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: Industrial firms’ profits flipped from a 1.0% y/y gain in 2022’s first half to a -1.1% y/y loss in the first seven months combined, suggesting July was quite tough. The article cites renewed COVID restrictions and power shortages caused by heatwaves as impediments to factories’ activity and profit margins, which seems about right—and it notes that the government has struggled to prop up the sector, which also seems like a fair assessment. But take note: Even as China flounders, until negative volatility flared up again last week, global markets were enjoying a very nice bounce from mid-June’s lows. Investors may see China as a huge global economic swing factor, but we think markets have moved on and are looking more clearly at the bigger picture—much as they did when Japan, basically the China of the 1980s from a sentiment perspective, stagnated in the 1990s.
MarketMinder’s View: This is an object lesson in how prices and markets work. When energy prices jump, it encourages conservation. That is happening all over Europe, helping countries quietly go about filling natural gas reserves for the winter, taking advantage of the new supply contracts that EU members have secured to replace Russia. Surprising many, “the EU as a whole had reserves of gas equal to 78% of storage capacity on Aug. 24, according to Gas Infrastructure Europe, making it likely it will meet its 80% target for Nov. 1 two months early.” We have seen separate reports indicating reserves in Germany—the nexus of today’s fears—are now just over 80% full, well ahead of schedule. Of course, this doesn’t mean things will go swimmingly this winter. Prices are still quite high, and conservation efforts will probably continue. However, compared to broad expectations for rolling blackouts and forced factory closures, this points to a high likelihood of reality exceeding sentiment. That is generally all stocks need to move past a big fear like this, in our view.
MarketMinder’s View: Because Treasury Inflation-Protected Securities (TIPS), contrary to their name’s implication, aren’t inflation hedges. Nor are they designed to be, which is how they can be down in a year of rapidly accelerating inflation. “The way they work is the principal value of the bond is tied to the rate of inflation — when inflation goes up the principal value of the bond goes up as well. But investors don’t get the inflation-adjusted principal value until maturity. The economy can be all over the place in the meantime which means inflation, deflation, rising rates, falling rates and everything in-between. So while the inflation protection built into these bonds is one of a kind, TIPS can be volatile along the way.” Indeed, they are quite sensitive to interest rates, as the article goes on to show, and tend to track Treasury bonds’ direction. They may out- or underperform a bit if inflation is milder or worse than expected, but that is about the extent of it. But this year, with interest rates up as inflation was worse than expected, TIPS are naturally struggling. Lesson: It is important to learn how any security generates returns and set reasonable expectations, not simply buy it for its name alone. In our view, those seeking to hedge against inflation should take a much longer-term view and consider potentially better options at their fingertips (sorry). For more, see our recent commentary, “Delineating the US Government’s Two Inflation-Linked Investment Options.”
MarketMinder’s View: Ending months of uncertainty, UK energy regulator Ofgem announced the price “cap” for households on default energy plans will rise to an average of £3,549 per year in March, up 80% from the current threshold, which was set in April. As you might have gleaned from that sentence, the “cap” is anything but, and most suppliers have treated it as a target rather than an absolute maximum. From here, the cap will reset every three months instead of every six. That change aims to increase the chances of customers feeling relief sooner by forcing suppliers to lower prices as wholesale energy costs fall. But they have gone in the opposite direction, and forecasters project big increases in January and April. All of this is widely expected and has been discussed constantly for months, likely sapping surprise power over stocks, but we see a couple of takeaways for investors. One, brace for this showing up in October CPI data, as the price cap will be 178% above October 2021’s level—that will build a huge year-over-year increase in household energy costs into headline CPI. Two, simply knowing what the price will be helps ease uncertainty a bit. It is unquestionably unpleasant, but at least households can plan and budget. Three, this is all built into the Bank of England’s recession projections, which stocks are also familiar with, and avoiding that outcome probably isn’t necessary for stocks to do ok. The gap between reality and expectations is what matters most, and brutal expectations set a very low bar, increasing the likelihood of positive surprise.
