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: Whether or not the two consecutive GDP contractions in Q1 and Q2 2022 qualify as a recession is an increasingly politicized issue, which this article sort of illustrates by quoting White House officials who deny it is with conviction, citing data like unemployment, falling gas prices and the upturn in the stock market. But none of those data actually confirm or deny whether the US is in recession. As we have written here for more than a decade, employment data lag economic growth. It wouldn’t be surprising to see hiring persist and the unemployment rate remain low after growth has rolled over. Two, inflation and gas prices usually fall in a recession. They don’t support the titular assertion. Stocks lead the economy and normally begin rising in a new bull market before growth recovers. We also can’t say the upturn since mid-June really is a new bull market yet. Now, where we do agree with this piece: For investors, this debate is largely semantic. Whatever we wind up calling this period, stocks likely pre-priced this to a great extent in this year’s bear market. So, in our view, let the politicians cast this period however they want. Don’t let the label skew your view of future conditions, which the stock market is likely to focus on.
MarketMinder’s View: “A gauge of New York state manufacturing activity plunged by the second-most in data back to 2001, with sharp declines in orders and shipments that indicate an abrupt downturn in demand. The Federal Reserve Bank of New York’s August general business conditions index slumped more than 42 points to minus 31.3, with the drop just behind that seen in April 2020, a report showed Monday. A reading below zero indicates contraction, and the figure was far weaker than the most downbeat forecast in a Bloomberg survey of economists.” That is what this article reports, which is all factual and not great. But, some other points it doesn’t convey: This is a very narrow, volatile gauge that people usually don’t pay much attention to. That makes a lot of sense when you consider it dates only to July 2001. There have been two full recessions (2007 – 2009 and 2020) since. (The 2001 recession began in March and ended in November, per the National Bureau of Economic Research.) Manufacturing also comprises 4.5% of New York state’s economic output, per the National Association of Manufacturers. Furthermore, since the 2020 lockdowns, the index has posted an average move of 17.2 points (up or down) monthly, more than doubling the average from its inception through 2019’s close. Nine of this index’s ten biggest monthly swings have come since January 2020, with August marking the fourth such swing in 2022. So seeing something narrow with little history swing big (as it has repeatedly since the lockdowns) get so much media attention seems like more of a sign of dour sentiment than a harbinger of what lies ahead for the broader US economy.
MarketMinder’s View: Please note, inflation has become a hot political topic. Our commentary is intentionally nonpartisan and focused on the potential economic and market implications only. We also don’t dismiss the real financial hardship many households and businesses face due to higher prices. However, stocks take a cold view of economic developments, so it is critical for investors to do the same. With all that said, we think this piece nicely illustrates how markets work—and prices’ critical role in signaling oil producers and consumers to make some changes this year. “Whether it was motorized-rickshaw operators in Dhaka, Bangladesh, Uber drivers in Baltimore, mothers picking up children after school in Savannah, Ga., operators of truck fleets and police departments or managers of large manufacturing plants, the signal was the same. It said to consumers, ‘Energy has gotten scarcer; it is time to conserve.’ And to suppliers, it said, ‘This stuff has gotten a lot more profitable to produce; see if you can find ways to provide more.’” As the article details, this is what happened: Consumers adjusted their thermostats and reduced their driving while energy firms worldwide increased production, thereby bringing supply and demand into better balance. Correspondingly, oil prices have been falling since early June. While the market doesn’t yield change immediately or painlessly, it is the best allocator of scarce resources, in our view—especially in comparison to elected officials.
