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: In light of recent volatility, we found this piece a helpful roundup of some behavioral biases to be aware of, including recency bias (extrapolating recent past activity into the future) and confirmation bias (focusing solely on information that validates and justifies your decision and dismissing contrary evidence). In particular, we found this description of action bias—“the perceived need to do something during stressful times”—helpful. “During broad market downturns, the action that often seems most appealing is selling. But if you do sell, you might lock in a poor price or trigger taxable gains that otherwise could have been delayed much longer. The urge to take dramatic action can trick us in cases where the statistically correct choice is thoughtful inaction. … Rather, doing nothing often is the smart move, especially if you have many years for prices to recover.” Important to note: These biases can afflict professional and regular investors alike, making it vital to understand your investment adviser’s processes and disciplines to avoid falling prey. And if you do fall prey, take heart: Acting upon them doesn’t necessarily derail you from reaching your investment goals, especially if you recognize and rectify the error quickly and treat it as a learning opportunity. Read the full article to help kick-start a little investing introspection.
MarketMinder’s View: We found this discussion of environmental, social and governance (ESG) investing to be overall mixed. On the plus side, we think this correctly highlights the difficulty in actually defining and identifying which securities “fit” the common understanding of those terms. “ESG raters can’t even agree on how to evaluate these companies when they consider the same attribute such as carbon intensity. … Bank of America gets a below-average ESG score from one rating agency and a well-above-average rating from another. These disagreements arise because raters differ on how to measure and weigh ESG attributes.” It also correctly notes that claims ESG factors drive outperformance are unproven and rest on shaky analysis. However, we see this mostly as championing passive investing over “active” (to the extent ESG is active). However, many of the critiques here apply to passive, too. Passive investing operates on the notion that you can’t beat efficient markets, so just mirror them. But if you are dabbling in niche active strategies as this suggests near the end, you aren’t passive. Lag there could offset whatever benefit you think you are getting from indexing with the “core” of your portfolio. Moreover, owning passive products doesn’t make you a passive investor, as the heavy proliferation of niche Exchange-Traded Funds illustrates well.
MarketMinder’s View: As always, MarketMinder doesn’t make individual security recommendations, but we occasionally feature coverage of specific companies that highlight a broader theme. That theme here is special purpose acquisition companies (SPACs)—also known as blank check companies—which have been in the news lately due to some high-profile backers. This piece explains the concept as well as the risks. SPACs are publicly traded holding companies without any holdings, and their sole purpose is to merge with startups, giving them an end run around the lengthy traditional IPO process. “The point of the stock market is to funnel capital to companies with bold ambitions that banks and bondholders might be wary of lending to. Early-stage life sciences companies have a long track record of raising money via an IPO to fund research and see them through the lengthy regulatory approval process.” But lately, electric vehicle and space travel startups have gone the SPAC route, drawing comparisons with the dot-com bubble due to their abundance of hype and lack of revenues. One is now being investigated for fraud. We aren’t saying every one of these companies is bad news, but the article hits the nail on the head: “These businesses are selling a vision rather than a proven track record of turning that dream into reality. Investments don’t get much more speculative than that.” As with any security, the onus is on you, the investor, to do your full due diligence, think critically about whether the risk is a match for your goals and needs, and avoid overconcentration.
MarketMinder’s View: This is the story of people who presumed low-volatility stocks were unloved and therefore undervalued, and loaded up on low-volatility funds in hopes of beating the market—never mind the fact that higher returns are usually the reward for higher risk. Reality, of course, soundly debunked the theory and thesis to own and proved once again that performance and past volatility aren’t predictive. “Often, the ‘backtests,’ or hypothetical historical results used to market such funds, are based not on one portfolio, but two. Researchers assume an investor bought the best stocks identified by the strategy and sold short, or bet against, the worst. The simulated past results also often assume you put an equal amount of money in each stock rather than more in the biggest. And they usually pretend that trading has always been free. In the real world, where regulations restrict funds from extensive short selling, these portfolios can profit only by betting on winners, not by betting against losers. They also incur trading costs, which can be substantial at big funds.” During 2020’s bear market, investors owning these funds also ended up with substantial overweights to Financials, Utilities and Real Estate, driving underperformance during the bear market and recovery. In other words, more volatility and less commensurate reward. The lesson: Don’t fall for flashy marketing tactics, and remember stocks are stocks, and there is no such thing as a low-risk stock or one with inherently low volatility.