MarketMinder’s View: We quibble with some of the specific portfolio allocation advice toward the end of this piece, as it seems to falsely equate time horizon with retirement date and suggests holdings for an emergency fund that have too much expected volatility for something whose purpose is to be liquid and there when you need it. The forward-looking parts also play too much into general investing mythology about inflation and the Fed, presuming these are all fundamental negatives rather than items that spurred overwrought fears earlier this year. But the first third or so, which focuses on perceptions of this year’s downturn and the dangers of reacting to it, is pretty darn great. “As it turns out, doing nothing was the second-best advice anyone could have given you for investing in the overall stock market this year. The very best advice would have required a crystal ball: You should have sold precisely on Jan. 3, when the S&P 500 stock index was at its peak, and bought on June 16, when it hit bottom. (Then, quite possibly, you should have sold again on Aug. 16, before the market turned rocky. The verdict is still out on that one.) If you made all of those moves, more power to you. Please get in touch and explain how you managed that perfect trick of market timing, and how you’re going to pull it off the next time.” This may come as a surprise, given—as the article goes on to highlight—the rally since mid-June hasn’t earned nearly as much attention as the downturn. We see that as a powerful sign of sentiment. Bear market rallies usually generate far more enthusiasm and “buy the dips” commentary. Recoveries, meanwhile, get derided, disdained or go unnoticed. Time will tell whether this rally is a new bull market, but the prevailing sentiment is what we would expect to see.
MarketMinder’s View: Please note, MarketMinder isn’t for or against any law or policy. Our analysis focuses strictly on rules’ economic and market impact. Stock buybacks are a popular target for elected officials seeking to score political points, and the Inflation Reduction Act includes a 1% excise tax on that activity. As we wrote earlier this month, the tax, in theory, discourages buybacks—although it has some pretty major holes. However, don’t underestimate companies’ abilities to find ways around new taxes. One way highlighted here: utilizing accelerated share repurchase (ASR) programs, “a commonly used mechanism allowing companies to complete buybacks that can be worth billions of dollars. Although the programmes are recorded as having been executed on a single day, it often takes several months for banks to complete the trades.” Bankers and legal experts are waiting on Treasury guidance on whether companies would have to pay the tax on stocks they received through accelerated buybacks started this year—and if Treasury says no, some companies might aim to front-load buybacks to avoid the levy in 2023. Now, this route isn’t some silver bullet for companies looking to avoid the tax. As concluded here, “While banks can structure longer-term programmes—including contracts with exotic derivatives to protect from share price moves—one dealer said they could ‘start to get expensive’ quickly, making them less attractive.” Rather, we highlight this development as a reminder that new taxes often don’t have the impact politicians promise on the campaign trail—businesses will always have a strong incentive to find clever workarounds.
MarketMinder’s View: For the latest example of dreary sentiment being a tad behind reality, see Germany, where a widely watched business confidence survey ticked down in August while a revised estimate of Q2 GDP inched higher. For the former, “The Ifo Institute’s gauge of business expectations for the next six months inched down to 80.3 from 80.4 in July, though economists had predicted a steeper decline. Current conditions were also assessed more negatively. … The Ifo index is seeing the worst declines in the retail sector. ‘This is of course to do with the high inflation rate we are observing in Germany, which is clearly weighing on the purchasing power of households,’ [Ifo economist Timo Wollmershaeuser] said.” Surveys aren’t predictive, but they are a snapshot of sentiment, which Ifo’s gauge suggests is still in the doldrums. On the flipside, Q2 German GDP rose 0.1% q/q, a tad better than the initial estimate of a flat reading, with household spending up 0.8% on a price and seasonally adjusted basis. Germany’s Federal Statistical Office credited easing COVID restrictions for boosting spending, noting that expenditures on accommodation, restaurant and transport services were strong. Here, too, little is surprising: Markets are well aware relaxing restrictions leads to a short-lived economic boost. Overall, these reports suggest economic activity fared slightly better than anticipated last quarter but people are still pretty dour about things now and in the near future. For investors, the muddled picture indicates where expectations are and how little it likely takes for reality to exceed them.
