Daily Commentary

Providing succinct, entertaining and savvy thinking on global capital markets. Our goal is to provide discerning investors the most essential information and commentary to stay in tune with what's happening in the markets, while providing unique perspectives on essential financial issues. And just as important, Fisher Investments MarketMinder aims to help investors discern between useful information and potentially misleading hype.


What Q3 Eurozone GDP Growth Tells Investors

Surprise! After the release of US Q3 GDP last Thursday, the eurozone’s four biggest economies followed suit, with Germany stealing most headlines thanks to Q3 growth beating contraction projections and rebuking widespread recession chatter. Yet most didn’t cheer the better-than-estimated numbers. Instead, many warned the surprise beat was a passing anomaly before more troubling times ahead—especially given persistent elevated inflation. While last quarter’s data are old news, this dour reaction reeks of the pessimism of disbelief—the foundation of a recovery, in our view. 

First, the numbers: Eurozone GDP grew 0.2% q/q in Q3, topping expectations of 0.1%.[i] Of the 19 eurozone nations, 9 reported as of November 1, with 3 (Belgium, Latvia and Austria) contracting.[ii] But the common currency bloc’s biggest economies all expanded. Italy grew fastest (0.5% q/q), beating flatline expectations, as national statistics bureau ISTAT noted service sector gains offset contractions in industry and agriculture. The findings were also mixed but growthy in France (0.2% q/q) and Spain (0.2% q/q). For the former, gross fixed capital formation contributed while household spending stagnated; for the latter, tourism boosted the services sector as the country relaxed COVID restrictions. However, the Continent’s largest economy, Germany, grabbed most attention, growing 0.3% q/q. Though the first estimate doesn’t share a component breakdown, statistics agency Destatis credited private consumption expenditure for Q3 growth.

In a vacuum, the data were fine—most were slower than Q2 growth rates, but they largely beat expectations. However, “yeah, but” was the typical reaction, as most coverage found reason to be downcast. In our view, that is evidence of the pessimism of disbelief—a phenomenon in which investors emphasize negatives everywhere, even in positive news.

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Chart of the Week: It Isn’t Gold

Elevated inflation. War in Eastern Europe. Recession fears and a bear market. This has been a trying year for assets almost across the board. But with the aforementioned backdrop, many would—and still do[i]—argue gold’s merits. They claim it hedges chaos, inflation and equity risk. But there is an inconvenient truth: Gold hasn’t been spared from this year’s downturn, and a cold look at the facts should show you theories of its hedging powers are pure, 24-carat myths.

Consider our Chart of the Week, which shows you gold’s performance this year, overlaid with a few key events. You will no doubt see it began the year well, rising 12.9% through March 8’s high. That was the day the West unveiled sweeping sanctions, including UK and US plans to cease importing Russian energy products.

Exhibit 1: Gold in 2022

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An Autumn Update on US Housing

Will trouble in the US housing market spill over into the broader economy? Some analysts worry rising mortgage rates—tied to the Fed’s rate hikes—will leave would-be buyers unable to seal the deal, leading to an oversupply of new homes. That will then cause housing prices to crash—with alleged worrisome consequences for the US economy. However, while housing market data don’t look great, we don’t think a US recession is assured to stem from housing—and here is why.

Your first clue housing doesn’t drive the economy: the latest GDP report. Despite residential investment’s -26.4% annualized plunge in Q3, its worst reading since Q2 2020, headline GDP rose 2.6%.[i] Residential investment’s -1.4 percentage point detraction didn’t negate positive contributions from personal consumption expenditures, business investment and net trade.[ii] Now, GDP isn’t an all-encompassing economic snapshot, but in our view, its Q3 growth despite residential real estate’s big drop speaks to housing’s broader economic impact—or lack thereof.