MarketMinder’s View: The headline is the popular interpretation of the Fed’s changed approach to its dual mandate (fostering maximum employment and keeping prices stable), which debuted in this week’s monetary policy announcement. As the article explains, the Fed is trying to avoid the trap of zero rates and stubborn below-target inflation, which Japan fell into almost 30 years ago and the eurozone is now struggling with. The irony is that the Fed is pursuing the exact same policies as the Bank of Japan and ECB, yet somehow hoping for different results. If zero or sub-zero interest rates and quantitative easing didn’t help in either place—and didn’t juice the US economy in the last decade—why would they suddenly start working now? We find it a bit odd that all the coverage presumes there was something uniquely weak about the 2010s that required this extraordinary policy, without considering that the policy itself might be causing the weakness by flattening the yield curve and distorting banks’ net-interest margins (i.e., profits on lending). In our view, saying rates will remain near zero “until the economy has reached maximum employment and inflation has risen to 2% and is on track to ‘moderately exceed 2% for some time’” is tantamount to promising that the floggings will continue until morale improves. We think it would be far more beneficial if the bank did something truly radical and reverted to normal, letting the yield curve steepen so that banks could fulfill their traditional role as the economy’s main money creators.
MarketMinder’s View: With the Bank of England jawboning about negative rates—and futures markets predicting them in the UK within the next year—Brits are naturally wondering what this would mean for their finances. We don’t think either of these developments mean the BoE will for sure take short-term interest rates below zero, as monetary policy is inherently unpredictable, but it is worth considering the possibility, and this piece is a largely handy primer. On the mortgage front, only folks with variable interest rate mortgages would see a change, and most contracts have an interest rate floor built in, so your bank will probably not suddenly start paying you to borrow. Nor are banks likely to pass negative rates on to deposit holders in the most obvious sense by applying a negative rate to savings accounts. Large commercial depositors may—and we mean may—get charged, as has happened to some in the eurozone and Scandinavia, but typical depositors are most likely to simply encounter new fees, if anything. As for the theorized impact on stock markets, we think this puts too fine a point on things by trying to identify specific winners and losers. There isn’t much evidence negative rates across the English Channel created massive demand for stocks, and as a bank tax, we think they are largely contractionary for the broader economy. However, they haven’t proven to be bearish, either, and we doubt that changes in the UK. Interest rates are just one variable influencing capital markets, and they have no preset impact. So if negative rates materialize in the UK, we would urge investors to continue weighing all economic and political fundamentals against the prevailing sentiment backdrop.
MarketMinder’s View: UK retail sales rose 0.8% m/m in August, rising further above their pre-pandemic peak, but slowing markedly from July’s 3.6% rise. Plus, the categorical breakdown alluded to in the headline sparked fears this is a temporary bump, with more stores set to suffer as people continue working from home and city centers remain ghost towns. To us, the widespread pessimism is a good sign, as it means expectations are in check, building a nice wall of worry for stocks to climb. No recovery moves in a straight line, and sales were always going to slow after the initial bump from shops reopening wore off. Rather than reading into volatile data, we think investors benefit from thinking longer term—like stocks do—and focusing on the high likelihood of recovery and improving corporate earnings over the next 30 months or so.
MarketMinder’s View: This story about New York City’s preparation for a second COVID wave illustrates one reason why we don’t believe a potential future outbreak is likely to derail the new bull market: a lack of negative surprise power. “For months, the city’s Department of Health and Mental Hygiene has been working with academic groups at Columbia University and New York University. The academic teams have been asked to model case numbers, help predict needed hospital resources and to advise the city on how to open up workplaces, schools, restaurants and more.” The article then goes on to describe the experts’ different models and estimates—most of which skew pessimistically. We aren’t saying their forecasts are necessarily correct or not—we aren’t epidemiologists—but from an investing perspective, these public discussions and debate help set expectations. Markets are efficient discounters of widely known information, and closely monitored topics—like anything related to COVID-19—get baked into stock prices. Unless the second wave is materially worse and wallops the global economy again—possible, though it seems unlikely, in our view, given all the information we have today—the bull market is likely to continue climbing the proverbial wall of worry for the foreseeable future. For more, see our 4/28/2020 commentary, “What Would a 'Second Wave' Mean to Markets?”
