MarketMinder

Headlines

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.


Fed Unity Cracks as Inflation Rises and Officials Debate Future

MarketMinder’s View: If you were ever in doubt predicting Fed actions is futile, give this a read: “The central bank’s 18 policy officials roundly say that the economy’s path is extremely hard to predict as it reopens from a once-in-a-century pandemic. But how they think about inflation after a string of strong recent price reports — and how they feel the Fed should react — varies.” The article then shows the diversity in opinion among Fed officials on several topics, including future inflation and rate hikes, which illustrates a broader point: It is near impossible, in our view, to produce a surefire model for how any one Fed person makes decisions, much less for its entire rotating cast of voting members. Officials’ thoughts on any subject today can change without warning based on new data or an updated opinion. However, for investors, an inability to predict future Fed decisions isn’t a negative: There isn’t any evidence markets have preset reactions to Fed moves (or lack thereof). The Fed supposedly tightening or easing monetary policy isn’t automatically bearish or bullish for stocks. It is one factor markets consider, but monetary policy alone isn’t the end-all, be-all many think. How the economy and earnings fare against prevailing expectations over the next 3 – 30 months may have a weeee bit more influence on stocks most times, in our view.

Treasury Yields Signal Investors Waning Economic Exuberance

MarketMinder’s View: Although we think this article overrates monetary and fiscal policies’ economic influence, it does a decent job highlighting how the bond market isn’t exactly conforming to popular narratives of a budding years-long economic boom and attendant inflationary fears. “The yield on the benchmark 10-year U.S. Treasury note settled Tuesday at 1.479%, up from 0.913% at the end of last year but down from 1.749% at the end of March. Treasury yields play an important function in the economy, helping set borrowing costs on everything from mortgages to corporate bonds. They are also a closely watched economic barometer, with longer-term yields in particular tending to rise when the growth outlook improves and decline when it falters.” The article quotes some economists who think yields’ recent downdraft is temporary, which is fair enough—we wouldn’t read too much into short-term moves either way. We would note, however, that 10-year Treasury yields are currently around where they were pre-pandemic—some evidence, in our view, that markets see a return to pre-pandemic growth trends and inflation rates. In our view, investors are better off listening to the market than any one pundit or group of experts. Bond yields suggest those anticipating a lasting economic boom or runaway inflation may be disappointed (or relieved). For more on what the bond market sees, please see last week’s commentary, “The Ebb in Inflation Fears.”

Seven Reasons to Be Extremely Optimistic About the Economy Right Now

MarketMinder’s View: First, please note this commentary has some partisan bias, which we urge readers to put aside. Markets don’t prefer one political party over another—important for investors to keep in mind regardless of your political preference. That said, we think this is an ok assessment of economic realities that stocks priced in long ago. The seven titular reasons for optimism: vaccination progress, the likely transitory nature of inflationary pressures, the rebound in consumer spending, the large amount of job openings, rising wages for hospitality workers, the recovery in the hospitality industry and the improvement in business productivity. While we don’t have major issues with these particular factors, they are also well-known to stocks. From an investing perspective, though, this article’s broadly upbeat tone is worth noting, in our view. As Sir John Templeton said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” While many think the bull market is young—just a year and a few months old—this sentiment snapshot suggests otherwise: It is mature. Current optimism is rational, in our view, which indicates to us the bull market isn’t out of gas. There are pockets of euphoria, but they aren’t universal, and we don’t see any overlooked negatives right now with the power to wallop the economy in the near future. Still, rising optimism implies stocks are further up the proverbial wall of worry than many may realize, which investors shouldn’t overlook.

Singapore, UK Sign Financial Services Deal

MarketMinder’s View: The UK and Singapore—both global financial hubs—struck a new financial accord today. “The Monetary Authority of Singapore (MAS) said the agreement, which was signed by the UK’s finance minister Rishi Sunak and MAS Chairmain Tharman Shanmugaratnam, is based on ‘commitment by the UK and Singapore to build a more comprehensive and enhanced relationship in financial services.’” From an investment perspective, don’t overrate it; memorandums of understanding for select industries aren’t broad economic game-changers. But we do think this is another sign the UK is exceeding dour expectations post-Brexit. A slight tailwind for markets perhaps, but a tailwind all the same after many predicted only headwinds. For more on Britain’s global outreach, please see our 6/7/2021 commentary, “The UK Is Lining Up Trade Deals.”