While real estate often gets eyeballs, it is a volatile subcategory that comprises about 3% of GDP—thereby lacking the scale to be a meaningful economic swing factor, in our view. Recent pre-pandemic history shows residential investment’s big swings (positive or negative) didn’t drive headline GDP. (Exhibit 1)

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What Recent Data Suggest About America’s Economy

Mixed. That is the word most coverage used to describe the US Q3 GDP report, which hit the wires Thursday morning. On the bright side, the 2.6% annualized growth erased Q1 and Q2’s sequential declines and brought GDP to a fresh high, with consumer spending and business investment also notching new records.[i] But residential real estate detracted bigtime, and two of the three biggest contributors were the relatively less meaningful government spending and net trade. Looming over everything, the most meaningful segment of the yield curve—the stretch between 3-month and 10-year US Treasury yields—slightly inverted in recent days, fanning fears that recession is just around the corner. To be fair, it is possible economic conditions get worse from here. But it isn’t a foregone conclusion, and for stocks, a mild recession probably lacks much surprise power.

The GDP report did clear up one thing: It cuts against the argument that the US economy was already in recession when GDP slid in Q1 and Q2. In both quarters, consumer spending and business investment rose—and even when you factor in residential real estate’s burgeoning slide, pure private sector components overall grew. That repeated in Q3, contributing to GDP more than erasing its Q1 and Q2 slide. But deeper under the hood, the script flipped a bit. Government spending and fast-rising imports pulled headline GDP negative in Q1, while Uncle Sam and falling private inventories were Q2’s detractors. Yet in Q3, net trade added 2.77 percentage points to headline growth as exports rose 14.4% and imports fell -6.9%.[ii] That isn’t great news, considering imports represent domestic demand and the strong dollar—in theory—should have enabled businesses and consumers to import a higher quantity of goods for less money. So that is something to watch. Meanwhile, consumer spending growth slowed from 2.0% in Q2 to 1.4% as spending on goods contracted again (-1.2%) and spending on services slowed from 4.0% to 2.8%.[iii] Business investment was more of a bright spot, accelerating from 0.1% annualized growth in Q2 to 3.7%, but residential real estate’s -26.4% plunge weighed heavily on total private sector growth.[iv]

Now, we aren’t of the school that believes slowing private sector growth is an automatic prelude to a contraction. Past behavior doesn’t predict. However, we also think it is fair to presume elevated inflation forced consumers to cool their jets a bit, and that could continue. Imports’ slide could be a sign domestic demand overall is slipping. Inventories’ continued slide could mean businesses are in cost-cutting mode. A lot of this stuff is open to interpretation.

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Despite the Sound and Fury, Chinese Political Shifts Don’t Seem Surprising

Chinese stocks came under sharp pressure in Hong Kong and the US early this week, with the Hang Seng Index falling -6.3% Monday, cutting against a rise in most markets globally.[i] This came as China’s delayed economic data hit the newswires and the Chinese Communist Party (CCP) National Congress concluded, officially handing President Xi Jinping an unprecedented third term amid a restructured leadership group packed exclusively with loyalists to him. While that last part stirred much conversation and may have surprised some at the margin, overall the developments look set to extend the status quo versus some kind of huge shock.

Let us start with the smaller stuff: The delayed data. When China didn’t release trade data as scheduled on October 14—with no explanation—many feared terrible figures would come. Those fears grew more when it delayed GDP results last week, ahead of the Congress’s convening. But in the end, the data don’t support the narrative. After Chinese GDP growth slowed to a 0.4% y/y crawl in Q2, the latest release showed it rebounded to 3.9% in Q3 and beat expectations.[ii] This was as September industrial production and fixed asset investment accelerated to 6.3% y/y and 5.9% year-to-date y/y growth, respectively. It appears easing COVID restrictions and a raft of government support measures—many aimed at ailing property markets—helped buoy growth.

Headwinds remain. For example, 30 cities still face varying degrees of COVID restrictions, affecting around 225 million people.[iii] Hence, with year-to-date GDP growth through Q3 at only 3.0% y/y, China may not meet its 5.5% full-year growth target. Meanwhile, retail sales (2.5% y/y), exports (5.7%) and imports (0.3%) decelerated in September.[iv] That said, few analysts expect China to meet its 2022 growth target, and slowing in these retail and trade data just continues existing trends. Domestic and global demand have been weakening—the former more than the latter due to “zero-COVID” policies and real estate uncertainty—but China has dealt with these issues all year. They aren’t anything new.

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What Follows Truss’s 44 Days?