MarketMinder’s View: Wildfires have ravaged the West Coast this year, and beyond the orange skies and smoky air, the results have also been tragic—some have lost not just their homes or businesses, but their lives. Our hearts go out to those suffering great losses. However, our focus is on the argument here that California wildfires pose a serious threat to the US economy. The reason: Beyond the wildfires’ immediate economic damage, they may also threaten tourism, harm public health, and prompt residents to leave California (which ranks first in state GDP), Oregon and Washington. While this dire scenario is possible, it isn’t inevitable—and rational investing is about acting upon the probable. First, in terms of known damage, consider some of the estimates highlighted here: “The costliest of all was Camp Fire in 2018, which set insurers back over $8.5 billion (€7.16 billion), according to numbers tallied by the Insurance Information Institute. … Reinsurer Munich Re estimates the costs for all the wildfires that year to be over $20 billion. So far this year's fires should bring in a similar calculation.” Even if 2020’s fires exceed that projection, they aren’t likely to approach Hurricane Katrina’s estimated $160 billion in damage—and the costliest natural disaster in US history didn’t start a national recession. As for a hypothetical West Coast exodus, fire season has been a fact of life for residents since these states were settled, and even fires that encroached on major suburbs didn’t cause residents to flee the state permanently—just as hurricanes haven’t spelled the end for Houston, North Carolina’s Research Triangle and even New York City as major commercial hubs and population centers. Moreover, the myriad negative possibilities tend to overshadow the positive ones—like the possibility entrepreneurial businesses and individuals find ways to address wildfire-related challenges. People are resilient.
MarketMinder’s View: Though New Zealand has received international acclaim for its handling of COVID-19, the country still suffered a historic drop in economic output. Q2 GDP plunged -12.2% q/q, the biggest contraction since quarterly records started in 1977. A big reason why: New Zealand closed its borders in order to contain the coronavirus, which knocked its big tourism industry. As noted here, “The second-quarter contraction was driven by service industries, particularly hospitality and accommodation as international travel stopped, the statistics agency said.” Many economists estimate a quicker Q3 GDP rebound than other developed economies, but in our view, New Zealand’s Q2 economic story provides an important investing reminder: Always think global, not local. Although domestic conditions in any one country tend to get headline attention, the global economy matters more—important for globally diversified investors to keep in mind.
MarketMinder’s View: The argument behind the titular question: The Fed’s near-term economic outlook has improved slightly, but because they projected short-term interest rates remaining near zero through 2023, more pain may loom—as evidenced by August’s retail sales rising just 0.6% m/m, missing expectations and continuing a slowdown after May and June’s big rebounds. In our view, that is an impressive amount of overanalyzing—dissecting both central bankers’ words and one monthly reading from a single data series. Despite what many pundits think, the Fed doesn’t possess a crystal ball indicating where GDP and unemployment will be in the future—their estimates are based on their interpretations of the data available to them. That so many seem worried based on one projection suggests pessimism remains widespread—a reason to be bullish, in our view. For more, see today’s commentary, “Don’t Presume ‘Forward Guidance’ Guides Fed Policy.”
MarketMinder’s View: Please note, MarketMinder doesn’t make individual security recommendations. Companies mentioned here serve only to illuminate a broader theme, in this case: Multinational businesses are resourceful in finding ways to do business globally. As headlines fixate on US-China trade tensions, some huge Chinese Tech firms have expanded operations in Singapore, known for its advanced financial and legal system. Many Western multinationals have long set up shop in the city-state as their headquarters in East Asia, so it isn’t shocking to see some Chinese companies follow suit as they expand overseas. In our view, this is a small, but still notable, example of businesses strengthening, not weakening, their ties to the global economy—a counter to relentless protectionism concerns.
