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: This concise article argues stock market volatility may lie ahead for two reasons. The first: Rising Treasury yields may cause bonds to look more attractive than expensive stocks, causing short-term spasms in the latter. The second: If the economy continues improving, Fed officials may start signaling an end to their accommodative monetary policy, which would first agitate bonds, then stocks. We think this reads too much into recent short-term volatility for both assets. (Yes, bonds are volatile, too.) Rising interest rates don’t mean automatic trouble for stocks—historically, rising yields have coincided with rising stocks quite often. But beyond the history, consider what stocks care about: how corporate earnings match up with expectations over the next 3 – 30 months. In our view, articles like this suggesting turbulence lies ahead indicate broad investor sentiment isn’t in full-fledged euphoria—so expectations aren’t out of touch just yet. For more on why rising yields don’t spell the bull market’s end, please see our 2/26/2021 commentary, “On Rising Rates and Stocks.”
MarketMinder’s View: Per the research cited here, households across major economies have accumulated $2.9 trillion in savings since the pandemic began—about $1.5 trillion in the US alone. Accordingly, this piece posits this “vast cash hoard” sets the stage for a strong recovery once COVID is under control. “The optimists are betting on a shopping spree as people return to retailers, restaurants, entertainment venues, tourist hot spots and sports events as well as accelerate those big-ticket purchases they held back on. Those who are less confident wonder if the money will instead be used to cover debts or hoarded until the health crisis passes and labor markets look stronger.” While we agree some of these savings will probably be spent (e.g., on much-needed holiday trips), we caution investors against presuming all this cash will turbocharge growth, as some of the estimates here project. More importantly, little of this is likely a surprise, and we think markets have largely priced the broad outlines of the eventual global economic recovery.
MarketMinder’s View: February’s Institute for Supply Management services purchasing managers’ index (PMI) fell to 55.3 from January’s 58.7. Readings over 50 indicate expansion, so more services businesses—which power America’s economy—grew than contracted, though the magnitude of that growth is unknown. What we found most interesting in this article: Sentiment today is sunny indeed based on the experts’ reactions. “Despite the slowdown in service sector growth in February, Oren Klachkin, Lead U.S. Economist at Oxford Economics, said the sector ‘is locked and loaded for a summer surge.’ ... ‘The stage is set for a more robust recovery, with the American Rescue Plan set to deliver a fiscal impulse that lifts GDP growth to its highest in nearly 40 years.’” While today’s optimism is rational, it also suggests we are in the later stages of the bull market—reason for vigilance, in our view.
MarketMinder’s View: Here is a trend in America’s shale oil patch that we think is worth highlighting: “Once minor players, private drillers held half the share of the horizontal rig count as of December. It’s the first time in the modern shale era that they have risen to the level of the supermajors. ... If private drillers keep expanding at their current pace, it could eventually mean that U.S. production ends up on the higher end of analyst forecasts. And that, of course, could weigh on prices.” Now, extrapolating recent production trends into the future veers into speculative territory, but we think this development underscores a broader point: US producers can ramp up production relatively quickly, as long as prices make it worth their while. As the article details, while major integrated oil companies have restrained production, the incentives for smaller drillers—with backers looking to score on their investments—have them “being driven to pump harder than ever before ... to expand output and increase cash flow in the hope that they can lure public companies down the line when oil markets and valuations improve.” The Energy sector has surged with oil prices this year, but for investors, the question is whether more is in store. In our view, global supply and demand factors, along with sky-high sentiment, suggest the Energy sector’s time to carry the leadership baton hasn’t arrived yet. For more, see our 1/28/2021 commentary, “What the Latest Executive Orders Do—and Don’t—Mean for US Oil Production.”
MarketMinder’s View: Australia’s “economy accelerated 3.1% in the three months to December, data from the Australian Bureau of Statistics (ABS) showed on Wednesday, higher than forecasts for a 2.5% rise and follows an upwardly revised 3.4% gain in the third quarter.” As the article notes, annual GDP for the Land Down Under fell -2.5% last year, better than other developed nations including the UK, Italy, Canada and even the US. While policymakers are quick to credit their efforts, we think a less-severe Aussie COVID experience—especially compared to Western Europe and the US—played a bigger role. No doubt government spending likely provided a lifeline for businesses and households directly hampered by COVID restrictions, but in our view, future recoveries, whether in Australia or elsewhere, depend on the eventual return to normalcy.