MarketMinder’s View: The titular gauge is the widely watched University of Michigan’s sentiment measure, which, “… rose to 55.1 from 51.5 in July, data showed Friday. Consumers expect prices will climb at an annual rate of 3% over the next five to 10 years, from 2.9% in July. They see costs rising 5% over the next year, the lowest since February, compared to last month’s 5.2%. The sentiment gauge exceeded all but one forecast in a Bloomberg survey of economists who had a median projection of 52.5.” As the survey’s director notes, though, consumer sentiment is still low by historical standards, and, “In the current context, even strong labor markets have been raised as negative news for business conditions, as consumers recognize the challenges businesses may face with hiring.” So yes, despite some improvement, moods are still pretty dour. While it may feel counterintuitive, that is a common condition in a bull market recovery, which often begins when sentiment is at a low. A new bull market’s beginning will be clear only in hindsight, but in our view, one is close—if not already underway. For more, see our June 16 commentary, “A Quick Reminder: Feelings Don’t Foretell.”
MarketMinder’s View: Spoiler alert: This article admits it doesn’t know the answer to the titular question—a refreshing response, as we agree a bear market’s end is apparent only with a good deal of hindsight. We do quibble with this piece’s focus on distinguishing cyclical bull/bear markets from secular bull/bear markets because, in our view, the latter is rather arbitrary and not much use when assessing market drivers. Secular market trends can supposedly span several decades, so forecasting a secular bull or bear market requires forecasting the far future—not useful, in our view, since stocks look forward to the next 3 – 30 months at most. Moreover, a period considered a secular bull market can include several cyclical bull and bear markets along the way, presenting numerous investment opportunities. That said, the bounty of historical data shared here do make a useful high-level point: Stocks are volatile in the short term, and there is no all-clear signal for when a downturn ends. Here, too, is an interesting observation: “For example, by my count there have been around 350 trading days since 1928 when the U.S. stock market was down 3% or worse. There have also been nearly 290 days when it was up 3% or more in a single day. … Here’s the kicker — more than 90% of all up and down 3% days have taken place during a correction of 10% or worse. And 83% of those up and down 3% trading sessions took place during a bear market drawdown (down 20% or worse).” These types of findings can be useful in setting expectations, but recognize the past doesn’t foretell the future—and, as always, we urge investors to make portfolio decisions based on forward-looking criteria, not backward-looking thresholds. For more, see our June 22 commentary, “Some Key Concepts Useful in Navigating Today’s Markets.”
MarketMinder’s View: Closing the loop on a story we highlighted earlier this week, oil flows to Hungary, Slovakia and the Czech Republic through the Druzhba pipeline (which flows from Russia to Central Europe via Ukraine) are set to resume after a Hungarian energy firm provided a solution to the sanctions dispute that stopped flows six days ago. That should help ease the risk of shortages in these nations, which received exemptions from the EU’s forthcoming ban on Russian oil imports due to their relative lack of alternative supply options. What we find most interesting, though, is how little coverage this resolution appears to be getting—a stark contrast from the heavy attention paid to the pipeline’s cessation. In our view, this is a telling sign of sentiment right now. Consistent with a phenomenon Fisher Investments Founder and Executive Chair Ken Fisher has long called the “pessimism of disbelief,” bad news gets emphasized while good news gets largely ignored, as in this case, or couched with yeah, but objections. This is a hallmark of early bull markets, and while market inflection points are clear only in hindsight, we think the pessimism of disbelief’s prevalence is a strong indication that the recovery is near, if not underway already.
