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: Pending the House’s approval and President Trump’s signature, this will be the fourth government aid package in about as many weeks. Most of the funding would bolster the CARES Act’s small business loan facility, which ran out of funds and triggered controversy for seemingly not getting money to the originally intended recipients. The bill would also provide additional resources for hospitals and virus testing. This funding may provide a lifeline for individuals and businesses hit by the virus-driven economic shutdown, but it isn’t a cure-all. The biggest economic relief would be a return to normalcy, and when exactly that will happen—and how it will compare to investors’ expectations—remains to be seen.
MarketMinder’s View: With all things political, MarketMinder favors no party or politician, assessing election developments strictly for their potential market ramifications. This article highlights the pandemic’s possible impact on the 2020 presidential race, particularly in key swing states. “Among six states seen as 2020 battlegrounds—Michigan, Pennsylvania, Wisconsin, Florida, Arizona and North Carolina—there have been some warning signs, as well as evidence of support for Mr. Trump. The political equation could change further in those states as some governors move to lift coronavirus restrictions soon, as Mr. Trump has urged, and others choose to wait.” Though COVID-19 will likely be a prominent talking point ahead of November’s election, we think it is a tad early to make definitive conclusions. Yes, we have some evidence a government’s virus containment response can sway voters—see South Korea’s election last week—but more than half a year remains before US voters make their decision. Political fortunes can change quickly, so while developments are worth monitoring, acting on anything now is premature, in our view.
MarketMinder’s View: Even before COVID-19 dominated headlines, questions about the future of global trade were rumbling—especially in the wake of the US-China trade tiff. Though some firms are reshoring manufacturing for medical or security purposes, evidence suggests trade is trending toward diversifying, not retreating: “Manufacturing shifting from one country to another as countries grow richer and pivot to higher-value manufacturing isn’t new. Just as China took a greater share of manufacturing once done in South Korea and Japan, Bangladesh and Vietnam are well placed to take a portion of manufacturing that, for now, is done in China.” Time will tell, but given the substantial investment into today’s global supply chains and the high costs associated with returning low-value manufacturing to America, a sudden reversal doesn’t seem likely to us despite politicians’ harsh rhetoric. Just another area where “this time is different” chatter seems too hasty.
MarketMinder’s View: Germany has allowed stores to begin reopening this week. The early verdict: Consumers aren’t exactly rushing back to shop. Some of this stems from confusion over what exactly is open—currently, “stores of up to 800 square metres (8,600 square feet) to open again from Monday, along with car and bicycle dealers and bookstores, provided they adhere to strict social distancing and hygiene rules.” The readjustment period was also unlikely to ever be rapid given many of the official policies’ conditions to end lockdowns are vague and unclear. It is very much a wait-and-see process, with policymakers and experts considering myriad data in their decision-making. As more countries, states and regions begin reopening, we will learn more about how quickly economies can start operating as normal. However that plays out, markets are considering the many paths the global economy can take from here, and as likely outcomes become more apparent, stocks will likely reflect them sooner than most anyone—and well before you see it in official data.
MarketMinder’s View: In our experience, when governments pass huge economic relief packages like the CARES Act, concerns about a rising mountain of government debt—and its potential consequences—arise, too. As this piece notes: “The U.S. budget deﬁcit may quadruple this year to almost $4 trillion. Projections from the Committee for a Responsible Federal Budget (CRFB) say that by 2023 U.S. debt held by the public will surpass records set in the post-World War II years. And these projections only include spending enacted so far—in a three-month-old crisis that has seen emergency Congressional appropriations top $2.3 trillion. Additional spending is almost certain as the coronavirus pandemic destroys millions of jobs and thousands of businesses while slashing tax revenues for local and state governments. … In a worst-case scenario, the CRFB predicts debt could reach 117% of GDP by 2025, easily exceeding the record of 106% set in 1946.” While these big numbers sound worrisome, size alone doesn’t make debt onerous. Rather, a country’s ability to service its debt matters most—and the debt-to-GDP ratio tells you nothing on that front. Instead, we think looking at interest payments relative to tax revenue better illustrates debt’s affordability. US interest payments today are comparable to the 1980s and 1990s, when interest payments were in the 15% - 18% range. No debt crisis ensued then, and considering interest rates today are near record lows, the cost to service debt isn’t likely to be onerous in the near future, especially with the interest burden on existing debt getting cheaper as the Fed refinances at lower rates. Relatedly, while we don’t have a particular issue with the CRFB or its forecast methodology, we think trying to estimate what the debt picture will look like several years down the road is a futile exercise. Too much can change—see COVID-19. Markets tend to look no further than 30 months into the future, so acting on any of these educated long-term guesstimates isn’t necessary for investors, in our view.