MarketMinder’s View: First, please note that MarketMinder favors no political party nor any politician. We analyze politics solely to assess how developments may impact markets. This article highlights how the current US government is unlikely to pass big bills that create winners and losers or stoke uncertainty, roiling markets. “Dick Durbin of Illinois, the chamber’s second-ranking Democrat, acknowledged to reporters that the leadership team is starting to feel the challenges of a 50-50 Senate. ‘One senator can stop things.’” As this article illustrates, getting all 50 Democrats—and even a majority in the House—to agree is an extreme challenge. The example here isn’t even a contentious bill overall, beyond the federal minimum wage hike to $15 per hour. But that alone seems to have drawn battle lines. If you, like many investors, feared or cheered the Democrats taking the White House and both chambers of Congress on the notion it meant an ocean of legislation was coming, read this piece carefully.
MarketMinder’s View: This article does a fair job documenting the fact a recent rise in long-term interest rates and lower-than-expected souring loans has paralleled improved performance among regional US banks. The trouble with it, in our view: It implies there are forward-looking takeaways from this. But markets are well aware of this obvious and intuitive factoid. They know regional banks are more directly exposed to credit trends than megabanks, which have diversified revenue streams. They are well aware interest rates are rising, factoring this into prices in real time. In our view, the more likely scenario ahead: Interest rates do not keep rising from here, and the tailwind from positive news on the default front wanes ahead. That scenario would likely render the recent pop higher for regional banks a mere countertrend, unlikely to last.
MarketMinder’s View: An interesting and timely post exploring the fact we have seen growth stocks dominate big bull market years historically—while interest rates were far higher than today’s low levels and rising. Now, it does this by showing that rising interest rates didn’t forestall a bubble from inflating in the early 1970s and 1990s. But the point remains true, as the included graphs show, throughout much of those decades. This all makes sense when you consider that rising long-term interest rates often accompany a healthy economic outlook—they may even steepen the yield curve, which typically foretells economic growth ahead. As this piece also notes, rates are also just one of many factors that influence stocks’ directionality and market leadership trends. They do not have a magical pull over the stock market. So, as we recently noted, we don’t expect interest rates to keep climbing from here. But if they do, it doesn’t necessarily spell doom for stocks.
MarketMinder’s View: It is old news by now, but Canadian GDP smashed estimates in Q4 2020, growing 2.3% q/q (or 9.6% annualized). This piece does a good job documenting and detailing that. So if that is your cup of tea, this should be a satisfying read. But to us, the more important takeaways are forward-looking: In its coverage of January’s monthly GDP report and outlook for the year, it highlights the optimism and expected strong growth: “Heading into Tuesday’s release, the fear was that economic activity would contract in January, given ample restrictions to contain the second wave. However, Statscan estimates that real GDP grew by 0.5 per cent that month, following a meagre 0.1-per-cent gain in December. That suggests momentum is picking up to start the year – and that once again, the Canadian economy is outrunning expectations in the recovery phase. The Bank of Canada’s forecast for the first quarter – a 2.5-per-cent annualized drop – could prove way off the mark, especially now that provinces have started to unwind their virus restrictions.” This suggests markets have pre-priced quick economic growth north of the border—and, based on similar coverage and estimates, in the US, too. That means it is unlikely to prove a material driver of returns to come, a fact that undercuts the quick-growth-means-value-leadership argument that seems quite common today.
MarketMinder’s View: As always, we are politically agnostic—we prefer no party nor any politician and assess political developments for their potential economic or market impact only. In that vein, it is notable that Senators have opted not to try to skirt the Senate Parliamentarian’s ruling against the inclusion of a $15-per-hour minimum wage in the $1.9 trillion COVID relief plan currently wending its way through the budget reconciliation process. Plan B, which had a brief time in the spotlight this weekend, was to slap a penalty tax on companies that don’t pay workers at least $15 per hour—theoretically a potential workaround since budget reconciliation allows only measures related to spending, revenues and the debt ceiling. It has now reportedly bitten the dust amid steep opposition within the Democratic Party, not to mention concerns over its complexity. “Economists and tax experts have said that the tax outlined by [these Senators] could be easily avoided and difficult to implement, with large corporations able to reclassify workers as contractors to avoid potential penalties.” We aren’t going to argue that would have been a major negative for businesses or stocks, although resources spent on accounting and business reshuffling could probably be better deployed on growth-oriented endeavors, likely making the absence of new headaches an incremental positive. More broadly, this is a shining example of how intraparty gridlock is blocking contentious bills, helping reduce uncertainty and keep investors’ fears of big changes at bay.
MarketMinder’s View: Those painful memories, according to this piece, are 2013 and 1994—times when rising interest rates coincided with volatility, to be sure, but not stock bear markets or prolonged bond market trauma. In mid-2013, markets priced in the eventual reduction and end of quantitative easing (QE) after then-Fed head Ben Bernanke alluded to “tapering” QE in a late-May speech. Global stocks dipped -7.6% in the succeeding month and long rates rose, but both stretches of volatility were short-lived. The MSCI World rose 26.7% that year, and the bull market ran another six-plus years after that (per FactSet). 10-year US Treasury yields actually fell in 2014, the year when QE actually wound down. The economy, meanwhile, benefited from a steeper yield curve. As for 1994, stocks were flattish that year, but the Tech boom was immediately on the horizon. Orange County and other municipalities had some problems, but bonds overall did quite well in the second half of the 1990s. Whenever you make a historical comparison as part of your market analysis, it is important to consider the full context, lest you lead yourself into making a knee-jerk reaction to short-term volatility—and missing good times over the longer term.
