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: We agree with the introductory point here that investors shouldn’t interpret a 20% positive move as a sign the bear market is over—even if it proves correct, it will be clear only after several months’ hindsight. But smaller qualms aside—e.g., a stock’s total return matters more than its dividend alone, in our view—we fundamentally disagree with this argument: “But the evidence and the data – unemployment, business transactions, economic growth – suggest otherwise. They all point to a prolonged period of strife where the situation for individuals, businesses and governments gets worse before it gets better.” Economic data confirm what already happened, while stocks look ahead. Said another way, stocks are the ultimate leading indicator. The bear market began before any official data confirmed COVID-19-driven economic contractions. Likewise, the next bull market will likely begin well before economic data turn positive. We don’t know if the bear market is over yet, but we do know backward-looking economic data won’t produce an all-clear signal, either.
MarketMinder’s View: It is early days indeed, as Germany, Italy and Spain have started to loosen movement restrictions just in the past couple weeks (Europe’s second-biggest economy, France, is planning to start relaxing its lockdown on May 11). But while official economic data won’t be available for a while, some nontraditional measures show some activity is stirring: “In Italy and Spain, electricity consumption has been rising since mid-April in contrast to France, where it is still at very low levels in comparison with historic norms. ... Meanwhile, data on mileage clocked up by German trucks has begun to show a mild uptick after a plunge that is set to leave April’s data as the largest contraction since records began in 2005.” This doesn’t mean a full-fledged European recovery is underway, but just as was the case with China’s economic reopening in March, these countries’ experience in easing COVID-19 restrictions will likely inform and shape market participants’ expectations looking ahead.
MarketMinder’s View: MarketMinder doesn’t make individual security recommendations, and we feature this article solely for its discussion of a theme we wish to highlight: Dividends aren’t a failsafe cash flow provider. The primary reason: Companies can suspend or cancel them during tough times—a lesson it seems some are, sadly, learning now. “Through Monday morning, 81 U.S. companies and public investment funds, like real-estate investment trusts, have suspended or canceled their dividends, the highest number in data going back to 2001, according to S&P Global Market Intelligence. … An additional 135 companies have reduced their payouts to shareholders in 2020, on pace for the worst year since 2009 when there were 316 such cuts.” This article then argues the bear market and low yields on sovereign debt have made dividend-paying stocks more attractive since they are higher-yielding right now. Yet that seems like a bit of a math-driven mirage to us. Falling stock prices have led to higher yields (calculated by dividing dollar dividends per share by stock prices). The same bear market that is inflating yields is also pressuring many companies to suspend, cut or cancel dividends. While we aren’t explicitly pro- or anti-dividend stocks, they don’t provide a free lunch. They are still stocks and subject to equities’ short-term bouts of volatility.
MarketMinder’s View: “… With some countries reporting falling infection numbers, governments are beginning to chart their way out of the shutdowns that have pummelled the global economy.” This article recaps several European governments’ timelines and COVID-19 containment benchmarks for gradually lifting restrictions on movement, gatherings and business activity. Plans vary considerably by country and are subject to change as government officials weigh their perceived costs and benefits based on the latest information. For example, France will start easing lockdown rules on May 11 (dependent on each region’s infection level) while Austria is set to lift all remaining restrictions on people leaving their homes (so long as they practice social distancing) at the end of this week. Announcing plans at least helps markets set very general expectations, alleviating some of the fog that previously weighed on stocks—though it is far too early to declare any country has returned to normalcy. In our view, monitoring how expectations evolve—and how those square with reality—will be key for investors looking ahead. For more, see our 4/20/2020 article, “Contrasting US and European ‘Reopening’ Plans.”
MarketMinder’s View: Note: MarketMinder doesn’t recommend you buy, sell or otherwise transact in the bonds or stocks of the companies mentioned herein. Disclaimer aside, we have mixed feelings about this piece. On the one hand, it nicely describes the recent decline in lower-rated (i.e., high-yield) firms’ borrowing costs. Bond issuance surged in April from March and the spread between high-yield bonds and US Treasurys has narrowed this month—some of which may be due to “the Federal Reserve’s promise to buy investment-grade corporate bonds and even some lower-rated bonds.” But we doubt all of it is, considering high-yield bonds tend to correlate tightly to stocks, which also rebounded in late March, which we think has little if anything to do with the Fed. It is also possible sub-investment grade corporate yields will rise again if COVID-19-related business disruptions seem likely to damage firms’ balance sheets more than currently expected. However, the latter half of the article delves more into the speculative side, listing several models and forecasts that suggest more defaults than anticipated are on the horizon. While possible, those forecasts are also opinions, not set in stone. Those opinions more provide a sense of sentiment than a crystal ball right now. But also, markets typically anticipate events like defaults rather than wait, so it is entirely possible the rise in yields and wider spreads this year to date reflect the risk these forecasts project.