MarketMinder’s View: The Bureau of Labor Statistics (BLS), guardian of US labor data (including the widely watched jobs report), announced the US economy added 462,000 more jobs in the 12 months through March 2022 than previously estimated, per its annual benchmark revision. The article points out which industries will likely see big revisions (positive for construction and financial activities, negative for retailers), which is all interesting for those curious about the labor market’s recovery during the second year of the pandemic. But for investors, we thought the BLS’s announcement offered a timely reminder on economic data’s limits: Revisions and more complete datasets may paint a different picture than initially announced. As described here, “Once a year, the BLS compares its nonfarm payrolls data, based on monthly surveys of a sample of employers, with a much more complete database of unemployment insurance tax records. A final benchmark revision will be released in February along with the BLS’ report on employment for January. Government statisticians will use the final benchmark count to revise payroll data for months both prior to and after March.” This doesn’t mean you should ignore the latest data—rather, just keep in mind they are imperfect attempts at measuring what happened and subject to improvement and more information.
MarketMinder’s View: That titular measure: gross domestic income (GDI), which grew at an inflation-adjusted 0.3% q/q rate (1.4% annualized) in Q2. As this coverage and others expressed today, GDI’s growth conflicts with the more well-known gross domestic product’s (GDP) inflation-adjusted -0.1% q/q dip (-0.6% annualized). So which is right? “The conflicting signals are a mystery because the two measures, in theory, should be identical. They measure the same thing, economic output, from opposite sides of the ledger: One person’s spending is someone else’s income. In practice, the two indicators don’t always match because the government can’t measure the economy perfectly, but they have rarely diverged this much for this long.” Yes, in theory, they should be the same, but different measurement methods produce different results. As the Bureau of Economic Analysis (BEA) acknowledges, differences between the two gauges may arise due to incomplete data, expected sampling errors, and constant revisions to account for the evolving US economy (e.g., the creation of a new category of investment, intellectual property products, in 2013 led to some minor shifts in how spending was categorized). The accounting treatment applied to corporate profits, including depreciation, can also play an outsized role when inflation is high. This all explains why the BEA and recession arbiter NBER (the National Bureau of Economic Research) “… recommend looking at an average of the two indicators. By that measure, economic output grew in both the first and second quarters, and growth actually accelerated somewhat in the spring.” In our view, the handwringing over which economic measure is telling the truth says more about sentiment today than the economy’s health. As we have noted recently, most US data paint a pretty mixed picture—and Q2 GDI and GDP add more evidence of that. Even if the economy is in recession, it is more likely to be a shallow one—likely a better-than-projected reality than most seem to think today. For more, see last week’s commentary, “Eight Ways to See America’s Volatile, Mixed Economic Data.”
MarketMinder’s View: Central bank watchers and market analysts are eagerly awaiting what policy hints will arise at this year’s big annual central banking symposium in Jackson Hole, Wyoming. We think the hype is vastly overstated, though we understand where it comes from. In recent years, former central bank heads, from Fed chair Ben Bernanke to ECB President Mario Draghi, used Jackson Hole to lay the groundwork for new initiatives, including the expansion of quantitative easing (QE) and changes to the Fed’s inflation targeting methodology. But as a market-moving event? “By the numbers, Jackson Hole is almost never the pivotal moment it’s made out to be. In the past decade, the S&P 500 Index has lost 0.2% on average on the day of the marquee Fed speech (usually the chair’s address). The index was typically up 0.5% after five days; 0.1% after 20 days; and 4.5% by the end of the year, counting from the day of the speech. In other words, the typical moves are less than one standard deviation, and there isn’t a whole lot of dispersion around the mean. The chair’s speech is generally no big deal.” We agree, and we think the logic applies to Fed moves and chatter in general—stocks have no preset relationship with any of it. This is why we are less keen on the article’s second half, which speculates about what current Fed chair Jerome Powell could say tomorrow, positing he won’t rock the boat. Perhaps, though we think this, too, is overrated as a market driver. Powell and his Fed friends can’t even stick to his own pledges to stop giving forward guidance, so the likelihood they stick to any guidance itself seems low. And, again, no pre-set relationship with stocks.