MarketMinder’s View: This argues deflation will be another consequence of the economic fallout of society’s efforts to contain COVID-19, then warns that could create a vicious circle of falling prices and shrinking demand as consumers perpetually await a better deal. The two historical examples it cites are the US in the 1930s and Japan during its lost decade(s). The problem with all of this is that deflation isn’t a psychological phenomenon, and it doesn’t cause economic problems. Rather, it is a monetary phenomenon. When deep deflation accompanied recessions, they generally had the same cause: shrinking money supply. In the 1930s, the Fed hoovered money out of the system when it should have done the opposite. That knocked output and investment and reduced the amount of money chasing goods and services. In Japan, misguided central bank policy discouraged lending, which weighed on broad money supply growth. Deflation and, in part, recession, resulted from these actions. And now? While we quibble with some specific policies, central banks are flooding the system with liquidity, not yanking it out. We just don’t think the scenario depicted herein is likely at all based on what we know now.
MarketMinder’s View: First, MarketMinder does not comment on or make recommendations on individual securities, investment funds and/or services. Rather, we highlight this piece because it shares some useful logistical points and options to consider with your 401(k) in the event you are leaving your employer. “Generally, a 401(k) plan participant leaving a job may choose to leave the money where it is; roll it over into a new employer’s 401(k) plan; roll it into an individual retirement account; or cash it out, which can be a costly move.” Circumstances will vary depending on the individual, but age may factor heavily in that decision. For example, there is the “55 rule”—if you leave your job in or the year after you turn 55, you face no 10% “early withdrawal” 401(k) penalty. In contrast, for IRA withdrawals, the account holder will generally face an early-withdrawal penalty unless over the age 59 ½, so depending on your situation, it could make sense for a subset of workers to leave their money in a 401(k)—particularly if you may need some of the funds. Read on for more some more high-level information.
MarketMinder’s View: After logging its sharpest fall on record, the ZEW Indicator of Economic Sentiment—a measure of German economic sentiment—advanced 77.7 points from -49.5 in March to 28.2 in April, its highest monthly reading in almost five years. While that big rebound grabs the headlines, we found the survey respondents’ reactions more interesting. Namely, most of the experts surveyed don’t expect to see a rebound until Q3 2020, and they don’t expect German output to reach pre-virus levels until 2022. Granted, this is a sentiment survey, and people’s feelings can change quickly. At this point, though, many seem to be anticipating a slow recovery after a sharp pullback. Whether reality beats those expectations depends mostly on how quickly and cleanly coronavirus-driven shutdowns ease—unknowable right now—but the experts’ opinions and projections factor into investors’ expectations. How reality ultimately squares with those expectations moves stock prices most, in our view.