MarketMinder’s View: This article points to discrepancies in unemployment benefit statistics between state and federal agencies, underscoring why investors shouldn’t treat any single economic dataset as all-telling. “Federal data implies that nearly 15 million Americans are now receiving benefits under the program, but some economists believe that overstates the true number by millions. The scale of the overcounting issue varies by state. In Texas, figures for Pandemic Unemployment Assistance [PUA] claims closely match the federal government’s. But in Montana, the state says just 9,000 people are receiving benefits under the program, versus the more than 60,000 reported by the federal government. The biggest problems, at least in absolute numbers, are in California. The federal data suggests that nearly seven million Californians are receiving pandemic benefits. The state’s data shows that number is under two million.” Officials and economists are trying to reconcile these gaps, and while some may be fraudulent, reality is much more complex. For example, each state runs its own unemployment insurance system, with different rules, procedures and technology limitations—producing an unclear picture of the actual number of people receiving benefits nationally. Moreover, some workers (e.g., the self-employed) weren’t able to receive benefits until the PUA was set up, painting an even murkier picture of comparing recent layoffs to ones from earlier in the pandemic. Now, labor data, including the now-widely watched weekly jobless claims, are late-lagging—very old news to forward-looking stocks. But knowing what any dataset is—and isn’t—telling you is critical for independently evaluating its importance beyond what the headlines might portray.
MarketMinder’s View: For those of you looking to brush up on your financial terms, here is a nice explainer on liquidity—an important concept for investors to understand, though it can be squirrely to define. Fundamentally, “An asset’s liquidity is a measure of how easily its value can be converted or transferred into another form. Cash is the ultimate liquid asset. Freeing up the value of less-liquid assets takes time or money or both – paying for something by selling a car isn’t as easy, quick or cheap as using a $5 bill to buy coffee.” In highly liquid markets (e.g., the stock market), it is easy to find a buyer or seller. But, crucially, this isn’t always the case, as different markets have different measures of liquidity—which this article explains. For investors, knowing assets’ underlying liquidity helps determine whether they are suited to reach your personal financial goals.
MarketMinder’s View: A common concern we have seen in financial headlines worldwide: Without more government and central bank action, economic recoveries now underway will sputter. This article focuses on Europe, and the worries include: an ECB that doesn’t appear willing to do “whatever it takes”; eurozone governments not doing enough to support their economies as they run up debt; and a “no-deal” Brexit potentially sowing even more chaos. We aren’t saying all is well on the Continent, but from an investing perspective, the concerns discussed here needn’t derail an economic recovery or bull market. For one, more government assistance isn’t required for an economic recovery. As partial reopenings have already shown, easing/lifting COVID-related restrictions can do a lot more for business than a vague stimulus plan. “Second wave” fears may inspire visions of a return to national lockdowns, but this isn’t certain—and based on recent experience, authorities seem determined to implement targeted measures instead. As for Brexit, the latest political brouhaha doesn’t change the fact that we have a good idea of what a “no-deal” outcome will look like. Critically, none of these stories pack the negative surprise power to shock markets, in our view—they have all been hashed and rehashed for most of the year. In our view, dour ongoing sentiment suggests a low bar for reality to exceed, teeing up further upside for stocks.
MarketMinder’s View: This doesn’t really surprise us or change much—the WTO frequently gives demerits to tariffs outside of those implemented to offset countries (allegedly) “dumping” subsidized exports at below-market cost. Its opinion doesn’t negate the domestic rationale for the Trump administration’s tariffs on China, which rests on US trade legislation, nor does it result in immediate changes. WTO disputes regularly take years to resolve. Mostly, this is a political development with no apparent market impact. As for tariffs, our opinion hasn’t changed—the tariffs in force are too small and too easily avoidable to dent global commerce, as GDP figures from 2018 and 2019 demonstrate in spades.