MarketMinder’s View: This piece delves into a very important topic for retirees: the relationship between market downturns and portfolio withdrawals. There is a commonly held belief that if a bear market strikes within the first five years of retirement—and you are taking withdrawals at the time—it can raise the risk of exhausting your savings too soon. Over the past decade, we have seen this belief prompt academics to recommend some rather strange asset allocations to retirees, including loading up on fixed income early and switching to a heavier stock allocation late in retirement—a tactic that we think ignores the time value of money and may be out of step with many retirees’ overall needs and financial situations. This article, while not perfect, shows why such tactics generally aren’t necessary. While everyone’s situation is different, researchers have crunched the numbers to show that a blended portfolio of stocks and bonds can still overcome early challenges provided withdrawals aren’t excessive. Using the common “4% rule,” whereby a retiree sets annual withdrawals at 4% of the total portfolio value and adjusts that dollar amount each year for inflation, they stress-tested 60% stock/40% bond portfolios with hypothetical starting dates in 1973, 2000 and 2008—the start of three big, brutal bear markets. In all cases, the portfolios survived. “Retirees [in 1973] would have had to watch their portfolios shrink to $328,000, or nearly 35 percent, by September 1974, and inflation rise by more than 12 percent by the end of the same year, the analysis found. An incredibly painful one-two punch. The retirees had no idea at the time that circumstances would turn around, but within a decade into retirement, the portfolio balance had reached $500,000 again. And even after the downturn of 2000, at the end of 30 years, the portfolio had soared to well over $1 million.” Now, that last figure relies on models of projected returns, which are unknowable now, and the simulation also uses straight-line math for the withdrawals, which may not match actual spending patterns. But it is illustrative all the same, showing that provided you are disciplined and don’t have unrealistic goals or needs, the market’s long-term returns can overpower even deep near-term declines. With that said, we agree cutting expenses to the extent possible when markets are down can be beneficial, and the article’s suggestions on how to do this—including delineating between wants and needs—are worthwhile regardless of the market environment.
MarketMinder’s View: The Social Security Administration will unveil next year’s cost of living adjustment (COLA) for Social Security recipients in October, but July’s inflation data give us the first hint at how large it will be. Using the CPI for Urban Wage Earners and Clerical Workers, the Social Security Administration calculates COLA based on the average year-over-year growth in July, August and September. July’s figure was 9.1% y/y, setting up the headline increase. That should help offset the impact of higher Medicare premiums, which the Medicare trustees expect to stabilize next year. So, good news, but it comes with some things to be aware of. One, as the article notes, the increase could expose more recipients to taxes on their benefits. “Taxpayers with incomes of $25,000 or more a year and married couples with $32,000 or more pay income tax on a portion of their Social Security benefits. The annual income figures include half of an individual or couples’ Social Security benefits. Those income thresholds aren’t adjusted annually.” Two, this CPI index (like headline CPI) may not reflect retirees’ actual cost of living, so assessing how your personal expenses have changed will probably be necessary as you map out your budget and plan any withdrawals from your investment portfolio to help fund living expenses. Lastly, as for the article’s warning that a higher COLA could accelerate the Social Security trust fund’s depletion, keep in mind that rising wages should help increase payroll tax revenue, helping offset the impact. For more on the general topic of Social Security depletion and why the risk is overstated, see our commentary last year.
MarketMinder’s View: This short piece highlights a development getting heaps of attention Thursday: dueling oil market forecasts from OPEC and the IEA. OPEC foresees supply exceeding demand this autumn thanks to higher output in the US and other non-OPEC nations and demand coming in weaker than it initially anticipated, tied primarily to global economic headwinds. The IEA anticipates soaring demand amid tight supply, tied primarily to power suppliers bidding up alternate fuel sources in the face of higher natural gas prices and Russian supply cuts. It is impossible to know which will come true given the geopolitical wild cards at work, but the IEA’s scenario mostly echoes what happened last year. Then, the combination of plunging European wind power generation during abnormally calm weather and jumping natural gas prices as Russia throttled pipelines to Europe caused the first big spike in oil prices. It also led to electricity shortages and rolling blackouts in China. Seeing a repeat of this wouldn’t shock, although China’s decision to boost coal output could help cushion the blow to an extent, as could its (and other nations’) continued purchases of discounted Russian crude oil, which frees up supply from the Middle East, US and other exporters for Europe to consume. Crucially, however, the world has been discussing the very real possibility of European energy shortages and rationing for months, likely sapping surprise power over stocks.
