Here we analyze a selection of third-party news articles—both those we agree and disagree with.
Please note: Though we make every effort to source articles from freely available sites, we will also regularly include articles on sites that have limited content for non-subscribers. Doing so is increasingly unavoidable, as more and more financial media is published behind paywalls.
MarketMinder’s View: This piece uses the -97% y/y fall in UK April car sales as the lede to the article’s thesis: “When the worst of the coronavirus pandemic has passed, every major industry will have its own horror stat to look back on, a moment that triggered a collective gasp of breath and the sudden realisation that the world may have changed for good.” It cites a range of other industries—air travel, traditional retail, oil, renewable energy, tourism and telecom—that allegedly will have to grapple with huge, permanent economic changes. For example, “The prediction of New Zealand prime minister Jacinda Ardern that the country won’t have open borders for ‘a long time to come’ offers airlines and tour operators a chilling glimpse of a future of mass market overseas travel gone for good.” Two thoughts: First, while some COVID-induced economic shifts may persist, we caution against presuming “horror stats” are predictive—what just happened, severe as it was, doesn’t tell you what will happen next. Second, these predictions generally extrapolate the recent past into a dour “new normal”—a common phenomenon during economic shocks and bear markets that we think is most telling about sentiment. The more folks are convinced things will never go back to normal, the lower expectations for the near future are—an important development for investors to monitor.
MarketMinder’s View: We see a couple limited takeaways from this rundown of major European countries’ electricity consumption last week, which some view as a rough early proxy of economic activity. For one, demand recovery is uneven and isn’t always stronger in the countries that have started lifting restrictions. For example, while “power use in Italy jumped from a week earlier as the nation, once the epicenter of the virus in Europe, began to ease lockdown measures,” in Spain “the loosening of restrictions didn’t translate into a bump in electricity demand with the midday peak down 0.9% from last week.” In our view, this is a reminder for investors to refrain from reading too much into one economic gauge and comparing it to other countries—each place has slightly different economic reopening plans, so it isn’t necessarily apples-to-apples. These data may simply hint at how these economies emerge from lockdown-caused downturns, which can help market participants form some baseline expectations of what is to come as more of the world reopens. That is worth monitoring, but don’t draw big conclusions from any one data series, either. For more, see our 4/15/2020 commentary, “Non-Traditional Data Show What Stocks Reacted To.”
MarketMinder’s View: “The U.S. Treasury Department plans to borrow nearly $3 trillion between April and June to bankroll the federal response to the coronavirus pandemic. … In a single quarter, the government will borrow more than twice as much as it did all of last year.” Major new Congressional appropriations plus a delayed tax filing deadline are producing a big Q2 budget shortfall, though even including July tax receipts, the Treasury “expects to borrow another $677 billion” in Q3. These are eye-popping numbers, but they don’t tell you much about the more important question: Can the US service this debt? Presently, “despite the surge in federal debt, the government’s borrowing costs remain low.” While this piece implies Fed purchases are a key demand source, private and public buyers globally are gobbling up new debt at auctions, suggesting investors don’t doubt Uncle Sam’s creditworthiness. Unless this materially changes, US debt servicing costs don’t look unmanageable. For more, see last month’s commentary, “What Rising Deficits Mean for US Debt.”
MarketMinder’s View: In a ruling that seemingly amounts to requesting the ECB show its work, Germany’s top court “ruled that Germany’s central bank, the Bundesbank, must stop buying bonds as part of an ECB stimulus program begun in 2015 unless the ECB reaches a ‘new decision’ on the program that demonstrates its effects on the economy were ‘proportionate’” with its monetary policy aims, and not straying beyond that into outright monetary financing of debt. Despite speculation the German court’s decision could “spell the end of the stimulus program,” this announcement likely carries more political ramifications—some German politicians have long criticized ECB policy for infringing on national sovereignty—than immediate changes to monetary policy. Moreover, German legal challenges to the ECB aren’t new. For example, back in 2013, the same court handled a case over the ECB’s Outright Monetary Transactions (OMT) program, eventually ruling the case should go to the European Court of Justice. We don’t know how this particular legal episode will end, but nothing here is likely to result in a sudden change in monetary policy.
MarketMinder’s View: Using the UK Office for Budget Responsibility’s (OBR) calculations, this piece highlights how much each area of the UK’s economy had contributed to the overall contraction, then surmises how the partial reopening in the works may help. The largest detractor, despite its 10% share of GDP, is manufacturing. Because over half of UK factory production went offline, the OBR estimates manufacturing has shaved -5.6% off GDP. Close behind are retail and education. The draft reopening guidelines include social distancing and disinfecting requirements for factories to reopen, suggesting they could come online soon, albeit with reduced output. Retail may take longer, given strict containment policies likely remain in effect there. As for education, “reopening schools and universities would give the economy a swift boost and represent an important step in the return to normality for the younger generations in particular. This is also crucial for the wider economy. The CBI sees education as an ‘enabler’ for the rest of the economy, because parents cannot go back to work if they still have to supervise and teach their children at home. If teaching unions agree, schools could be among the first to return, filling a major hole in GDP immediately and helping get the rest of the economy back on track. The Telegraph reported on the weekend that primary schools could reopen as soon as June 1.” In short, while the whole economy won’t come back online immediately, improvement off a low base could appear in short order when business begins gradually returning to normal.
