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: Economic green shoots continue sprouting, with June manufacturing purchasing managers’ indexes (PMIs) the latest evidence: “Manufacturing sectors returned to growth in a number of other countries, including France, the U.K., Malaysia, Vietnam, Australia and Ireland.” Those countries all reported PMIs above 50, indicating expansion. In the US, “A separate survey by the Institute for Supply Management released Wednesday showed that manufacturing activity expanded slightly in June at 52.6, up from 43.1 in May. New orders posted the strongest monthly gain since records began in January 1948, ISM said.” While acknowledging the positive readings, many economists are quick to temper their enthusiasm. They argue manufacturing output is still far off pre-pandemic levels, not to mention other issues: weak global demand, ongoing logistical bottlenecks and COVID upticks that may force businesses to close again. We don’t dismiss these issues—the global economy has a lot of ground to regain, and one positive report reflecting a narrow slice of most developed nations’ economies isn’t all-telling. PMIs provide just a high-level snapshot since they tally only growth’s breadth, not its magnitude. From an investing perspective, though, prevailing pessimism suggests to us the bar reality needs to clear for stocks to continue rallying remains low.
MarketMinder’s View: The high-frequency economic data out of South Korea cited here are consistent with similar data in other countries: As governments allow businesses to reopen, pent-up demand is making its way into the economy. “Close to 100,000 people visited Jeju Island last weekend just ahead of peak summer holiday season. According to the Jeju Tourism Association, 99,161 people visited the southern resort island over the weekend, and 99.7 percent of them were Koreans. ... Luxury hotels on Jeju including Lotte and Shilla are fully booked every weekend, while car rental companies have seen reservation rates return to peak-season levels after plummeting by more than a third.” While this boon in domestic tourism partly reflects international travel restrictions, it also illustrates South Korean demand hasn’t dried up—rather, COVID-related restrictions have weighed on spending. In our view, this is more evidence that reopenings—even gradual ones—are key to an economic recovery.
MarketMinder’s View: With all eyes on tomorrow’s June Employment Situation Report, ADP’s June private-sector tally shows employers added 2.37 million jobs last month, short of some economists’ expectations of 3.5 million but a second consecutive positive month. However, this piece points out why investors shouldn’t put too much weight on any one dataset: “For instance, last month ADP reported 2.76 million job losses, while the government reported net gains of 3.1 million jobs. On Wednesday, ADP revised its May decline to show a gain of 3.1 million jobs.” That is a pretty big swing, which may be due to the vagaries of classifying workers’ employment status—another reason jobs data aren’t terribly useful for investors right now, along with their general backward-looking nature.
MarketMinder’s View: When the tough gets going for financial markets, they often get creative. Many developed world nations’ bond yields are near or below zero. To entice investors, some—most notably Italy—have explored “GDP-linked” bonds (the “BTP Futura” in Italy’s case), which pay out according to GDP growth, leading to potentially higher payments compared to conventional bonds. This article has further details and notes GDP-linked bonds are gaining attention among more countries’ treasuries and finance ministries looking to raise money. It also raises some of the risks, namely of the moral hazard variety: “Countries that issue the securities may be more tempted to misreport growth figures, or even stifle economic growth policies, to avoid having to pay a higher rate of interest. Also, it’s not always clear whether investors in regular or growth-linked bonds would get their money back first in the event of default.” That makes institutional credibility a key factor for investors to weigh. Beyond that, we think this nicely illustrates how markets adapt: Where there is demand, there is an incentive to supply, benefiting both parties in the process.
MarketMinder’s View: Here is a small non-COVID, non-recession news palate cleanser: The US-Mexico-Canada Agreement (USMCA)—NAFTA’s replacement—will finally go into effect tomorrow, so here is a handy ’splainer on what it does and doesn’t do. In brief: “Some industries will notice changes. For automakers, new rules require more vehicle components to be made in North America, with a portion made by workers earning an average of at least $16 per hour. Canada will allow more imports of U.S. dairy products. Both Canada and Mexico will increase the value of goods that can be imported duty-free. Internet platforms can’t be held liable for third-party content, and companies can’t be required to store their data locally. Canada is also increasing its copyright protection term.” Beyond these relatively modest tweaks, trade between the US, Canada and Mexico will proceed on largely the same terms as before. For additional commentary, please see our (still relevant) 10/1/2018 article, “A NAFTA by Any Other Name.”