MarketMinder’s View: It appears more headlines are recognizing—and expressing cautious optimism—that supply chain disruptions, a key driver of higher inflation, are abating. As this article summarizes upfront: “After a turbulent 18 months — triggered by what industry specialists describe as a ‘perfect storm’ of factors ranging from chronic under-investment and Covid-19-induced closures to a giant container ship getting stuck in the Suez Canal — recent data point to a return to relative calm.” The piece then runs through a spate of evidence: a -45% decline in container shipping costs from their peak last fall; the -75% year-to-date decline in ships queuing at the Port of LA, despite the busiest June in a century; falling delivery times for air freight; and, according to the New York Fed’s gauge of global supply chain pressures (which we featured here), July’s reading is down -57% from its December peak. Still, the article frets potential downsides: “… the trend may reflect weakening demand for goods, as high inflation — which was, in part, owing to the surge in the cost of shipping and materials over 2021 — dents purchasing power.” We see this as a sign of what Fisher Investments founder and Executive Chairman Ken Fisher calls the “Pessimism of Disbelief” (PoD), the ready dismissal of good news to focus on any negatives that might lurk. In our view, PoD’s continued prevalence is bull market fuel because it makes positive surprise easier to attain. Don’t overthink it. Contorting supply chain improvements into something bad is a recipe for missing a recovery that may be close, if it isn’t underway already.
MarketMinder’s View: We give this article one point for its decent explanation upfront about why the yield curve matters. “Banks can make money when interest rates rise but this is far easier when the yield curve slopes upward, and they borrow lower and lend higher. A deeply inverted curve puts a damper on margin expansion.” However, it then commits a common error we have seen in many yield curve inversion discussions: “Two hundred and twenty five basis points of rate hikes this year and the promise of more to come as the Fed battles to bring inflation somewhere in the same ZIP code as its 2% target has lifted the two-year yield almost 50 bps above the 10-year yield. This is the deepest inversion since 2000 ... as long as the yield curve is heavily inverted, markets are fragile, and recession looms large over the economy.” Yet, as we have written (repeatedly), rate hikes alone don’t spell recession, and the yield curve—properly measured using the three-month Treasury yield instead of the more commonly cited two-year yield, as this article does—isn’t signaling one, either. The reason: Banks’ funding costs are closely tied to shorter-term 3-month rates, which remain below benchmark 10-year rates lenders typically base longer-term loans on. New lending remains profitable. Moreover, even if the Fed hikes further, banks’ deposit costs haven’t kept up—nationally, they still round to zero (per the St. Louis Federal Reserve). In our view, the argument lending conditions are restrictive and a “credit reckoning” is due is a false fear. We are closely monitoring for a US yield curve inversion—especially if one has global parallels with other major economies—but also keep in mind that it isn’t a timing tool. Given how widely covered the “yield curve inversion leading to recession” fear is today, we also think the fear has little negative surprise power, with stocks likely pre-pricing much of the concern already.
MarketMinder’s View: As always, MarketMinder is politically agnostic, never favoring any party, politician or policy anywhere. We seek to address political developments’ potential economic and market impact only. In this case, to defray households’ rising living costs, “German Finance Minister Christian Lindner on Wednesday announced measures to raise tax thresholds and increase child benefits slightly. ... Rather than directly cutting taxes, the proposals would raise the threshold from which tax is paid, including the level from which the highest rate is levied. The Finance Ministry is set to raise the tax-free allowance from €10,347 (roughly $10,550) currently to €10,632 next year and €10,932 in 2024. People start paying income tax on earnings after this figure. The top tax rate, which currently kicks in from €58,597 at present will increase to €61,972 next year and from €63,515 in 2023. Meanwhile, child benefit payments for the first two children are set to rise by €8 to €227 per month, along with other increases for families with more than two children.” From here, the article delves into sociological implications—focusing mostly on the potential winners and losers, though that isn’t our focus. Rather, we think the debate highlights the three-way coalition government’s divides. We don’t favor one side over the other, but we point this out because it illustrates why coalition governments struggle to pass major legislation. Marginal tax relief over a couple years and a small extra child benefit doesn’t strike us as earth-shattering, yet political squabbling over these minor changes could water them down further. For stocks, Germany’s political gridlock extends a status quo from the past several years—one that suits markets just fine.