MarketMinder’s View: This argues monetary policy and high hopes have driven stocks’ rally since late March, and nothing short of perfection on the economic and earnings front will keep it going. The main bit of evidence? The sharp divergence between economic data released last month and the month’s stock returns, as well as the potential for the proverbial next shoe to drop in the form of corporate bankruptcies. The problem with this line of logic, in our view, is that it ignores bear markets’ repeat tendency to end long before economic data and earnings improve. Both were awful when the last bear market ended in March 2009, and bankruptcies—including that of a certain US automaker—persisted for months afterward. All stocks need to cement a recovery is a reality that is incrementally less bad than feared. We can’t know whether that is happening now or this is a bear market rally with more downside in store. But whenever a new bull market starts, we would expect to see the majority of commentators questioning it—that pessimism is what early bull markets climb on.
MarketMinder’s View: And so it begins: “Italy on Monday allowed factories, construction sites and wholesale commerce to reopen. Much of the consumer economy remains suspended. Most shops can reopen only from May 18. Restaurants, bars and hairdressers have to wait until June 1. Economic normalcy could take much longer to achieve. Italians this week regained some personal freedoms, from visiting close relatives and significant others to taking food home from restaurants. Already, more people are leaving their homes.” The significance for investors isn’t so much the potential economic rebound or speed thereof. Rather, we suspect many other countries see Italy as a test case and will be watching virus statistics over the next few weeks in order to judge whether gradually lifting their own lockdowns is a net benefit. So, whether or not Italy’s move is successful will likely do a lot to shape investors’ expectations, making it worth keeping a close eye on.
MarketMinder’s View: While the headline findings here probably go without saying, we thought the details provided an interesting snapshot of sentiment among UK CFOs. “‘CFOs expect the lockdown to ease in May and June and demand in their own sectors to start recovering later this year. But there is no expectation of a quick snap back in activity, with most CFOs assuming revenues will not return to pre-crisis levels for at least a year,’ said [Deloitte Chief Economist Ian] Stewart. Almost all the executives surveyed expect UK corporate revenues to fall over the next 12 months, while the executives expect revenues at their own businesses to be on average 22% lower than they estimated before the pandemic. … The economic outlook for the UK is gloomy, according to the majority of finance bosses, with over half (53%) forecasting a deep and prolonged downturn in Britain, which lasts until the end of 2020.” This and other surveys like it help shape investors’ expectations. The more dismal those expectations become, the lower the hurdle for reality to clear. So while it may be counterintuitive, we think these worsening expectations are actually encouraging.
MarketMinder’s View: IHS Markit’s April manufacturing purchasing managers’ indexes (PMI) for the eurozone hit the wires today, and they were once again ugly. The headline PMI sank to 33.4, the lowest in the series’ 23-year history (readings under 50 indicate contraction). France and Italy also hit record lows, while Spain and Germany logged their worst readings since the global financial crisis. From here, we suggest keeping measured expectations: “With some countries including Germany, Spain and Italy, slowly reopening, Markit Chief Business Economist Chris Williamson said April will have ‘hopefully represented the eye of the storm.’ But it’s going to be some time before many businesses are fully operational, while the overall level of economic activity and demand will remain below normal for some time. ‘Steps needed to keep workers safe will mean even businesses that are able to restart production will generally be running at low capacity, and most will be operating in an environment of greatly reduced demand,’ he said. ‘Business spending on inputs and machinery and equipment will also remain subdued for some time.’” This news, dire as it is, is likely something markets weighed long ago, considering the ubiquitous expectations of strongly negative data.
MarketMinder’s View: This spends most of its time highlighting solid demand for newly issued Treasurys, supporting our view that markets are well capable of handling the huge deficit increase on the docket this year. But nestled within is a handy, interesting tidbit: “Companies last month sold more than $227 billion of investment-grade corporate bonds in the U.S. market, breaking the previous record of $194 billion set a month earlier, according to Dealogic.” One month ago, the world feared bond markets locking up, starving companies of financing. Instead, we get record-high issuance in the investment-grade realm, helping companies get over the COVID hump. Giving credit where credit is due, it appears the Fed’s corporate bond backstop has likely brought some benefits.