Moderate Leader Kristersson Gets First Bite at Forming New Swedish Government

MarketMinder’s View: First, a reminder: MarketMinder favors no party nor any politician, assessing political developments solely for their potential impact on markets. After Swedish Prime Minister Stefan Löfven resigned yesterday following his defeat in a no-confidence vote, the speaker of Sweden’s Parliament tapped Moderate Party leader Ulf Kristersson to try forming a new government. If successful, he would replace Löfven, in power since 2014, and assume the prime minister post for a year, ahead of September 2022’s scheduled general election. That said, it is far from clear Kristersson will succeed in forming a government—and even less likely his government would be able to enact big legislation if he takes office. His support is a coalition of three parties totaling 174 seats in Parliament, which is a 349-seat body. Hence, his coalition is short of a majority and would need at least a couple of people whose parties oppose him to either vote with the coalition or abstain. Even if they do, though, a minority coalition government is a recipe for inactivity at an extreme level. Gridlock rules the day in Sweden no matter which personality and coalition nominally leads the country, as it does in much of the developed world today. That is just ducky for stocks, as gridlock prevents sweeping change, giving businesses more visibility to plan for the future. This isn’t reason enough to load up on Swedish stocks, which are heavily tilted toward value categories. But it is a positive worth noting.

Stimulus ‘Pandexit’ Is Next Challenge as Recovery Quickens

MarketMinder’s View: This article is the latest installment in a post-recession tradition: hand-wringing over the withdrawal of “stimulus,” which pundits presume is needed to “support” growth. This piece covers the Bank for International Settlements’ recent argument that central banks and governments’ curtailing their economic rescue plans presents a huge challenge for growth ahead, what it has dubbed, a “pandexit.” (Folks, can we please stop slapping “exit” onto everything following Greece’s near-departure from the eurozone?) Anyway, fears over the withdrawal of stimulus are even more misplaced now than in a recovery from a typical recession. Simply, central banks’ hugely bizarre monetary efforts and governments’ temporary bailout plans played little role in the economic recovery we have seen since last year’s contraction. The issue then wasn’t a lack of demand. It was the simple fact that governments shut the economy down. Reopening was the only stimulus needed, as data proved once it came. Much of the developed world is now near or beyond pre-pandemic output levels, too. So the idea government support is needed for economies strains credulity, frankly.

Banks’ Next Act Gets Tougher

MarketMinder’s View: Banks sailed through the Fed’s annual stress tests last week with more than adequate capital, greenlighting them to boost dividends and share repurchase plans. Most of the big US banks unveiled those yesterday, with lots of investors cheering the outcomes. But before you extrapolate bank stock outperformance forward, consider: The forward-looking prospects for them aren’t that great. This piece is a sensible look at why: “For one, earnings growth isn’t for now expected to be the tailwind it has been recently. It has been driven in part by a wave of Wall Street activity that could crest, while rates and loans are only ticking higher slowly. Analysts’ estimates of earnings per share for S&P 500 banks are currently lower for 2022 than 2021, according to FactSet.” This largely echoes our take, as detailed in April 16’s commentary, “Don’t Buy Big Banks’ Q1 Earnings Bounce.”

2022’s Midterm Elections Already Are Pressuring Democrats, as Wall Street ‘Might Be Praying for Republican Gains’

MarketMinder’s View: Here again, a reminder: MarketMinder favors no party nor any politician, assessing political developments solely for their potential impact on markets. This is a good look at how next year’s midterm elections are already influencing politics in Washington, detailing both the influence on legislative ideas today and the historical tendency of the president’s party to lose seats, sometimes many, in midterm elections. “Time is growing short, [Brookings Senior Fellow Sarah] Binder said, because party leaders often avoid making their members vote on tough issues in the same calendar year as an election, since that can hurt incumbents in tight races. ‘Party leaders often think primarily about what they can get done in the first year of a Congress, as opposed to counting on the second year,’ she said.” Read it for those reasons and you will find a valuable discussion of how midterms entrench gridlock—even before the actual vote, in some cases. However, tune out the stuff about which sectors favor which party, as this is very overblown. Politics are only one driver for markets, and assuming sector XYZ will do well solely because a political party ostensibly backs or opposes it overlooks cyclical and structural economic factors, as well as sentiment. Even politically it makes the mistake of overlooking the margins of control, which is a huge factor in Congress today. But these quibbles constitute a minor part of an overall pretty good piece.