MarketMinder’s View: While July’s headline durable goods orders were flat (as volatile defense aircraft orders dropped -49.8% m/m), “Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rose 0.4% last month. Data for June was revised higher to show these so-called core capital goods orders advancing 0.9% instead of 0.7% as previously reported. Economists polled by Reuters had forecast core capital goods orders would increase 0.3%. The report added to data on retail sales, industrial production and the labor market in underscoring the economy’s resilience. ... Manufacturing, which accounts for 11.9% of the economy, remains supported by still-low inventories of long-lasting manufactured goods like motor vehicles.” Note, as with retail sales, durable goods orders aren’t inflation-adjusted, and this article discusses the difficulty in accounting for elevated prices. “Higher prices are making it harder to get a clean read of the equipment spending data, which is not adjusted for inflation. There is also uncertainty over which price index the government will use to adjust the data for inflation. The producer price index for private capital equipment increased 0.5% in July which would imply that the inflation-adjusted core capital goods orders were negative last month. But shipments are running ahead of inflation, putting equipment spending on a moderate growth path early in the third quarter.” Moreover, in the context of the broader economy, durable goods represent only a small slice of GDP—and less than half of business investment—so although last month’s orders are today’s and tomorrow’s production, they don’t give a full picture. That said, July’s reading beat expectations, which offers some positive news on the data front to go along with the less-rosy picture shared in recent flash PMI surveys. Overall, the latest economic data are mixed, and while they may hint at a slowdown or even mild contraction, they don’t imply a big downturn is inevitable.
MarketMinder’s View: Don’t fight the Fed (i.e., Fed rate hikes are inherently bad for stocks) is a pervasive mantra in investing circles, and this article pushes that myth. “From mid-June to mid-August, the S&P 500 rose about 17 percent, gains that in part reflected a view in markets that the Fed had pivoted away from its all out war on inflation to a more gentle approach.” The supposed implication looking ahead to upcoming Fed pronouncements: “Bank of America analysts forecast that the recent rally in the market will give Mr. Powell room to lean hawkish — financial parlance for monetary policy that is restrictive for the economy — and that could send stocks lower. Conversely, a more moderate tone from Mr. Powell — as he has delivered before at Jackson Hole — could push stock and bond prices higher.” The problem with all this, in our view? Markets don’t revolve around the Fed or its so-called “guidance.” While markets do account for central bankers’ actions, Fed policy’s macroeconomic impact is generally overstated. Monetary policy influences money supply growth, but it takes time to work its way into the economy. Think about how rate hikes are likely to affect lending—the primary way Fed policy translates to economic activity. Even if the Fed inverts the relevant 3-month to 10-year section of the Treasury yield curve, the biggest banks’ deposit rates remain pinned near zero. Their low cost of funding new loans and much higher longer-term lending rates (banks’ prime loan rate stands at 5.5% today, per the St. Louis Fed) means making new loans remains profitable—whatever the Fed does. Indeed, total US loan growth has been accelerating, not slowing, this year (again per the St. Louis Fed). That isn’t generally what you see in or entering a recession—or if monetary policy was “restrictive for the economy.”
MarketMinder’s View: As we have mentioned before, prices are signals that elicit supply and demand responses from those affected. In this case, as Japan’s imported energy costs have soared, the government is discussing opening the door to “extending the operating life of and building a new generation of nuclear power plants,” following Germany’s footsteps to delay its planned nuclear plant closures. This would be a big about-face. “After the Fukushima disaster, state policy and public opinion abruptly shifted towards winding down the island nation’s use of nuclear power, given the significant seismic activity in Japan. Existing power plants were only to be permitted to remain in use for another 60 years.” Japan will decide on its new policy by yearend, but the government’s openness to change is a good reminder of nations’ adaptability to dynamic, fluid conditions. While higher living costs can be painful, they can also spur adjustments, either through output boosts, spending cuts, substitution or a combination thereof. This is why it generally isn’t wise to extrapolate short-term economic developments (whether painful or no) forward indefinitely—particularly when most people (and politicians) are aware of the problem.