MarketMinder’s View: Here is a concise rundown of proposed rule changes for EU banks. Two in particular caught our eye: “The [leverage] ratio is a measure of capital to a bank’s assets on a non-risk weighted basis. The European Commission will allow banks to exclude reserves held at central banks from the leverage ratio calculation for up to a year. The aim is to free up room on bank balance sheets so they can lend more.” Second, the Commission relaxed a rule requiring banks to set aside cash for potential future loan losses, noting “the temporary inability of business to pay back loans due to the pandemic should not mean that banks have to automatically significantly increase provisions.” Easing banks’ capital requirements would likely free up more funds for lending—fine as far as it goes and a way to keep some firms afloat while containment measures restrict commerce. Markets likely reflect this already, as it was under discussion for weeks. Still, the biggest shot in the arm would be a return to normalcy for businesses—and the timing and likelihood of that are unknowable right now.
MarketMinder’s View: “The Conference Board said its consumer confidence index plunged to 86.9 in April after tumbling to a downwardly revised 118.8 in March.” Conversely, the expectations component improved considerably “as the percentage of consumers expecting business conditions will improve over the next six months jumped to 40.0 percent from 18.7 percent.” Since consumer confidence fluctuates primarily with recent economic and market conditions, the headline gauge’s huge drop isn’t surprising. We see this mostly as a sign of prevailing sentiment rather than a look at what consumers will do ahead. The recent rebound in stocks (plus widespread talk or reopening and short-lived economic damage) likely has some folks more optimistic about the future than last month. That increased optimism is nice and all, but the thing is, this all hinges on business returning to normalcy in the relatively near future—a factor that defies forecasting. Now, folks are still pretty dour in their outlooks, but how this evolves will be worth watching for a clue on sentiment’s evolution. If folks get too optimistic about a rebound, the risk of disappointment rises, in our view.
MarketMinder’s View: This piece presents paying down your mortgage early and adding to your stock portfolio as an either/or, which seems a little reductive, though we do award points for the even-handed explanation of the benefits of both choices. With that said, it ignores the larger questions we think all investors would benefit from considering first: What are your long-term financial goals; how much money will you require in 10, 20 or 30 years to reach them; and what rate of return do you need to get there? Money invested now may serve you better upon retirement than money put toward early mortgage repayment, as compound returns may mean it is worth more and able to do more to cover your living expenses. Continuing to carry low-cost mortgage debt now may give you the flexibility you need to build a better retirement nest egg. It all depends on your needs, personal circumstances and investment time horizon. But the warnings here about getting too cash poor and house rich are a worthwhile point to consider as you weigh your plans.
MarketMinder’s View: This is an interesting exploration of a recent survey tracking investors’ declining preference for stocks and perpetual fondness for real estate. That trend isn’t shocking considering that “for most of the people being surveyed, the only real estate they have any experience with is their own home. The value of their own home doesn’t fluctuate each day because there is no ticker. And they have emotional bonds to their homes – it’s where their children have grown up and where their fondest memories are made. You can’t throw an eighth birthday party for your daughter in an IRA account.” Plus, as the article goes on to note, your primary residence isn’t purely an investment. It carries ongoing costs that eat into the long-term price appreciation. Meanwhile, stocks’ long-term returns have exceeded real estate’s at a national level. “This is not to say that owning a home is either a good or a poor investment, especially when we drag back in all of the emotional aspects of having a place of your own to live in. It’s an individual choice, regardless of whether or not the price appreciation can compare to a portfolio of stocks.” Hence why surveys like this, while interesting, aren’t a great barometer of investor sentiment in general.
MarketMinder’s View: This is a long, wide-ranging discussion of an issue we highlighted back when the Fed announced its new lending facilities for businesses and states, expanding its “lender of last resort” remit from banks to the broader economy. We surmised from the start that this deserved some scrutiny, as it forced the Fed’s technocrats to make decisions that are ordinarily the purview of elected officials, likely teeing up post-hoc debates about Fed overreach and politicization. Now, it appears that debate is starting. “Among risks the Fed is taking: that some programs won’t work, that officials won’t be able to unwind them, that politicians will grow accustomed to directing the central bank to fix problems its tools aren’t designed to solve, and that public discontent about the central bank’s choices will erode its authority over time. This last risk is prominent because the Fed’s tools are better suited to helping large firms that borrow in capital markets than small ones that don’t.” How the backlash plays out and what politicians do about it could shape future crisis responses, not to mention result in changes to the Fed’s mandate. In our view, it is way too premature to draw conclusions on what the Fed should and shouldn’t have done, but the ongoing debate will be worth watching even if there is nothing actionable for investors in the near term.