MarketMinder’s View: We highlight this mostly to a) set expectations and b) reiterate that the crucial task for investors is to separate your views of the pandemic from your opinion on markets. While it may be a couple years before humanity reaches herd immunity or a vaccine arrives, both issues will be discussed widely as they develop, helping markets reflect their eventuality long before they actually arrive. Hence, in our view, significant improvement on the medical front shouldn’t be necessary for stocks to recover from this bear market. With that said, however, should a second wave prompt another round of lockdowns, it could be a negative surprise for investors. That isn’t knowable now, but it is one front we are watching closely. Regardless, there are a tremendous number of unknowns underpinning any outlook on the virus today, so we would recommend taking them all with a grain of salt (or many grains).
MarketMinder’s View: This piece gets way too political toward the end, so as always, we ask you to tune out the sociology, turn off your political biases and focus on the investment-related argument. That argument: Stocks’ rebound is because investors have nowhere else to go with bonds yielding a pittance, amid a dashing heap of Fed-boosting. This is another example of the sentiment that is typical during the initial recovery from a bear market—persistent pessimism that refuses to believe the recovery could have any fundamental support. We aren’t arguing that the recovery has arrived, but we do encourage readers to become accustomed to what we call the pessimism of disbelief. As for the broader argument, it misses the fact bear markets usually bottom out before recessions do, and that while short-term volatility is indeed a terrible economic indicator, in the long run, stock cycles are pretty good at leading expansions and recessions. They did so on the way down in March 2020, falling before data turned sour, and will likely do so on the way up—just as they did in 2009.
MarketMinder’s View: The Institute for Supply Management’s April manufacturing purchasing managers’ index (PMI) fell to 41.5 from March’s 49.1. Readings below 50 mean more firms reported contracting activity than expanding. While April’s reading was better than most analysts expected, it was still the lowest in 11 years—not great. Sixteen of the 18 industries the ISM tracks declined, with production and forward-looking new orders at 27.5 and 27.1, respectively. The broad PMI beat expectations solely because of supplier delivery lag times, which isn’t a silver lining. While these are usually evidence of a strong economy, now they are a result of supply chain disruptions from COVID-19-related shutdowns. Hence, these gauges’ big positive contributions are a negative in disguise. Overall, our view hasn’t changed. Economic data likely remain lousy until major commercial areas reopen. But what matters for investors is whether reality over the next several months and beyond meets, beats or misses expectations. Crucially, stocks will likely move before economic data, if they haven’t already started. For more, please see our 4/3/2020 commentary, “How Bleak March Data Help Markets Anticipate the Future.”
MarketMinder’s View: First, the numbers: Eurozone Q1 GDP fell -3.8% q/q, worse than expectations. Three of the eurozone’s four biggest economies—France (-5.8%), Italy (-4.7%) and Spain (-5.2%)—contracted on a quarterly basis. While Germany’s figures come out in mid-May, most economists expect a contraction there, too. For comparison’s sake, the eurozone’s Q1 GDP decline was sharper than the United States’, where Q1 GDP fell -1.2% on a quarter-over-quarter basis. However, European nations locked down their economies in response to COVID-19 earlier than the US, and some are starting to ease movement restrictions, so the US’s Q2 figures could end up weaker than the eurozone’s come July. While headlines focus on France’s steepest GDP decline since World War II or ECB President Christine Lagarde’s comments that Q2 data will be even worse, we urge investors to separate their views of the economy from their views of the market. As bad as the data will look in the coming months, they reflect what already happened. Stocks care more about what the probable future holds, which backward-looking numbers won’t reveal. For more, see our 4/2/2020 commentary, “Separate Your Stock Market Views.”
MarketMinder’s View: First, MarketMinder doesn’t make individual security recommendations; those mentioned here are part of a broader theme we wish to highlight. That theme is how this piece encapsulates some of the common topics discussed in financial headlines now, for better and worse. For one, it partially attributes stocks’ rebound to “stimulus money from the Fed and Congress.” While news of policymakers’ spending and lending could have buoyed sentiment in the near term, markets don’t need saviors to ride to the rescue. History shows recoveries take place with or without outside assistance. Not to mention the government’s recent spending is more akin to a bailout than creation of new demand. Though the article rightly points out stocks are forward-looking—“So investors care less about the actual facts reflected in today’s headlines, and more about what kind of picture those facts paint about the coming year”—it then attempts to credit stocks’ recent rise to several positive stories. They include: slowing COVID infections; reopening economies; and progress in drug development. While the desire for clarity is understandable, we believe investors should refrain from myopically focusing on day-to-day glimmers of hope or seeming setbacks. Sound investment decisions are based on probabilities, not possibilities, and in our view, it is still too early to determine whether the bear market is over or not. Plus, markets tend to look beyond the very short term. Though frustrating, we believe long-term investors should focus on the probable future rather than react to the latest positive or negative headline.