The Stock Market Hasn't Been This Placid in Years

MarketMinder’s View: In addition to repeating the very, very tired argument that stocks’ rally since March 2020 is inflated by Fed policy and fiscal stimulus, this piece reads way too much into market volatility—both the relative lack thereof in the broad market, as well as the recent divergence between growth and value stocks. We guess we award half a point for being one of the first pundits to acknowledge that growth has been beating value lately, but everything else here falls flat. Yes, P/Es are high, but that is normal in a maturing bull market. High-P/E markets can and often do keep rising (just like low-P/E market can and often do keep falling). Volatility doesn’t predict anything—not future returns, nor future volatility. The relative calm since last autumn is an interesting observation, nothing more. It doesn’t mean the market is vulnerable to a rate hike or anything else. As for the divergence between small and big and value and growth, that is actually a rather common feature of maturing bull markets. The largest growth stocks usually lead then—and can keep doing so for a while. So, nothing here is a timing tool.

The Young Fall for Scams More Than Seniors Do. Time for a Warning.

MarketMinder’s View: This is a good rundown of the many scams that target younger folks and some steps you can take to increase your awareness and lower your vulnerability, and two in particular caught our eye for their potential relevance to most age brackets. The first is the army of scammers impersonating a certain e-commerce behemoth. Here are the tells: “Real Amazon sites have a dot before amazon.com in the URL. If you get a message saying you need to update your payment method, always go directly to the Amazon site on your own to see if it’s true—not through a link in the message. The company doesn’t send links that have strings of jumbled numbers in them.” You can apply that same filter to messages impersonating courier services or any other big online outlets. The other is the fake employment scam, where people post phony jobs—and hire people for these phony jobs—to get their birthdays and social security numbers. Consider this a friendly reminder not to send that information out willy nilly.

Record Stock Sales From Money-Losing Firms Ring the Alarm Bells

MarketMinder’s View: This piece argues the rush of secondary offerings from unprofitable companies—and investors’ apparently high appetite for them—is a sign of big froth and a warning sign for stocks generally. We guess we are sort of sympathetic to the broader thesis that when investors are throwing money at slop it is time to think long and hard about whether expectations are detached from reality, but we also think focusing on secondary offerings rather than all supply increases—including IPOs and SPACs—when determining quality is vital. Especially now, when investors backing unprofitable firms are buying largely on a turnaround thesis, which is a lot different than throwing money at a new IPO that is burning through cash while operating deep in the red. Moreover, this piece offers all of two data points to back its thesis: 2000 and 1982. Yes, 2000 was a market peak. But you know what happened in August 1982? A grueling bear market ended and a new bull market began. You need a lot more evidence than this to make a compelling case for any alleged market indicator, in our view.

China's Industrial Profit Growth Slows Amid High Raw Material Prices

MarketMinder’s View: While this coverage of Chinese industrial profits has some interesting nuggets, it overlooks a key reason profit growth slowed in May: The depressed base effect from pandemic-related weakness in early 2020 is petering out. May 2020 was the first month when profits flipped positive year-over-year. Growth was swift over the rest of the year, which will probably make the base effect an artificial headwind rather than a faux tailwind from here. In other words, as in the rest of the world, year-over-year figures are basically trash right now—of little to no use to investors. With that said, we do think this shows a nugget useful for investors worldwide: “Imbalances in profitability became prominent between upstream and downstream firms due to high commodity prices, said Zhu Hong, an official at the statistics bureau. … Profits grew rapidly in the metals, chemicals and petroleum sectors, while smaller and downstream enterprises saw much more pressure, Zhu said.” Yep. While shortages can present headwinds for the companies relying on those resources to produce finished goods, they are often a bonanza for producers. That is a big reason we found the notion of shortages as some big economic negative flawed from the start, in China and everywhere else. As for policymakers selling supplies of certain commodities from state reserves to combat high prices, we would simply note that such monkeying in other countries (e.g., the US and strategic petroleum reserves) has historically not moved the needle. Supply and demand are global, not local, and shortages end when high prices incentivize producers to increase output.