MarketMinder’s View: We aren’t about to dive into this or any other economic forecast, as all have to factor in several unknowable variables, such as when shelter-in-place orders end, how quickly businesses reopen, and how long it takes people to revert to normal consumption patterns. All of that is unknown and much of it amounts to non-market functions we don’t think you can forecast. Instead, we will note that markets digest these forecasts as they are released, and they help set popular expectations. What will drive stocks over the next year or two is how reality compares to those expectations. A forecast isn’t reason to be bearish or bullish.
MarketMinder’s View: While we aren’t declaring the bear market over, this is a tour de force in unfounded speculation about why stocks are up since March 23. Ignoring that stocks are a leading indicator and bear markets usually end before any hint of improvement is apparent in broad data, it surmises stocks are up because investors anticipate direct stock market support from the Fed and politicians. Far be it from us to speculate about what any cabal of policymakers will do, but it seems unlikely central bankers will start pumping up the stock market after all of the backlash the government received for writing its first small business assistance package in a manner that let publicly traded companies tap it. Yes, as the article notes, the Fed backstopped corporate debt markets, but that had more to do with stabilizing interest rates and preventing corporate downgrades from triggering a negative chain reaction, not propping prices for investors. Plus, Japan’s central bank has been buying Japanese stock ETFs for years, yet Japanese stocks didn’t outperform in the last bull market, so extra juice from central bank buying seems like a weird thing for investors to lean on.
MarketMinder’s View: This article’s thesis: “There is a growing divide between how markets are performing—American and British share prices are 25pc and 15pc higher than in March—and the economic data which points to a recession of historic proportions.” It then cites high unemployment and forecasts for falling earnings and GDP as evidence markets are underestimating the scope of COVID-19 economic fallout. While it is quite possible restrictions on business and travel remain for longer than expected, the recovery is much more tepid and markets sink to new lows, we don’t think stocks’ recent rise proves they are divorced from reality. Stocks typically move ahead of economic data. They did at this bear’s start, plummeting well before data hinted at economic contraction, and we believe the next bull will eventually begin as markets reflect a not-yet-visible economic recovery. In our view, whenever the bear market’s ultimate low arrives (if it hasn’t already), investors should expect to see plentiful coverage arguing still-weak data invalidate the rally—a normal sentiment feature early in a bull. Lastly, regarding the closing speculation about what may have buoyed stocks of late, we think markets’ looking ahead to the fruits of a gradual economic reopening is more plausible than alleged fiscal and monetary support, as the latter is designed to tide businesses and citizens over to a recovery, not kickstart growth. In other words, all those central bank measures and fiscal packages are a giant bailout, not stimulus.
MarketMinder’s View: This is a very good look at the questionable wisdom of widespread credit downgrades on both the sovereign and corporate fronts. Not because some companies’ and governments’ finances aren’t stressed, but rather because those stresses are widely known at this juncture, and in many cases they aren’t the issuer’s fault. Moreover, downgrading a bunch of companies and governments from investment-grade to junk territory forces some institutional investors with firm investment-grade mandates to sell those bonds whether or not they would otherwise want to, potentially with unnecessary unintended consequences. This is why central banks have made such an effort to backstop bond markets: “Both the U.S. Federal Reserve and the European Central Bank appreciate the dilemma and are making efforts to either purchase higher-quality junk-rated debt, or to accept it as collateral, but we need to change the way we rigorously evaluate credit risk. What’s the point of creating ‘fallen angels’ — the name given to bonds that have dropped below investment grade since the pandemic struck — if the world’s biggest bond buyers then have to implement special measures to ignore the downgrades?” Especially because, as the article concludes, markets are very good at pricing new bond issues according to investors’ broad perception of credit risk, which credit ratings mostly confirm at a hefty lag. This is how a streaming video giant with a junk rating managed to get its lowest yield on record with demand 10 times the supply on offer at an auction this week, while an investment-grade cruise company had to pay 12%.
MarketMinder’s View: UK retail sales fell -5.1% m/m in March, with deeper declines in April likely. “Panic-buying of fridge freezers and food ahead of the lockdown and household goods bought online prevented a bigger slump, leading to predictions of an even bigger fall in April when the full impact of the government’s measures to combat Covid-19 will be felt.” The numbers are ugly, but they were also widely expected. So are more dismal reports for Q2. While probable further job losses and business closures are tragic, what matters most now for markets is whether the associated economic contraction lasts longer or shorter than most people expect. This isn’t knowable now, but we encourage investors to separate terrible (but backward-looking) data from their views on where stocks are headed.
