoes heading to Europe before Vladimir Putin’s invasion of Ukraine. The war pushed Europe to ease dependence on Russia and expand port infrastructure to take in more LNG tankers. … Since then, prospects have improved for about a dozen of U.S. LNG projects that held federal permits but lacked supply deals and funds to move forward. Long-term purchasing agreements are critical to securing financing for the multi-billion-dollar projects, demonstrating market demand for the final product and ensuring that lenders will be repaid.” This is worth being aware of to help see how the energy market is shifting in response to Russia’s invasion of Ukraine and threats to cut off European gas supplies. But it isn’t very useful to investors, considering markets are well aware of this and likely already factored these developments into share prices.
MarketMinder’s View: First, please note that MarketMinder favors no party nor any politician, assessing developments solely for their potential impacts on markets and the economy (or lack thereof). With that said, after the Scottish National Party (SNP) came within two seats of a majority in the devolved country’s parliament in last year’s election, some uncertainty has lingered in the UK over a possible second Scottish independence referendum, following the defeat of a motion in 2014. SNP head and First Minister Nicola Sturgeon has publicly talked tough on this as a means to motivate her base ahead of local council elections this week, seen widely as a litmus test of party clout. We have long argued that such a measure would need Westminster’s approval, as Scotland lacks the legal authority to hold a unilateral independence vote. Now it seems Sturgeon agrees. “Appearing on Radio 4 this week, the First Minister was asked about the ongoing row over the legal advice she has received on her rerun referendum. Anticipating a continued refusal by the UK government to issue another ‘Section 30’ order (that’s the part of the Scotland Act that allows the UK government temporarily to devolve reserved matters of policy to Holyrood to legislate upon, as happened with the first independence referendum in 2014), Sturgeon is keen to know whether lawyers reckon Holyrood has the legal authority to hold a vote anyway. The BBC’s Martha Kearney asked her if she would go ahead if the legal advice suggested it would be illegal. Sturgeon replied: ‘I wouldn't want to go ahead with a referendum that wasn't legal.’ It’s hard to overstate how significant this is, because the Scotland Act is pretty unequivocal in its terms: matters concerning ‘the constitution’ are explicitly reserved to Westminster.” That basically means no IndyRef2 is likely any time soon.