MarketMinder’s View: This piece piles a heaping helping of pessimism on August US industrial production—a bit odd, in our view, since it grew. “The rise in manufacturing offset declines in both mining and utilities output, lifting industrial production 0.4% [m/m] in August. Industrial output rose 3.5% in July. Mining production fell 2.5% in August as Tropical Storm Marco and Hurricane Laura caused what the Fed said were ‘sharp but temporary’ drops in oil and gas extraction and well drilling.” While one month, positive or negative, isn’t all-telling for America’s services-heavy economy, industrial production’s ongoing growth amid hurricane headwinds is nothing to sneeze at, in our view. But worries still abound, à la the economist quoted here: “It is looking increasingly like the recovery in factory production will stall in coming months if no one from Washington is going to ride to the rescue with another pandemic stimulus package.” We disagree: Economies eventually rebound with or without government support. While federal and state relief likely benefited many consumers and businesses hurt by COVID-driven economic restrictions, we think the main force driving recovery is gradual reopening. Insofar as this progresses, economic data should remain growthy—though occasional monthly wobbles wouldn’t shock.
MarketMinder’s View: The Fed’s Main Street Lending Program (MSLP), launched in mid-July, aimed to make $600 billion in loans to medium-sized businesses too large to qualify for the Paycheck Protection Program. But “just $1.4 billion of Main Street loans were issued as of Sept. 10.” Why the minimal take-up? Few lenders were interested in participating—and for sensible reasons, in our view. “Among lender concerns in the program’s current state are capital charges they have to account for due to the requirement to hold 5% of the loans. Some also lack expertise after stepping back from lending to riskier middle-market companies after the last financial crisis a decade ago. And there are also questions around how potential bankruptcies would work, spooking would-be lenders fearful of facing off in court against the Fed, said Ellen Snare, a partner at King & Spalding LLP. The Treasury itself has advised banks to avoid taking any credit risk—a critical component of lending—telling them to target zero losses, according to bankers interviewed by Bloomberg.” Said simply, these stringent terms don’t incentivize many banks to lend—especially not when the yield curve (the gap between short and long rates and a proxy for new loans’ profitability) is extremely flat. That, ironically, is a product of other Fed moves like quantitative easing bond purchases that lower long rates. As for the concerns here that untapped Fed cash is “threatening to undercut the economic recovery and efforts to protect jobs,” we see a different takeaway—that the economic recovery thus far has occurred largely without this purported “lifeline.” In our view, this is powerful evidence the economy doesn’t need the Fed, Congress or any other savior to eventually recover—and stocks, knowing this, don’t wait for an economic recovery to rise.
MarketMinder’s View: “China’s economic recovery accelerated in August, with retail sales, the last holdout among the economy’s major components, returning to pre-coronavirus levels by showing their first month of growth this year. … Sales were up 0.5% from a year earlier, a strong improvement from July’s 1.1% drop.” However, compared to other indicators like accelerating industrial production growth, some experts worry China will have a “two-track” recovery—one led by factory production as consumption and services lag behind. In our view, this is yet another version of “slow recovery” fears major economies worldwide face—a sign of still-rampant pessimism. Rather than get hung up on the specific growth rates, we think China’s experience post-COVID lockdowns still hints at what lies ahead for Western economies as they continue their slow reopening progress. “With no local cases reported in weeks, shopping malls, restaurants and gyms across the country are packed with consumers again. … ‘The retail sales data indicate that pent-up consumer demand was released in August when social-distancing rules were further relaxed,’ said Larry Hu, an economist with Macquarie Group.” Importantly, though, stocks don’t wait for economies to fully recover to rise. Better than expected reality—like these data reflect—will do just fine.
MarketMinder’s View: In August the UK government rolled out the titular plan that covered 50% of a diner’s tab (up to £10 per person on certain weekdays)—an effort to boost the economy while aiding severely impacted restaurants. The results: “Britons spent £155m less in supermarkets in August than in the previous month as many returned to workplaces and the government’s eat out to help out scheme encouraged visiting restaurants and cafes.” This highlights a point we have long made about COVID fiscal responses. They are less stimulus and more bailout—an effort by the government to reverse the winners and losers lockdowns wrought in the winter and spring. The encouraging thing about all this is less the government response and more the shift to restaurants and eating out. It hints that the post-COVID world might look a little more like the pre-COVID world than many fear.