MarketMinder’s View: In the initial wake of Russia’s war in Ukraine, many feared sanctions and self-sanctions’ economic impact. Six months later, this article shows one affected goods category in the UK: “The ONS data shows that by June the UK government had already achieved its objective of phasing out Russian oil imports by the end of 2022 and ending imports of liquefied natural gas as soon as possible after that. In the 12 months leading up to the war, the UK imported an average of £499m of fuel from Russia but this figure has dropped to zero, the first time this has happened since modern records began in 1997. The ONS said the UK had been compensating by increasing imports of refined oil from Saudi Arabia, Kuwait, the Netherlands and Belgium.” In our view, this is an example in which a projected scenario that everyone fears happens, and the actual occurrence can help people—and markets—move on. Major energy disruptions in the UK and Europe have occurred and are a headwind for households and businesses. Yet they are coping, and the worst-case scenarios imagined at the war’s onset have yet to manifest. As the UK’s Russian energy imports hit zero in June, UK GDP ticked down -0.1% q/q in Q2, per the ONS. Recession is still possible—and challenges, including big energy price-cap hikes, lie ahead. But against expectations for a deep recession, a shallow one or muddling growth might seem like a relief.
MarketMinder’s View: “The [US Department of Labor, or DOL], however, signaled in its spring 2021 regulatory agenda report that it would once again be rewriting the fiduciary definition. The Employee Benefits Security Administration was expected to issue the notice of rulemaking this past spring. That never happened, and now the industry has done the extensive compliance and training to do business under the DOL rule package that took effect in July.” This is the rule package that requires anyone dealing with retirement accounts (401(k)s, IRAs, etc.) to act as fiduciaries, requiring them to disclose known conflicts of interest and put customers’ interests before their own. This was new for brokers and financial advisors (with an “o”), but is a watered-down version of the standard that applies to all client relationships with Registered Investment Advisers—and the DOL version has holes, in that it permits brokers to gain exemptions and collect commissions, as well as share fees with financial products they sell. Now it seems the industry increasingly expects the rules to be rewritten again, potentially closing these loopholes. Maybe that happens. Maybe it doesn’t. But we remind you: Knowing which standard your financial professional is subject to is important. But it isn’t everything. After all, the world’s most incompetent adviser could put your interests before their own and disclose conflicts of interest. But in the end, they are still the world’s most incompetent adviser, and we doubt you want advice from them. No rule, or knowing which rule your adviser is held to, is a substitute for doing requisite due diligence to understand the firm’s structure, investing philosophy, history and approach to delivering investment counsel in addition to whether they are held to a strict fiduciary standard or no.
MarketMinder’s View: For the first time since July 2002, one dollar is worth more than one euro in foreign exchange markets, and this article spills a ton of pixels on what it means, who wins and who loses. In our view, it commits the error of overrating exchange rates’ impacts to a very large degree. First, on the notion of why the euro tumbled, we think it has less to do with the energy crisis detailed here and more to do with interest rate differentials. Currencies tend to chase higher expected yields, and with the Fed tightening fast while the ECB dawdles, those differentials have grown. As for who wins, yes, American tourists may win, although larger companies like hoteliers and airlines could simply boost prices to offset the weaker euro. Lower import prices in the US are possible, but aren’t likely to have much effect. After all, the dollar has been strengthening dramatically for most of 2022, but inflation has surged. Imports just aren’t a big source of price pressures. That is doubly true in the euro’s case, considering eurozone imports constituted about 14% of total US imports last year. Furthermore, as for the idea that US multinationals lose, as “American companies that do a lot of business in Europe will see the revenue from those businesses shrink when and if they bring those earnings back to the U.S. If euro earnings remain in Europe to cover costs there, the exchange rate becomes less of an issue,” that last sentence is important, as it is generally a key practice of multinationals. But even beyond this, multinationals tend to source goods and labor globally and they often hedge to manage currency fluctuations. Finally, analysts know currency swings aren’t core to a business, so many of them either look past such swings or rely more on constant-currency adjusted earnings that eliminate these moves’ impacts. So the notion that the dollar rising versus the euro is bad for revenue is just too simplistic to matter much.