MarketMinder’s View: As we close April, one of the investing world’s most well-known adages—“Sell in May”—has returned to headlines, prompting questions on whether now is the time to exit markets. Several experts, including some in this article, say yes, arguing stocks are due for a pullback after a positive April. We disagree—basing an investment decision on seasonality or the past month’s returns is a mistake, regardless if it is a bull market or bear market. Consider: If there is another downturn in the bear market that began in February, a fundamental cause—e.g., ongoing global economic contraction or a monetary policy error—will be the reason. We don’t know if the bear market is over, but we do know its status won’t change simply because of a flip of the calendar. For more, see our 4/22/2020 commentary, “'Sell in May' Still Isn't Sound Strategy.”
MarketMinder’s View: US initial jobless claims hit 3.8 million in the week ending April 25, higher than expectations for 3.5 million and lifting the total to over 30 million over the past six weeks. The pace has slowed, but that is cold comfort to anyone who has lost their job. Claims are also still near historically high levels, further illustrating the extent of the damage from the COVID-driven economic shutdown. With April’s jobs report set to come out next Friday, the weekly jobless claims numbers allow observers to formulate an educated estimate—right now, the expectation is for “… a 22 million decline in payrolls and jobless rate of 16.3%.” However, as bad as the labor market data are now, we caution investors against extrapolating the latest numbers deep into the future. For example, the implications that employment will take “years to eventually recover” and more layoffs may be in store as economic growth sputters assume one possible outcome. Another possible outcome: As economies reopen, growth rebounds more quickly than anticipated and boosts jobs along with it. Perhaps swiftly, no less, considering data suggest many of those filing are temporarily furloughed versus actually laid off. We aren’t arguing one scenario is more likely than the other—at this point, it is too early to assign probabilities to any outcome. But for investors, note that labor data are lagging economic indicators—when they finally turn positive, the recovery will likely be well underway.
MarketMinder’s View: As businesses struggle due to COVID-containment policies that brought the economy to a screeching halt, America’s central bank continues to broaden its reach in its effort to support the economy. The Fed announced the expansion of its “Main Street Lending Facility,” opening up the program to slightly bigger firms—likely an attempt to move past the controversy of midsized publicly traded companies tapping a separate program intended for small businesses. The article provides some high-level detail—for example, businesses with up to 15,000 employees and $5 billion in revenue can participate in the program. In the short term, the Fed’s moves may help companies get through this virus-driven rough patch. But in the medium to long term, what are the potential implications for the Fed’s future responsibilities? Per the 1978 Humphrey-Hawkins Act, the Fed has a dual mandate of targeting maximum employment and price stability. As a central bank, its historical role is lender of last resort to solvent banks in need of short-term liquidity. Will the Fed’s rapid reach to support other areas of the economy cue up a political debate about the supposedly apolitical institution? The situation warrants monitoring, in our view.
MarketMinder’s View: We are of two minds about this article. On the bright side, it provides an even-handed rundown of recent improvement in the corporate bond market: “The blowout in credit spreads (the difference between yields on bonds and those of their benchmarks) has abated. Almost half of the widening from the early days of the coronavirus lockdowns has been reversed, and the spread is steadily tightening.” We also think it is fair to point out that another series of business lockdowns caused by a flare-up in COVID-19 infections could roil markets and blow out credit spreads again, putting pressure on businesses. That prospect’s likelihood is unknowable now. However, we have some quibbles with the portrayal of a ticking timebomb among “fallen angels” downgraded from investment-grade to junk credit ratings. The article warns these downgrades could force index funds to sell them, but there are two sides to every transaction—and plenty of high-yield corporate debt funds. This is another iteration of the long-running belief that index classification changes are a market driver, something markets have repeatedly proven false. Plus, the Fed’s backstops extend to fallen angels (not that we think markets need a savior).
MarketMinder’s View: The first part of this analysis provides a snapshot of the challenges facing oil producers today: Global supply is plentiful while COVID-19 containment efforts have stifled worldwide demand, leading to plunging oil prices. Yet the rest of the article speculates about how these developments may fundamentally alter oil markets over the long term, from changing producer behavior to inspiring governments to make policy changes that will supposedly speed up the pivot from fossil fuels. Many of those topics delve into sociology, which isn’t our primary concern—potential market implications are. However, we do think investors should refrain from basing any portfolio decision on speculative and distant projections. Consider “peak oil” theories featured prominently more than a decade ago. Fast forward to today, with the US a top producer and the world awash in oil. History constantly shows why “this time is different” are the four most dangerous words in investing. While possible, sound investing decisions are based on probabilities, in our view. Instead of possibilities, we believe investment decisions should be based on what looks probable over the next 3 – 30 months—the timeframe stocks focus on most.