MarketMinder’s View: Please note, MarketMinder takes no stand either for or against any policy such as the one discussed here: taxing corporate stock buybacks. Our aim is simply to assess the potential economic and market ramifications, if any. On that front, we think this article helpfully dissects buybacks’ alleged drawbacks: “The critics argue that buybacks are driven by greedy executives and starve firms of capital for investment. They point to data that dividends and repurchases by S&P 500 companies routinely exceed 90% of their net income. Between 2012 and 2021, public companies distributed $11 trillion to shareholders, 99% of net income, mostly via repurchases. These critics ignore equity issuances to shareholders, which move cash in the other direction. Across the market, firms recover from shareholders, directly or indirectly, most of the capital distributed by repurchases. Taking into account equity issuances, net shareholder payouts in public firms during 2012-21 were only about $4.4 trillion. By our calculations, this left public companies with approximately $10 trillion for investment, not counting proceeds from debt financing.” As the article further notes, much of that capital was ploughed back into investment, as evidenced by capital expenditures and research & development hitting record highs even amid big buybacks—debunking the notion share repurchases hinder businesses investment. The latter half of the piece tallies the supposed harms taxing buybacks will cause, which we think are probably a tad overstated at this juncture, but it acknowledges the proposed 1% tax’s damage would likely be limited. While this is something worth keeping an eye on, we see little to be alarmed about at this point, in our view. For further discussion of this and other issues in recent legislative activity, please see our commentary last week, “Sinema Speaks, Delivering Inflation Reduction Act Tweaks.”
MarketMinder’s View: Those countries are the Czech Republic, Slovakia and Hungary, which have an exemption from the EU’s plans to ban Russian oil imports. They receive Russian oil through the Druzhba pipeline, which runs through Ukraine and appears to be caught in a sanctions standoff. “Transneft, the state-owned operator of the Russian portion the pipeline, pays transit fees to its Ukrainian counterpart, UkrTransNafta, for the oil to pass through the country. But on Tuesday, Transneft said its July payment had been returned, and it blamed issues related to European sanctions aimed at punishing Russia for its invasion of Ukraine. … Germany and Poland, which sit at the northern end of the pipeline, were not affected by the interruption, Transneft said.” This is obviously not great news for the three affected nations, which rely on Russian oil—hence their exemption from the EU’s import ban. But also, this development mostly just confirms an outcome that investors have speculated about for months. Counterintuitively, it could help uncertainty fall a bit. That isn’t to dismiss the potential economic pain, but rather to remind investors how markets work. They look forward and usually discount widely expected events well in advance.
MarketMinder’s View: We always enjoy a contrarian view, so we read with great interest this argument that floating exchange rates are causing instability throughout the developing world, as we have long agreed with those who argue fixed exchange rates are inherently unstable. In making its case, this piece compares what it portrays as a time of steady, crisis-free economic development under the post-War system of fixed exchange rates with a supposedly wild era of developing world booms and busts once the Nixon Administration ended fixed dollar convertibility to gold in the 1970s. Supposedly this was “an era of flexible, unstable exchange rates” that encouraged developing nations to borrow beyond their means in US dollars at low interest rates, creating bills they couldn’t hope to pay when their currencies depreciated. Now, there indeed is a history of Emerging Markets getting into trouble when high foreign currency debt loads became unserviceable after their currencies crashed. But this happened because nations had currency pegs. The primary example is 1997’s Asian Currency Crisis, when South Korea, Thailand and Indonesia required IMF bailouts and several other nations came close. All borrowed heavily in dollars throughout the 1990s, taking advantage of their pegged exchange rates—if their currencies were free-floating, governments would have had more market signals and might have borrowed differently. But instead, they continued loading up on debt that was artificially cheap, creating big trouble when the dollar strengthened. Maintaining the pegs—and debt affordability—required draining foreign exchange reserves to defend them. Inevitably, these nations exhausted their reserves, forcing devaluations that sent dollar-denominated interest payments higher overnight (when converted to their home currencies) at the exact time they were out of hard currency to service them. In our view, their decisions to adopt floating rates after this period is a large reason why we haven’t seen a repeat in these nations. So we are skeptical that going back to a system where all developing-world currencies are pegged to the dollar will erase the risk of the crises that Frontier Markets Sri Lanka, Bangladesh and Pakistan are presently suffering through—if anything, making pegs more widespread could raise the risk of crisis in more nations beyond these.