MarketMinder’s View: As always, when it comes to articles with a heaping dose of political discussion, we ask readers to set the sociological stuff aside, turn off their political preferences, and focus on what matters to markets. The $349 billion small business assistance portion of the CARES Act has fallen under intense scrutiny since day one. First it was small businesses’ widely documented troubles accessing funding as banks were overloaded with requests and bogged down with anti-money laundering compliance rules for each. Then last Thursday, the Treasury announced the program was fully subscribed, prompting politicians to discuss extending it. Now, it appears several national restaurant chains that one wouldn’t normally consider “small business” have received a large portion of the loans, with mom-and-pop businesses shut out, which many argue violates the program’s original intent. Given the intense attention here, we think it is worth pointing out that when Congress passes bailouts like this in a hurry, it isn’t unusual to see unintended consequences and evidence that the program’s aren’t working as intended. We saw that in the late-2008 and early-2009 responses to the recession that accompanied the global financial crisis. After Congress passed TARP, there was huge outcry about lawmakers bailing out Wall Street and ignoring Main Street. The automaker bailout in 2009 inspired another round of scrutiny. None of it prevented a recovery. This time around, we don’t disagree that genuine small businesses are hurting and could likely use assistance. We don’t think a recovery hinges on this, however, so while Congress patching this program would be a benefit for those most directly impacted, it likely isn’t a make-or-break issue for markets.
MarketMinder’s View: First off, breathe. This is one of many pieces claiming US oil prices plunged into negative territory today. That is not quite what happened. West Texas Intermediate crude (the US benchmark) closed at $18.12 per barrel, according to FactSet. What actually flipped negative was the value of a futures contract that expires tomorrow. A futures contract is an agreement to buy oil in the future at a specified price. Said specified price is converging with—and in some cases falling below—the price to buy a barrel of oil now (the “spot” price) on the open market, making those contracts largely worthless. Futures prices often wobble (though not to this extent) as the contracts expire, which is why most observers use spot prices or futures prices one month ahead to get a more accurate read on the market. That isn’t to say all the supply and demand issues highlighted in this article are inaccurate or not an issue—there is indeed a massive supply glut, storage is tight in the US, and it is weighing on prices. But not to the extent hyped in the headline here or globally.
MarketMinder’s View: In Japan, COVID-19 containment measures take the form of government “requests,” rather than mandates. As those requests go nationwide, rather than on a prefecture-by-prefecture basis, here is a look at how businesses are responding. In short, it doesn’t appear to be a full nationwide shutdown, but rather, businesses are responding to the perceived variance in risk levels in different areas. Whether that makes Japan’s related economic contraction milder than those in the US and Europe remains to be seen, and we won’t have good data on that until Q2 GDP comes out in three months. But for the time being, it does probably prevent Japan’s economy from recovering from the contraction that began last autumn in the very near term. That is widely known to global investors at this point, but having tempered expectations can help investors refrain from reacting to dreary data.
MarketMinder’s View: Setting aside all of the technical analysis commentary sandwiched in here, the beginning and ending discussion of an interesting COVID-19 case study has some useful implications for investors. It focuses on a Boston homeless shelter, where 397 people were tested for COVID-19 and 146 were positive but asymptomatic. As the article notes, that implies US society may be closer to “herd immunity” than many perceive, with the mortality rate significantly lower. Both of these items are good news, but we encourage readers not to get overly optimistic. What matters for markets isn’t the disease-related statistics, but how policymakers interpret them as they continue weighing when and how quickly to phase out social distancing restrictions and restart economic activity. If the US approach remains as gradual and uneven as it is presently shaping up to be, then there is a risk of reality missing expectations regardless of good news on the disease front. Then again, a gradual restart could also dampen sentiment, making it easier for reality to beat expectations. It is impossible to know now. But we think investors would benefit from keeping both possibilities in mind and not running away with a bullish or bearish mentality now. We still believe a recovery is only a matter of when, not if, but having realistic expectations can help stave off knee-jerk portfolio moves.