MarketMinder’s View: Note: MarketMinder doesn’t make individual security recommendations, including of the companies mentioned here. Rather, we highlight this article to address a prominent “second shoe to drop” fear—namely, that a wave of bankruptcies is on the way, with only Fed support holding back the tide for now. While we think this piece gives the Fed too much credit for saving businesses from the COVID-driven economic lockdown’s fallout, it also points out that Corporate America isn’t in as dismal shape as widely feared. “For the most part, however, the companies that have succumbed were already heavily indebted and in industries that were declining before the pandemic. The loss of revenue during the economic shutdown tipped them over the edge.” While large, investment-grade companies may benefit somewhat from the Fed’s promise to buy corporate bonds, “even illiquid midsize businesses may be able to kick the can down the road long enough to survive until their businesses recover, restructuring advisers say. Most companies whose loans come with lender protections known as covenants already have received waivers for the second and third quarters. Private-equity firms also have a boatload of unspent cash that they could use to keep portfolio companies afloat.” We aren’t dismissing the possibility of widespread bankruptcies if harsh, prolonged COVID shutdowns return. But we wouldn’t treat corporate carnage as a foregone conclusion, either.
MarketMinder’s View: “The CARES Act raised the possibility of $4.5 trillion in credit flowing from the central bank. The total may end up less than a fourth of that.” Yep: Three months and myriad Fed lending support programs later, very little credit has left Fed coffers. As noted here, “The Fed so far has made no loans under a vaunted ‘Main Street’ program for small and medium sized companies, provided only $1.2 billion to local governments, and holds just $8.3 billion in corporate bonds. It may, as Fed officials contend, be overall good news, and evidence their mere announcement of support for the economy has kept private lenders and borrowers transacting on their own, kept financial markets stable, and lifted confidence the Fed could keep the worst from happening.” That is possible, especially early on in the COVID crisis, when interest rates spiked briefly as corporate credit markets froze. Yet it is equally possible that the Fed’s emergency announcement in mid-March shook investors’ confidence and exacerbated the volatility. We don’t have a counterfactual either way. Most notably, we think the minimal tapping of the Fed’s alphabet soup worth of programs undercuts the widespread belief that Fed actions have been the only thing keeping the economy and markets from (re)entering a tailspin. Not so—central banks aren’t saviors, and economies and markets eventually recover with or without their “assistance.” For more, see our 3/24/2020 commentary, “Meanwhile, Back at the Fed.”
MarketMinder’s View: China’s official June manufacturing and non-manufacturing purchasing managers indexes (PMIs)—which focus on the country’s larger, state-owned firms—each topped 50, indicating expansion, for the third straight month. The manufacturing gauge “came in at 50.9 in June, compared with May's 50.6 … The forward-looking total new orders gauge also brightened, rising to 51.4 from May's 50.9, suggesting domestic demand is picking up as industries from non-ferrous metals to general equipment and electrical machinery all showed an improvement. But export orders continued to contract, albeit at a slower pace, with a sub-index standing at 42.6 compared to 35.3 in May, well below the 50-point mark.” That last point isn’t shocking, given much of the developed world is still gradually reopening. Meanwhile, “The non-manufacturing PMI rose to 54.4, from 53.6 in May.” Rather than guess what growth will look like in the near future, we think these expansionary PMIs make a simple point: An economic recovery in China appears to be underway. It may not be a smooth ascent—especially with some Chinese cities implementing local lockdowns to contain COVID upticks. But Chinese stocks’ 8.4% rise since May 31 (per FactSet) suggests markets don’t wait for economic data to turn rosy. All that is necessary is for reality to exceed expectations—which remain mired in pessimism, in our view.
MarketMinder’s View: Some #NewsYouCanUse: If you receive a letter in the mail from the IRS informing you that you will have to pay a fine for filing your tax returns late, don’t be alarmed. It is likely because the IRS “wasn’t able to mail previously printed balance-due notices because its offices were shut down because of the pandemic. But rather than print new notices with the correct dates, the IRS decided to send the old ones out anyway once the tax agency’s offices began to reopen.” Hence, if you receive one of these notices, you will also receive “an insert confirming that the due date in the notice has been extended. … The new payment will be either July 10 or July 15, depending on the type of tax return and original due date.” If you wish to verify how much you owe, visit the website listed in the IRS letter or call the number provided in your notice.
MarketMinder’s View: Normally, a Census Bureau survey on how American households are spending their COVID-19 relief money wouldn’t have much insight for investors, but in this case, we think it helps dispel a popular myth. For weeks, we have heard how young folks are allegedly plowing their checks into penny stocks in hopes of making a quick buck or replacing the gambling thrill they can’t get from sports right now. While this may be true of some people anecdotally, the Census Bureau’s findings strongly suggest the market is not actually being propped up by COVID relief funds finding their way into stocks: The vast majority of recipients spent their funds on the basics, like food and shelter. Another chunk chose to pay down debt or save. For more, see Christopher Wong’s column, “Have Markets Gone Young, Wild and Free?”