Real Estate Investment Trusts Can Generate Income and Provide Inflation Protection in Retirement

MarketMinder’s View: This is an ok primer on real estate investment trusts (REITs), although we think their ability to protect against inflation is a tad overstated here. As this acknowledges, “However, not all REITs perform the same, regardless of what inflation is doing. … REITs whose properties strike longer-term lease deals with tenants — for example, retailers at shopping malls — typically have annual increases built in that are based on the movement of the consumer price index. However, those rent hikes also tend to have a limit to how big of a jump can occur, which means inflation could outpace those increases.” We would also point out that while some REITs focus on residential real estate, an increasing amount center on commercial real estate, cellular towers and other growthier areas. So, as with any investment, doing your due diligence is critical. With all that said, however, the fundamental thesis underpinning this piece is flawed: the notion that investors need to seek high-yielding securities to beat inflation or that REITs are somehow a fixed income replacement—they are stocks. Additionally, while this article focuses on traded REITs, investors should beware of their shadier siblings, non-traded REITs—illiquid investments that often carry high fees and make promises they can’t keep. In our experience, interest in REITs often picks up when concerns about low bond yields are rampant—a fear we addressed this week in our commentary, “Investors Needn’t Reach for Yield."

Mario Draghi's Warning to Europe Is Right On

MarketMinder’s View: The titular warning is about Europe’s long-term economic growth prospects, which, according to several think tanks and research outfits cited here, pale in comparison to other developed nations. To avoid this fate, this piece argues the EU needs to go above and beyond its current COVID-relief program and increase government investment in certain areas—e.g., digital infrastructure and worker training programs. Failing to do so risks its economic trajectory resembling Italy’s weak recovery from the global financial crisis. Besides putting too much stock into long-term projections—imperfect guesses at an unknowable future—we think a big misperception underpins this argument: that more government spending will boost an economy’s fortunes. While MarketMinder isn’t for or against government spending, our research shows it isn’t necessary to turbocharge a recovery already in progress. For one, the private sector comprises the majority of EU GDP, so household and business spending and investing matter much more to economic growth than governments’ efforts. Moreover, government involvement means public officials are selecting winners and losers—a task market forces are better equipped to do, in our view. We are sympathetic to the notion of genuine fiscal stimulus offsetting the private demand destroyed at the depth of a recession, but that jumpstart seems less vital now that simple reopening is restoring demand and private economic activity. Finally, for investors, (potential) slow economic growth may make headlines, but it needn’t derail stocks—see the 2009 – 2020 global bull market for more.

Consumer Spending Is Primed to Fuel Summer Growth

MarketMinder’s View: US personal consumption expenditures (PCE)—a broad gauge of consumer spending—was flat in May, missing expectations of 0.4% m/m growth. However, as noted here—and we posited last week—this isn’t a sign of weakness. Rather, US consumers shifted their spending from goods to services as the country continued reopening. “Consumers spent 0.7% more on services in May than April, a steady pace, albeit a slowdown from earlier in the spring when stimulus checks first hit bank accounts and business reopenings began. They curtailed spending on long-lasting goods such as cars and furniture by 2.8% last month.” The rest of the article then runs through some widely discussed themes about future spending—e.g., that high savings rates are a sign that “… consumers have more room to spend.” Yet history debunks this conventional wisdom—a reminder for investors, in our view, to question and test the common narratives of the day.

Parts of Sydney Going Into Lockdown as Virus Outbreak Grows

MarketMinder’s View: “The local council areas in Sydney headed for lockdown are Woollahra, Waverley, Randwick and the City of Sydney. People can leave their homes only for reasons such as essential work or education, shopping, and exercise. The lockdown is expected to affect more than 1 million people who live or work in those areas. … Australian states have closed their borders to travelers either from parts of Sydney or from anywhere in New South Wales. New Zealand has stopped quarantine-free travel with the state until at least July 6.” Now, we don’t share the news of renewed COVID restrictions in Australia’s most populous city to be a bummer on a Friday. Rather, we are simply making a broader point: Though COVID-19 will remain with us for the foreseeable future, its ability to shock markets has been vastly diminished—the ASX All Ordinaries, Australia’s answer to the S&P 500, was even slightly up today (per FactSet). In our view, this is an important lesson about how markets work: Even bad news isn’t automatically “bad” for stocks, which have long priced in the pandemic’s lingering impact on the global economy. Note too, that this event probably helps markets deal in advance with a potential autumn/winter COVID wave in the northern hemisphere should that happen later this year. Stocks are pretty good at pricing in well-known things like the changing of the season.

Antitrust Overhaul Passes Its First Tests. Now, the Hard Parts.

