Daily Commentary

MarketMinder’s View: According to the European Commission’s Economic Sentiment Indicator, economic and consumer confidence fell sharply this month: “The figures, measuring economic sentiment across five key sectors of the European economy, also reveal employment expectations are under pressure across the EU and euro zone. Employers in the retail trade, services and industry sectors are all adjusting their employment plans against a backdrop of ongoing war in the Middle East.” This, alongside weakness in recent eurozone business surveys, has sparked fears of “looming ‘stagflation.’” The rest of the article speculates about how the situation in Iran may evolve from here, which we don’t offer an opinion on—our interest is more on the economic and market implications. While we don’t dismiss the possibility of an escalation in the conflict, it is critical to think in terms of probabilities when it comes to investing. History suggests war in the Middle East may spook markets in the short term, but over the long term, stocks recognize the broader economic fallout is limited. That sentiment surveys already reflect worst-case scenarios indicate to us that it won’t take much to positively surprise to the upside.

MarketMinder’s View: This piece mentions a number of publicly traded companies and investment themes, so please note MarketMinder doesn’t make individual security recommendations. Rather, we highlight this piece to address a broader theme. As its title suggests, the article argues Utilities stocks’ historically “defensive” characteristics and potential growthy upside due to AI demand (in the form of data centers and energy) make for a seemingly winning combination. We see things differently—Utilities is a “defensive” category, full stop. The sector’s recent connection to AI and the broader technology sector is way overstated, for several reasons. For one, greater demand for electricity generation via data center buildouts doesn’t equate to sustained equity outperformance, which 2024’s lackluster rally showed. Secondly, this connection overlooks the high costs of upgrading power grids to account for this supposed demand spike, weighing on Utilities’ companies margins. More generally, though, many miss that their short-lived outperformance also coincided with a broader market selloff tied to conflict between Iran and Israel, behavior typical of a defensive category. Also, sometimes, countertrends just happen. Reading too far into them risks making portfolio mistakes. Lastly, note Utilities are also down since the war began, albeit less than global stocks, which makes sense when you consider their rates are regulated and higher energy prices make power costlier for them to provide.

MarketMinder’s View: While we have a few small quibbles, this is a great takedown of the Fed’s economic forecasting and forward guidance—two attempts at transparency that tend to hurt the Fed’s credibility. Once upon a time, the Fed was opaque by design, with former Chair Alan Greenspan perfecting the art of Fed speak—noncommittal jargon-laced muttering that didn’t make much sense so that policymakers wouldn’t back themselves into a corner. For the past 20 years, the Fed has pursued the opposite, transparency, signaling clearly its expected economic and monetary policy outcomes. Even though the fine print says none of this stuff is airtight and all decisions are data-dependent, it often gives the impression of the Fed saying one thing and doing another. “The Fed’s quarterly forecasting exercise is bad for the Fed’s credibility. The most conspicuous feature of the SEPs [Summary of Economic Projections] in recent years is how wrong they’ve been. Officials since 2022 have chronically goofed in predicting the pace at which they’d pull inflation down to their 2% target rate, exposing the technocrats’ faulty grasp of how the economy works. Beyond an economic embarrassment, this is a political-economy nightmare. The rationale for vesting awesome powers in a politically insulated central bank is that sage technocrats will make wise decisions. The Fed undermines this premise four times a year by giving the public ample grounds to question officials’ sagacity.” Yuuuuuup. Now, where we think this goes a little far is in arguing Fed guidance steers markets, obliterating “important price signals” policymakers should otherwise follow. Yet fed-funds futures and Treasury markets often shift before the Fed talks, and the Fed often ends up being a rate follower rather than a rate setter. Yes, forward guidance can affect sentiment, but markets price it quickly and move on.