MarketMinder’s View: IHS Markit/CIPS’ February UK manufacturing purchasing managers’ index (PMI) rose from 54.1 to 55.1 in February, which technically signals increasingly widespread growth. But as this piece explains, the headline reading isn’t quite what it seems. Longer supplier delivery times, which contribute positively to PMIs as they usually signal companies can’t keep up with faster demand, were a big driver. But in this case, longer delivery times stemmed from continued ports delays due to the pandemic and Brexit, which are more headwind than tailwind. However, this doesn’t mean all else was grim. Manufacturing output slowed but still grew. New orders returned to growth after contracting in January as companies worked through inventories stockpiled ahead of Brexit. Order backlogs increased, further underscoring healthy demand. Sentiment surged the most in over six years, suggesting businesses are getting over pandemic and Brexit uncertainty. Overall, we see plenty of underappreciated strength here. Granted, manufacturing is a small slice of the UK economy, and the much larger services sector still faces stiff headwinds from COVID restrictions. But if the UK economy were in for a long stretch of deep weakness, manufacturing probably wouldn’t be chugging along—it would be struggling as businesses canceled investment and focused on getting lean to survive the famine.
MarketMinder’s View: After finding various ways to avoid passing the ECB’s negative rates onto most retail depositors, German banks are now starting to charge annual fees on large deposits—and showing why negative rates don’t work as advertised. The ECB and other central banks adopted negative rates several years ago in hopes it would spur people to save less and spend more, boosting economic growth. Instead, banks spent years absorbing the costs so they didn’t lose business. Now, with savings jumping during the pandemic, German banks are charging for deposits not because they want to collect the revenue, but because they have more deposits than they have any use for and want to incentivize customers to move elsewhere. One bank highlighted here is advising customers to transfer their accounts. A new platform gaining popularity helps depositors shop for better rates, in many cases moving their money to other EU nations. When people want to save money, they save money, and negative rates simply encourage people to find different ways to do that. They don’t magically turn big savers into big spenders. In our view, the most beneficial move would be to restore some sanity to monetary policy so that banks and customers don’t have to do all this monkeying. While negative rates haven’t caused a calamity where they have been deployed, and monetary policy can’t be forecast, we think this is worth monitoring considering other central banks haven’t learned from the ECB’s experiment yet and some are reportedly considering a negative-rate policy currently.
MarketMinder’s View: Get beyond the bizarre driving analogy and this article explores a question we have seen elsewhere: How much fiscal stimulus does the economy need today? The implication: Too little will delay the recovery, too much risks hot inflation. To determine the “just right” amount, this cites the Congressional Budget Office’s estimate of potential GDP. Based on this metric, it argues “… fiscal policymakers may have already pushed on the accelerator hard enough to bring the economy close to its speed limit by year’s end, when widespread vaccination is likely to have released much of that pent-up demand. Another $1.9 trillion, as President Biden has proposed, could push the economy well beyond the limit.” However, concerns that Biden’s plan could bring us back to the 5% inflation of the mid-1960s—potentially leading to a repeat of the economic issues of the 1970s—seem premature and speculative to us. For one, potential GDP is a theoretical construct. Models and thought exercises have value, but the economy is a vastly complex system that can’t be solved like a math equation. Two, Biden’s spending plan—even if it passes as initially proposed, which seems doubtful—is light on the direct spending that forcibly creates demand and stokes the multiplier effect, as money changes hands more quickly (a key component to higher inflation). We don’t dismiss the possibility of rising prices, but we don’t see Biden’s plan as the match to set it off. For more, see our 2/11/2021 commentary, “Good News! More Pundits Are Worried About Inflation.”
MarketMinder’s View: Please note, MarketMinder doesn’t make individual security recommendations. The fund profiled here illustrates a broader theme we wish to highlight. That theme: Financial products or services that purport to produce solid, steady returns with little or no risk of loss is Wall Street’s version of calorie-free chocolate cake—it doesn’t exist. Much of this piece profiles one fund, which claimed to “produce attractive returns on unconventional assets at lower risk than mainstream portfolios.” But, as the piece later explains, this isn’t an isolated story. Over the years, many have sought equity-like returns with less-than-equity-like volatility. (This, in essence, is how Madoff became Madoff.) But this is a chimera. No investment is risk-free, and the potential for gains always comes with the potential for loss, period. That said, we have one bone to pick with this piece, which assumes that highly valued stocks and low yields necessarily spell bad returns ahead from stock and bond portfolios. Yet that is what people have been saying for years and years now, and it hasn’t proven true. That presumption contributes to people seeking fancy investment solutions to reach their goals—and is very often how they wind up making bad choices.