MarketMinder’s View: As always, MarketMinder doesn’t make individual security recommendations. But this article highlights two noteworthy developments. One, as the chart shows, growth stocks have outperformed value significantly since stocks’ February peak, as the companies that led on the way up remained in the driver’s seat. That, in our view, is a big sign stocks are behaving much as they would in a sentiment-driven correction, not a bear market. Of course, we aren’t saying this isn’t a bear market—it is—but stocks typically behave quite differently in recoveries from corrections versus bears. In a normal bear, the growth stocks that lead late in the bull usually lag on the way down, and small value-oriented stocks lead early in the recovery. In a correction, you usually don’t get that leadership shift. The categories that led heading into it stay in pole position during the recovery. Second, the big stocks discussed here are the same huge, growth-oriented Tech and Tech-like companies that pundits routinely called risky and overvalued during the bull’s waning months. People still see Tech companies through dot-com lenses, perceiving them as flighty and overly subject to boom-and-bust. In reality, the companies that survived that era—and the consumer-oriented Tech-like firms that steadily gobbled up market share over the past 15 years—have become more like blue chips. They have the high quality, resilient earnings and strong brand recognition that investors reward when seeking stability. Consider this your friendly reminder that as economies develop and evolve over the long term, so do the types of companies that fall into various style buckets.
MarketMinder’s View: When the UK announced its initial fiscal response to COVID-19 containment’s economic fallout, observers quickly pointed out numerous gaps. After adding supplemental measures to extend support to self-employed people and startups, the Treasury is now adding a backstop for mid-sized businesses—those that were too big to qualify for the program assisting small businesses but too small to tap funding targeted at large corporations. Now, “all viable companies with a turnover of more than £45m will be able to apply for government-backed support [for up to £25m], including those which take in more than £500m.” Additional support is no doubt welcome, especially with the government also extending its shelter-in-place orders another three weeks (and hinting they may linger into June). But only ending those restrictions will enable an economic recovery. For more, please read our 3/27/2020 commentary, “Around the World in Coronavirus ‘Stimulus.’”
MarketMinder’s View: Earlier this week, we surmised that even with OPEC and other large producers’ plans to collectively cut oil output by nearly 10 million barrels per day through June, it probably wouldn’t be enough to ease the supply glut and boost prices materially as long as COVID-19 containment measures continued destroying demand for fuel. Now OPEC has crunched the numbers, and for oil producers, it isn’t pretty: “Even if OPEC members fully implement their share of the agreed cutbacks -- a fragile assumption, given that many tend to cheat -- they’d still be producing more than the market requires in the second quarter. With perfect compliance, the 13 nations would be pumping about 23.4 million barrels a day, or roughly 3.7 million more than the ‘call on OPEC.’” Plus, as the article goes on to note, OPEC’s demand projections are a lot sunnier than the US Energy Information Administration’s. Time will tell which outfit is closer to being correct, but either way, oil prices probably won’t soar. That means we likely haven’t seen the end of bankruptcies and consolidation among smaller US shale producers, but that is a widely known issue, and the oil patch has already declined considerably as a share of US GDP and business investment, sapping further troubles’ ability to have much economic impact.
MarketMinder’s View: We share this piece neither to highlight the specific companies discussed herein, nor to support its conclusion, which we disagree with. But it does accurately document a key way this bear market has acted more like a correction, highlighting there hasn’t been the sector- and style-leadership reversal that is typical in bear markets. “Rather than breaking the habits investors fell into during the bull market, the coronavirus crisis and economic shutdown have reinforced two of the biggest trends in stocks: U.S. technology and ‘quality’ stocks, those with a steady earnings record, continue to beat the market. …. It shouldn’t be surprising that stocks with little debt, steady revenues and reliable earnings appeal during a recession. But they did well in the good times, too, far outperforming the S&P 500. Quality has a big overlap with the high-growth stocks, as technology makes up almost half of the MSCI USA Quality index.” Because this was an institutionally induced economic contraction, so-called defensive stocks (e.g., Utilities and traditional Telecom companies) haven’t performed as they usually might. However, we wouldn’t interpret that—or the underperformance of small value stocks during the recent rally—as an automatic sign of another shoe to drop. If this bear continues behaving like a correction, we would expect the companies that led heading into it to lead afterward. Only if we get a longer, grinding recession and bear are stocks likely to behave as they normally would during a bear market recovery, with small value leading. As for the conclusion, don’t give the Fed too much credit for rising stocks. Policymakers backstopped the financial system, but that isn’t stimulus. Plus, the one measure that purports to be stimulus, quantitative easing, is inherently contractionary, in our view. See our 3/16/2020 story, “The Fed’s Mixed Bag of Measures,” for more.