MarketMinder’s View: A record improvement, sure, but don’t overstate it—eurozone sentiment merely rose off an all-time low. Despite the increase, this survey’s readings remained far below their winter highs. Sentiment among businesses in the services sector was at 11.1 in February. Even after May’s bounce, it is floundering at -35.6. Every other subindex was also well in negative territory, and the headline index remains lower than any other point since the depths of the financial crisis. Now, sentiment gauges really don’t tell much about future consumer behavior—they are more of a sentiment snapshot than anything. Given the overall low readings, it seems fair to us to say pessimism toward the recovery is alive and well, which should make positive surprise easier for reality to attain.
MarketMinder’s View: File this one under interesting, but pure speculation. Any time there is a recession, regardless of the cause, pundits hypothesize about what the “new normal” will do to the way we live and work in the long term. We tip our hat to this one for at least being positive, arguing the pandemic is accelerating changes that will modernize economies, spur innovation and improve quality of life by expanding the breadth of professions that can shift to work from home, enabling people to get out of cities, ditch long commutes and live in more bucolic, affordable areas. It also takes a stab at identifying the industries that will be winners in this new normal. Yet none of this is actionable for investors, as far-future stuff like this is impossible to assign probabilities to. Moreover, the vast majority of the time, the new normal ends up looking an awful lot like the old normal. Economic change generally comes through gradual evolution, not revolution. So rather than base portfolio decisions on pie-in-the-sky visions, we suggest narrowing your focus to the more foreseeable future and considering probabilities, not possibilities.
MarketMinder’s View: The titular myth is that Congress has used Social Security as a slush fund, draining its resources and leading to its widely feared collapse. As the article explains, this is patently false. Though the fund does technically lend money to the Federal government, this is through the purchase of special-issue bonds, which the law requires. For Social Security, these are in an investment—a very high-quality investment that pays interest. Without that interest-bearing investment, Social Security’s fund would likely be in worse shape, not better, considering “the trust fund's investments in Treasury bonds produced $77.9 billion in interest income for the Social Security retirement benefit program in 2019 alone.”
MarketMinder’s View: Far from being cheerful about the headline jump in household spending, the article takes a dour tone. With personal income falling -4.2% m/m as the boost so-called stimulus checks faded and the federal government’s unemployment benefits top-up set to expire at July’s end, the article warns consumer spending improvement may not last, jeopardizing the recovery. While the present circumstances are unique, the general argument isn’t—people fear unemployment harming every economic recovery. Yet it has never proven true. Unemployment doesn’t drive consumer spending, which actually stays fairly stable throughout most recessions as most household spending goes to essential goods and services. Many of the latter were forcibly closed in April and began reopening in May, enabling the bounce. Considering that bounce mostly reflected people trying to re-establish normal spending patterns, we agree several months’ more of similar gains are unlikely. But with the economy beginning to resume normal function overall, it seems reasonable to expect consumers to behave as they normally do early in expansions—namely, spending on all the goods and services needed to make life happen. Meanwhile, as businesses invest and grow, that will eventually create new jobs, addressing the employment situation long after the economy has resumed growing.
MarketMinder’s View: In 2016, national polls proved pretty darned accurate at projecting the popular vote. But state polls in key battlegrounds missed the mark, making President Trump’s Electoral College win a shock to many. After a good deal of soul-searching, many pollsters hit on education as the swing factor they weren’t weighting properly as they sought to construct a representative sample of the population. This piece documents their varied efforts to address this and other issues. The upshot, for investors, is that polls aren’t perfectly predictive, and using even state polls to guide investment decisions amounts to basing portfolio moves on sheer speculation. Not that doing so is even necessary, considering markets don’t have pre-set reactions to elections and don’t prefer any politician or party over another. Mostly, we think this is just an interesting discussion of one factor a lot of people will be watching this summer and autumn.
MarketMinder’s View: We think this is more about the Fed seeking to maintain appearances than actually enacting meaningful policy. After seeing banks endure history’s sharpest recession—a far worse scenario than anything the Fed stress tested them for—while increasing lending and keeping balance sheets strong, the Fed still wasn’t convinced that banks’ capital levels are fine. So Fed policymakers decided to concoct yet another test of banks’ ability to survive a hypothetical weak recovery. Based on the results (which the Fed didn’t release transparently), regulators decided to ban buybacks and limit dividends in Q3. As the last few months proved, reality usually differs from Fed modeling. Look, we aren’t arguing that banks should be dialing up shareholder payouts left and right, but we aren’t convinced they would have anyway.