MarketMinder’s View: This is news you can use, as text message scams boom: “Federal law now requires carriers to combat robocalls with anti-spam technology. Such calls were down over the past year to 1.1 billion from 2.1 billion, according to U.S. Public Interest Research Group, a nonprofit consumer watchdog. An FCC spokesman said the commission is discussing similar action on robotexts, but it hasn’t gone into effect. Meanwhile, robotexts have swelled: The watchdog report shows text scams have increased 10-fold over the same period, to about 12 billion monthly.” So, some general pointers: First, like scam emails, if a text urges you to take an unexpected action (“You’ve won, click here to collect”), treat it as if it were a scam. Second, don’t click links in texts from unfamiliar sources. This may be phishing, just like links in emails. Third, don’t text back. Scammers will see this as you confirming the number is valid and that you are responsive. What can you do to limit your exposure? As this notes, you can use your phone’s filters to block unknown senders. If a text purports to be from a business you frequent, log in to your account at the business or call customer service to confirm legitimacy. Just be sure you navigate to the business’s site to do so—again, don’t click any link texted to you. Last, there are apps you can download to help block scam texts and calls. This article offers a few suggestions in that regard.
MarketMinder’s View: “Euro-area consumer confidence unexpectedly improved, though it remained below anything seen during the pandemic as the rising cost of living hurts households and energy shortages threaten to curb economic output. A monthly gauge from the European Commission rose to -24.9 in August from -27 in July, according to data released Tuesday. Economists surveyed by Bloomberg had predicted a slight decline to -28.” Confidence gauges tend to be concurrent indicators heavily influenced by recent market movement and headlines, so it isn’t super-surprising that eurozone confidence inched up alongside a broad market rally over the past couple of months. This article goes on to warn of weak economic conditions and the potential for energy issues to compound further, which we don’t dismiss. However, when you consider the depths sentiment has declined to—alongside eurozone markets’ drops earlier this year—we think it seems fairly clear stock prices reflect those conditions to a great extent already. Fundamental conditions don’t need to materially improve for stocks to rally; it is all a matter of reality proving less dire than what stocks weighed previously.
MarketMinder’s View: As always, we look past the sociological aspects of news like this and encourage readers to do the same when considering the economic and market impact. That is actually why we are highlighting this article, as it gives a clear accounting of how the latest supply chain interruption is likely to affect the UK economy and international trade overall—helpful context for analyzing data when they eventually come out. The Port of Felixstowe processes a little less than half of the UK’s shipping containers, typically handling primarily non-perishable items shipped from Asia. Therefore, there is ample concern that the ongoing eight-day work stoppage will have a severe impact on the global supply chain, not to mention supply of clothing, electronics, furniture and other goods in the UK. One outlet estimates it could affect $800 million worth of trade. But there are some mitigating factors: “Industry sources said shipments had been timed to arrive to avoid the strikes, with orders rushed to beat the start and others delayed to arrive afterwards. Trade is also expected to be diverted to smaller UK ports and EU ports, including Rotterdam in the Netherlands and Wilhelmshaven in Germany.” That should help reduce the risk of shortages, and more broadly, global markets are pretty used to supply chain disruptions by now. So beyond short-term hiccups in some monthly data, the impact is likely pretty muted for stocks.
MarketMinder’s View: Much about this year’s shallow bear market is unusual, including its (in our view) largely sentiment-driven nature. But in some ways it is behaving like a typical bear market, and its impact on the market for Initial Public Offerings (IPOs) is one of those ways—a telling sign of how sentiment has evolved this year. Last year fetched a bumper crop, but now the market is largely frozen. “So far this year, traditional IPOs have raised only $5.1 billion all told, Dealogic data show. Typically at this point in the year, traditional IPOs have raised around $33 billion, according to Dealogic data that goes back to 1995. Last year at this point, these offerings raised more than $100 billion. The last time levels were this low was 2009, when the U.S. was recovering from the depths of the financial crisis and the IPO market reopened near the end of the year.” Few expect it to reopen quickly this time, given sentiment toward Tech companies is pretty abysmal still, fanning fears that late-stage startups will have to burn through cash to keep going, which may cull the herd a bit. Several have already implemented layoffs and other cost-cutting measures. Now, we disagree with the sentiment that it is necessary for all these companies to go public in order for retail investors to reap continued growth in the stock market. Much of today’s mature startups have already enjoyed that fast-growth phase, leaving early investors the primary beneficiaries (a legacy of Sarbanes-Oxley and a topic for another day). But this was a pocket of excess that is now getting wrung out a bit, which is a typical byproduct of a market cycle and may, counterintuitively, be yet one more indication that a global bull market recovery is nearby, if not already underway.