MarketMinder’s View: This article offers lots of useful information on how to raise cash from various savings and investment vehicles in a tax-efficient manner, including Congress’s recent rule-tweaking. For example: “Those who qualify can take out a total of $100,000 from traditional IRAs, Roth IRAs, traditional and Roth 401(k)s and similar plans, and Congress has waived the 10% penalty for early withdrawals by people younger than 59½. While such withdrawals are usually taxable, savers have up to three years to put the payout back into the account. If they don’t plan to put the money back, they can spread the tax due over those three years.” In our view, investors holding stocks should also weigh the potential opportunity cost of selling them after markets have fallen, but if you must do so, “Investors who have both winners and losers in taxable accounts—as opposed to retirement accounts—can sell some of both and use the losses to offset gains on the winners and minimize or avoid capital-gains tax.” As ever, talk to a tax professional to see how any of these options fit your personal situation.
MarketMinder’s View: IHS Markit’s April flash purchasing managers’ indexes (PMIs) fell to record lows for major developed economies, exceeding already dour estimates. The numbers: 27.4, 13.5 and 12.9 for the US, eurozone and UK, respectively (readings below 50 indicate contraction). As noted here, “The drop in services-sector activity is unprecedented in the history of the surveys, even in the wake of the global financial crisis. Manufacturing activity is also contracting though not quite as severely.” April flash PMIs reflect a period in which governments’ virus-containment policies were in full effect—providing a snapshot of the extent of the economic damage in the Western developed world. But as bad as these numbers were, they weren’t necessarily a big surprise, either. They also help inform market participants’ expectations for upcoming data, and at this juncture, Q2 output will likely be broadly weak. For investors, though, the key is looking ahead rather than at the recent past. Upcoming developments regarding the institutional response to COVID-19 (and how those square with evolving expectations) will likely have significant influence on where stocks go next—whereas breaking economic news might hit sentiment ultra short term but is fundamentally backward-looking. For more, see our 4/15/2020 commentary, “Non-Traditional Data Show What Stocks Reacted To.”
MarketMinder’s View: The titular recovery refers to how economic output would appear on a line chart. In contrast to a V-shaped recovery—a sharp downturn followed by a sharp rebound—a “W-shaped recovery means the economy starts looking better and then there’s a second downturn later this year or next. It could be triggered by reopening the economy too quickly and seeing a second spike in deaths from covid-19.” The rest of the article details what this scenario could entail: a rash of bankruptcies after government lifelines run out, a double-digit unemployment rate and wrecked consumer confidence that would forestall spending. We don’t dismiss this possibility since the recovery hinges on when economies will open back up, restoring a sense of normalcy for businesses and consumers—unknowable now given the fluidity surrounding policymakers’ timelines to ease outbreak-driven lockdowns, not to mention the wealth of unknowns regarding the virus itself. However, the growing number of analyses discussing a long and painful recovery influences sentiment—important for investors to monitor. The more headlines discuss a W-shaped recovery, the less likely markets will be surprised by that scenario should it occur. If expectations turn increasingly pessimistic, they may end up overshooting a reality that isn’t as bad as feared, although deepening fears could also weigh on stocks in the near term. Importantly for investors, markets move most on probabilities, not possibilities, and in our view, it is unwise to make knee-jerk portfolio reactions to scary possibilities. For more, see our 4/15/2020 commentary, “A Look at the Range of Forecasts Markets Are Anticipating.”
MarketMinder’s View: With oil prices dominating headlines this week, this article provides a helpful primer on the economics impacting oil supply. Simply, reducing output isn’t as simple as turning off a switch. Producers invest a lot of capital upfront to develop the necessary infrastructure, and they have fixed costs. Even if the producer is taking a loss overall, an existing well brings in some money—better than no money. Another factor: “It's their [producers’] legal contracts: They may have signed leases that require them to drill the land in question. … So even at very low oil prices — prices where oil producers clearly are unable to make a profit — they might opt to keep wells running now, to ensure they can operate those wells in the future.” These are some of the reasons—particularly applicable for the US, which became the world’s biggest oil-producing nation in 2018—why supply isn’t likely to dry up quickly.
MarketMinder’s View: Bad actors often use turbulent times to take advantage of people’s already frazzled nerves, and a pandemic is sadly no exception. This article shares some of the wide range of tactics fraudsters will use, from sowing confusion (e.g., claiming your Social Security benefits will be suspended due to COVID-19) to preying on generosity (e.g., false charities). In our view, the best way to combat these malicious efforts: a healthy skepticism and rejection of any requests that require immediate or urgent action. Legitimate offers or inquiries don’t rely on coercion, in our view. For more, see our 4/17/2020 commentary, “Tips on Protecting Yourself From Coronavirus Ne’er-Do-Wells.”