MarketMinder’s View: More specifically, a five-step guide to thinking long-term—remembering the reason you invested in the first place and why you chose the plan you did—which we have found to be a helpful antidote against the urge to react to volatility. Such as: “Perhaps you chose your investments using historical stock market data. That data — and this is super important — reflected the reality that markets go up and down. Any period of history of any length would show that there was absolute certainty that wildly unpredictable periods like this would occur. Scary markets are quite literally part of the plan, since the stocks that give you decent returns over decades come with risk that their prices will bounce around a fair bit in the shorter term. As long as your goals remain the same, your carefully constructed investment plan still represents your best chance of achieving those goals. Especially when it feels scary.” As the article goes on to stress, the right reason to reconsider your strategy is because your goals or time horizon change, not because the market gets wobbly. Your goals don’t include avoiding volatility. They are factors like funding your retirement or a child’s education or thereabouts. Don’t mix and match the two, as many are wont to do after steep volatility.
MarketMinder’s View: While there is no direct market takeaway here, we share this article as a compelling counterpoint to fears a possible second COVID wave will necessarily roil countries as badly as the first one. Europe—particularly Italy and Spain—struggled mightily when COVID struck hard early this year. However, after “flattening the curve” and reopening their economies, most Western Europe nations have slowly been making their way back to a semblance of normalcy. “Yet there is optimism that a second wave, if it comes, won’t be as bad as the first. Much of Europe has used the lockdown period to build up new systems for testing, tracking down and isolating virus carriers. Millions of Europeans have made social distancing and mask wearing part of their daily routine.” While we caution readers against painting with broad brushstrokes—the experiences of individual countries, states, regions and cities will vary, and a second wave could happen despite the precautions taken—we find it encouraging reality has yet to turn as dire as initial forecasts first projected.
MarketMinder’s View: With headlines warning inflation may surge in the future and take a big bite out of investors’ purchasing power, this article provides some helpful historical perspective. Now, a word of caution: It uses a hypothetical 60% US stocks, 40% US bonds allocation, which won’t be right for everyone since an investor’s asset allocation depends on their unique investment goals, objectives, time horizon and circumstances. It also reports real (i.e., inflation-adjusted) returns, which isn’t how returns are typically measured—since companies earn nominal profits and investors buy and sell with nominal dollars, nominal returns are the most relevant reading, in our view. That said, as the figures here illustrate, this hypothetical portfolio didn’t wilt during the “stagflation” era of the 1970s. The primary reason why: stocks, whose returns outpaced inflation. “Notably, stocks did just that while battling two headwinds inflationistas fear, namely declining earnings and contracting valuations. Real earnings declined by 1.3% a year from 1970 to 1982, while the price-to-earnings ratio shrank 2.7% a year, based on 12-month trailing earnings. And yet, an investment in stocks held its value.” Bonds, in contrast, didn’t fare as well during this period, delivering a negative return. While today’s concerns of rampant inflation are overstated, in our view, we also don’t think investors need to find exotic securities or alternative asset classes to bolster their portfolios should prices rise—stocks’ long-term returns have proven to be a good inflation hedge, overall and on average.
MarketMinder’s View: This analysis raises some interesting high-level points. Sensibly, it argues stocks are forward-looking and move ahead of economic indicators like GDP or the unemployment rate (though we found it odd to argue jobless claims are important components of leading indexes since employers’ hiring decisions generally reflect the recent past). Interestingly, the article posits that stocks’ turning point was when New York’s coronavirus hospitalization beginning to stabilize in late March since it provided “the first real sense that the Covid-19 curve was beginning to bend, and the market began to see a light at the end of the recessionary tunnel.” That may have been a factor, but it paired with rumblings of economic reopening plans in the developed world, which we think helped stocks start getting a sense of post-lockdown life. While we don’t know whether the recovery will look more like 2009 – 2010 or 2001 – 2003, we think this largely depends on countries’ reopening progress. How local, state and national governments will act on constantly changing data and opinions is unknowable, in our view. Though many are already worrying lockdowns will resume in response to recent localized COVID spikes, all evidence suggests stocks have been fathoming this scenario, too—dampening the potential surprise. In our view, it would take a big, surprising shock to wallop markets anew, and while possible, we don’t think that is probable right now.