MarketMinder’s View: The Conference Board’s March US Leading Economic Index (LEI) fell -6.7% m/m—the series’ largest decrease in its 60-year published history—though it fell less than analysts expected. As this piece notes, considering shelter-in-place orders began over halfway through March and remain in effect through at least this month, April data could well be worse. None of this surprises, as LEI is rightly signaling an economic contraction, in keeping with its status as one of the best forward-looking indicators in town. Just keep in mind that LEI doesn’t predict stocks. Not only do stocks lead the economy, but they are one of LEI’s components—stocks don’t predict stocks. Hence, waiting for LEI to signal a pending recovery doesn’t seem like a wise investing approach, as stock prices will probably be part of that signal.
MarketMinder’s View: After 5.25 million initial jobless claims in the week ending April 11, the total over the past four weeks is now around 22 million. The huge numbers illustrate the speed at which COVID-19-related restrictions roiled the US economy, to say nothing of the hardships and personal tragedies due to lost jobs. With the sheer amount of applicants still overwhelming reporting systems and last week’s Good Friday holiday limiting some filings, job losses likely remain elevated in the coming weeks. That said, “… the data showed most states reported declines in claims from the prior week on an unadjusted basis, suggesting that the breakneck pace of job losses is starting to slow, if just a bit. … California had the most claims last week, at about 661,000 on an unadjusted basis, down from 919,000 the previous week.” Perhaps the pace picks back up again next week, but some experts posit the trend is now tracking below the extreme projections of a 20%+ unemployment rate. That is cold comfort to anyone afflicted by a lost job now, but for investors, even this reality would exceed extremely dour expectations. That might be a teensy boon to sentiment, but unemployment isn’t a stock market driver as it is a late-lagging indicator, so we wouldn’t overrate it.
MarketMinder’s View: In South Korea, President Moon Jae-in’s Democratic Party and its allies won the biggest legislative majority since the country transitioned to democracy in 1987. As local observers speculate about the policies Moon will pursue—e.g., diplomacy with North Korea or decreasing the influence of the huge family-run conglomerates known as the chaebol—we think the election results offer some important reminders for investors. Moon’s popularity was flagging as recently as late January as a political scandal and his government’s initially criticized COVID-19 response seemed to point to a doomed election outcome. But Moon’s “coronavirus diplomacy” fueled a big rebound, and as one political analyst notes here, “… voters had been impressed by international recognition of the administration’s coronavirus response.” Now, it is far too early to say how exactly the fluid COVID-19 situation will impact this year’s US presidential and congressional races. However, South Korea’s election illustrates how quickly fortunes can flip on one issue, so presuming any one candidate or party is a lock today seems premature, in our view. Also noteworthy: Turnout was the highest in nearly 30 years, a strong counterpoint against fears of COVID-19 and social distancing reducing turnout in November’s contest.
MarketMinder’s View: Regulators in several European nations (e.g., Italy, France, Spain, Belgium, Greece and Austria) have extended bans on short selling—the practice of borrowing stock, selling it and then buying it back later. Some vilify short selling as profiteering while others argue it exacerbates short-term volatility, threatening financial stability during fragile times. While we won’t opine on the morality behind short selling, history shows prohibiting the practice doesn’t decrease market volatility. In 2008, for example, the US’s ban on short-selling Financials stocks didn’t stem the sector’s drop. Moreover, forbidding short selling carries potential unintended consequences—like reducing market liquidity. Perversely, less liquidity could actually increase volatility since market participants have less information about prices, widening the gap between sellers’ asking prices and buyers’ bids. We aren’t saying these European short-selling bans will extend the bear market, but they probably aren’t calming anything down either. For more, see our 3/31/2020 commentary, “Would a Short Selling Ban Help—or Hurt?"