MarketMinder’s View: Another bill, another round of gridlock. As always, we are politically agnostic, preferring no politician or political party. We analyze political developments for their potential market impact only, and we have heard a fair amount of pundits argue the antitrust efforts aimed at Tech, which passed the House Judiciary Committee yesterday, present a fundamental negative for the biggest American Tech and Tech-like companies. History suggests otherwise, given legislation like this is usually too slow-moving to present a huge negative shock, giving companies and markets time to adapt. (See the Affordable Care Act with any questions.) This article illuminates another big reason for markets’ resiliency: Gridlock usually waters down or kills big regulatory changes, making the final version (if anything passes) less cumbersome than expected. That phenomenon is already taking shape on the Tech regulation front despite the bipartisan vote to advance it to the full House. Republicans are divided over whether it addresses their core concerns. California Democrats worry it overreaches and will cripple the sector that generates a big chunk of their state’s revenue and employment opportunities. All these concerns likely come to the fore in the full House—not to mention the Senate, where this legislation will be subject to the filibuster. Watch and see how all this shakes out, but markets move on probabilities, not possibilities, and the probability of something major passing that seriously disrupts profitability and commerce seems low.

Investors Face Two-Year Wait for Savings as Second Property Fund Closes

MarketMinder’s View: As always, MarketMinder doesn’t make individual security recommendations, and those discussed here serve to highlight a broader point: Consider this a friendly reminder that however liquid a fund appears, if it invests in illiquid assets, it may be a lot harder to sell than you anticipate. In this case, two UK real estate funds suspended withdrawals in March 2020—at the depths of the pandemic market downturn—in order to avoid selling property at firesale prices to meet an avalanche of redemption requests. Those redemption gates have lingered since, and now the funds are closing—and warning investors it could be another two years before the managers can fully liquidate their real estate holdings and pay out the proceeds. This has always been a risk with funds investing in hard-to-sell assets. The real-world consequences aren’t always this extreme, but they do provide a timely reminder that liquidity should be on your pro/con list when deciding where to invest. If you could need your money in a hurry and the funds can’t provide it, then you could be in trouble.

US Core Capital Goods Orders Dip in May; Shipments Increase Solidly

MarketMinder’s View: Despite the -0.1% m/m dip in core capital goods orders (the closest proxy for business investment in equipment), May’s durable goods report was overall fine. For one, that tiny dip came on the heels of April’s 2.7% m/m rise and stemmed more from shortages than a lack of demand. Two, total durable goods orders rose 2.3% m/m as airline orders jumped 27.4%, a strong sign of a return to normal in the travel world. Three, auto orders staged a partial rebound, potentially a sign the semiconductor shortage is slowly ceasing to hobble the industry. None of this is make-or-break for economic growth, considering it all relates to manufacturing—a tiny sliver of GDP. But it does suggest that segment is defying many of the false fears surrounding it lately.

Merkel’s Would-Be Heir Softens Tone on Future EU Fiscal Policy

MarketMinder’s View: People are reading a lot into an apparent about face from Armin Laschet, leader of Germany’s Christian Democratic Union (CDU)—outgoing Chancellor Angela Merkel’s party—and the party’s candidate for chancellor in September’s federal election. In an interview a week ago, “he called for EU budget rules to be reinstated once the pandemic has subsided. ‘When this crisis is over, when its effects on the global economy are over, German as well as European politics will have to return to the stability policies as defined in the Maastricht Treaty,’ Laschet said on June 17.” Now he is apparently changing his tune: “After Merkel’s last big policy speech in parliament on Thursday, Laschet attacked Austria, Denmark, the Netherlands and Sweden for being too tight-fisted on EU spending. These fiscally conservative member states ‘for a long time had the calculator as a concept and not the European vision,’ he said.” We recommend not reading into this—politicians always do this sort of thing, and trying to glean policy from offhand campaign-trail statements is a fool’s errand. Plus, even if the CDU wins the most seats, it will likely have to govern in coalition with at least one party with differing values and priorities. Finally, the EU budget rules in question—which allegedly limit debt and deficits to 60% and 3% of GDP, respectively—are super squishy, a fact the eurozone sovereign debt crisis laid bare in the last decade. Whether they come back or not, we wouldn’t overrate any effect. So watch what politicians do, not what they say, and don’t latch on to any one statement as positive or negative. Instead, think like markets, which weigh probabilities and are party-blind (just like MarketMinder’s political analysis).