MarketMinder’s View: This forecast isn’t quite what the headline suggests. The Institute for Employment Research is not forecasting a -7% contraction in German GDP, which is what a reduction of -£220 billion (-€260 billion) from Germany’s 2021 nominal GDP (per FactSet) would amount to. Nor is it projecting nearly a quarter million near-term job losses. Rather, this is an academic exercise aimed at comparing how the economic response to the war in Ukraine might affect Germany’s economy over the rest of this decade compared to a counterfactual where there is no war. So, they modeled out a hypothetical future, then applied the war to that model, leading to the conclusion that German output over this period would be €260 billion higher in a no-war scenario. The employment calculation follows similar logic. For investors, we don’t see much here of use. One, the vast majority of investors already see and expect more German economic trouble due to the natural gas shortage spurred by sanctions and Russian retaliation—that is a big reason why German stocks have endured a bear market. Two, long-term forecasts like this are guesswork, full of assumptions that may or may not prove true in reality. Three, stocks move most on the next 3 – 30 months, not possibilities over a decade.
MarketMinder’s View: The UK’s private-sector July retail sales measures are out, and at first blush they don’t augur well for the official report, which comes out late next week. According to the British Retail Consortium’s survey, sales rose just 2.3% y/y. That figure isn’t adjusted for inflation, which is running north of 9% y/y in Britain, so it points to a substantial decline in sales volumes on a year-over-year basis. Yet separate data from credit card provider Barclaycard, which aggregates card users’ spending, showed sizable month-over-month jumps in spending on electronics, clothing and personal care products even as spending on gasoline soared. But these figures, too, aren’t adjusted for inflation or seasonality, so it isn’t clear that the summer holiday boost will reflect in the Office for National Statistics’ seasonally adjusted measure of sales volumes next week. Therefore, we see these data as, at best, a loose sketch of retail spending. More important, in our view, is the general reaction and what it says about sentiment. Keeping with the recent trend—as the headline alludes—few expect any positivity from July to last, especially with the household energy price cap set to soar in October, which will flip more of households’ budgets away from discretionary spending. This is a fair observation, but it is very well known by now, limiting its surprise power over markets, which we think is a big reason why UK stocks have rebounded so strongly since July.
MarketMinder’s View: We are a little bit ambivalent about this piece, in large part because we have never really bought the thesis that stocks enjoyed a 40-year bull market driven by low interest rates from 1982 onward. Such portrayals of so-called secular bull markets have always struck us as too simplistic, and they gloss over some huge bear markets as well as the fact that the bull markets along the way had varying sector and geographic leadership. We also think it leads to a this-time-is-different argument that rising interest rates radically change the calculus for stocks from here, which is far too speculative and, in our view, conflates coincidence with causality. But we think the piece also makes two great points worth considering today. First, the 1980s bull market began when things looked quite dark. The fed-funds target rate was still in double-digit territory, inflation rates were about where they are now, and the general consensus was stocks were a lousy investment. Let that be a reminder that bull markets often begin when people least expect them. Which brings us to number two: Bull markets still follow bear markets, and there are plenty of frontiers for technological developments to drive earnings growth in ways people can’t imagine now. Perhaps that will include “next-generation machine intelligence, geothermal energy, gene therapy, insta-vaccines, nuclear fusion or, more likely, something completely out of left field that starts out expensive, is dismissed by skeptics and then gets relentlessly cheaper over decades, creating wealth for society.”