MarketMinder’s View: First the numbers: January US personal consumption expenditures rose 2.4% m/m while personal income surged 10.0% m/m—the latter due primarily to December’s COVID relief bill, which provided direct payments and extended federal unemployment benefits. Both figures more-or-less met analysts’ expectations. One nugget of note: Within services, spending for food services and accommodations led all categories—a sign of some pent-up demand finding an outlet as COVID restrictions ease in some areas. While we won’t downplay a positive report, we also found the sentiment expressed both here and similar coverage elsewhere interesting. For example, with January’s personal savings rate at 20.5%, this piece posits that, “As the economy reopens, these savings should facilitate even more spending and help the recovery along.” That could happen, but savings don’t automatically translate to future spending. In our view, this cheery tone highlights how widespread optimism is today—and how broadly people anticipate strong economic growth ahead. Both factors are worth noting for investors, in our view.
MarketMinder’s View: Indian Q4 GDP rose 0.4% y/y, its first positive reading following contractions in Q2 and Q3 2020. The data echo trends seen among other major economies’ GDP figures: improvement in private consumption and resiliency in the manufacturing sector. “Investment recorded its first growth since December 2019, growing at 2.6% compared to a revised 6.8% fall in the previous quarter, while weakness in consumer demand eased. Consumer spending - the main driver of the economy - dropped 2.4 % year-on-year in Oct-December compared to an 11.3% fall in the previous quarter, data showed. … Annual growth of 3.9% in the farm sector and 1.6% in manufacturing during the three months to December raised hopes of an early recovery as the government rolls out plans to distribute COVID-19 vaccines to India’s 1.4 billion people.” Note the usual caveats: GDP growth rates are backward-looking, imperfect gauges of economic output—especially in economies employing year-over-year methodologies, as this means the level 12 months ago influences growth rates now. Still, a return to growth in one of the world’s largest economies is another bit of evidence the broader global economic recovery is underway.
MarketMinder’s View: As always, we are politically agnostic and highlight news like this solely for its potential economic and market impact. As this discusses, various tax hikes are allegedly in the cards when UK Chancellor of the Exchequer Rishi Sunak unveils the 2021 Budget next week. One option on the shortlist is raising the corporate tax rate. Another is scrapping preferential rates for capital gains, subjecting them to income tax rates. We don’t think either would be a net benefit for the UK economically. The country benefited from deep corporate tax cuts under former Prime Minister David Cameron and his Chancellor, George Osborne, and even the mild increase discussed here likely raises uncertainty and discourages investment a bit. As for capital gains, as a general rule, the more you tax something the less you get of it, so this too could discourage investment. Aligning capital gains rates with income rates doesn’t make sense to us philosophically, either, considering many investors reinvest gains rather than take them as cash flow. Overall, we suspect the biggest winners from both moves would be the accountants that help companies and investors reduce their tax burdens. But, it is also premature to base investment decisions on any of this, as both options seemingly face stiff opposition from Conservative Members of Parliament. So consider this a reminder that talk is cheap. Even intraparty gridlock can water down or kill contentious legislation, helping uncertainty fall.
MarketMinder’s View: The title here sums up the thesis: Allegedly, with 10-year yields now above the S&P 500’s dividend yield, investors are likely to jump from stocks to bonds in search of a payout, removing some fundamental support from this bull market. We have long considered these yield-chasing investors to be mostly myth, as people own bonds for more than their yield. Their lower expected volatility is another key factor, and the notion of flipping from bonds to stocks as yields change ignores investors’ larger goals and needs. The best asset allocation for someone generally doesn’t change on a whim. More broadly, there just isn’t any evidence the S&P 500’s dividend yield slipping below 10-year yields is bad for stocks. Dividends exceeding bond yields is a recent phenomenon. For the vast majority of the past 25 years, bond yields were on top—in equity bull and bear markets alike. So we chalk this up as an interesting observation with little to no meaning for returns from here. To say otherwise would be to argue today’s stock and bond prices determine tomorrow’s, which just isn’t how markets work.
MarketMinder’s View: Durable goods orders tripled expectations and notched their ninth straight month-over-month rise, boosted by a nearly 400% rise in orders for aircraft. Excluding that notoriously volatile component, core capital goods orders (non-defense orders ex. aircraft), rose 0.5% m/m—indicating the equipment component of business investment is climbing, too. We don’t view any of this as forward-looking, but it is a sign the recovery from last year’s contraction continues apace, with manufacturing doing a lot of the heavy lifting as services industries still deal with partial or full lockdowns in many areas of the country.