Editors’ Note: MarketMinder prefers no politician nor any party. We assess developments for their potential economic and market impact only.

Forty-four (and a half) days. That is how long Liz Truss served as UK Prime Minister (PM) before announcing her resignation today, capping a madcap week in Parliament. Now the Conservative Party must hold another leadership contest to determine who will be this year’s third PM. A lot of names are flying around, as is talk of a snap election, with much chatter about who is and isn’t good for markets. In our view, this is the wrong way to think about it. While recent volatility may seem to imply otherwise, stocks don’t care about political personalities or the ideology of who is in charge. Remember this as the circus rolls on.

Mercifully, the replacement process should be short, unlike the months-long contest that determined ousted PM Boris Johnson’s immediate replacement. That race, with many runners and riders, went through multiple rounds of voting among Conservative Members of Parliament (MPs) before winnowing down to Truss—the grassroots’ preferred choice—and former Chancellor of the Exchequer Rishi Sunak, whom more MPs backed. Both spent the summer wooing party members, and Truss emerged victorious. But although the Conservative public at large remains largely favorable to Truss’s platform of tax cuts and deregulation, many Conservative MPs blame her ideology for their recent polling declines. So in what looks like an effort to keep Truss’s ideological bedfellows off the final shortlist, the party will require all leadership hopefuls to get the backing of at least 100 MPs in order to make the ballot. That would mean a maximum of three. In that event, MPs would vote Monday, then put the top two finishers to an online vote of all party members, which would run from Tuesday through Friday. But it is also possible that only one candidate attracts the necessary number of backers, which would negate the need for a vote. Either way, the matter will be settled by the end of next week.

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A Counterpoint to Dour Economic Forecasts

Recession forecasts have dominated financial headlines this year. That is understandable given the global economy’s soft patches (e.g., Europe’s energy situation), and today’s economic headwinds heighten the prospect of recession in certain regions. That said, expectations of a severe global downturn seem overstated, in our view. Fundamental drivers—key among them bank lending—suggest reality isn’t as poor as many anticipate and underpin the recovery we think is coming.

Many prominent outlets and voices think things are going to get worse before they get better. A recent Wall Street Journal survey found a majority of polled economists expect the US will enter recession in the next 12 months. World Bank President David Malpass warned of a “real danger” of a worldwide contraction next year. The International Energy Agency lowered its global oil demand growth forecast because “major institutions” downgraded their latest global GDP estimates.

But the kicker: Last week the IMF’s “World Economic Outlook” (WEO) cranked headlines’ recession warnings into overdrive. Interestingly (and unsurprisingly), most coverage focused on one line in the WEO’s foreword: “In short, the worst is yet to come, and for many people 2023 will feel like a recession.” (boldface ours) We don’t dismiss people’s emotions or hardships, but feelings don’t predict people’s actions. Looking a bit deeper, the IMF isn’t even forecasting a global GDP contraction next year—it is predicting annual growth of 2.7%, 0.2 percentage point below its July WEO estimate. Yes, that is slower growth—but it is still growth.

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What to Make of Heightened Volatility

All year, volatility—swings in both directions, even intraday—has been elevated, contributing to many feeling like markets are on a roller coaster in 2022. The swings may be uncomfortable. But how people react can often be more problematic than that: Wild gyrations are potentially unhelpful, leading many to think momentous events—and perhaps turning points—are afoot. They see the swings as a call to action as a result. We suggest tuning out the noise.

If it seems like 2022 is more volatile than in recent years, it is. Consider intraday data. As Exhibit 1 shows, this year has seen the biggest S&P 500 intraday moves since 2009, with a 1.9% average difference between days’ lows and highs. Volatility normally is elevated, unfortunately, in a bear market. Also see the mid-1970s, early-1980s and early-2000s. And, of course, there is the Great Depression, history’s most volatile period.

Exhibit 1: S&P 500 Bouncier in 2022 Than Most Years, but not Abnormally So

Source: Global Financial Data, Inc., as of 10/19/2022. S&P 500 price index annual average percent change between daily intraday lows and intraday highs, 1/2/1930 – 10/18/2022. 2022’s average is year to date. Note: Intraday prices aren’t available during WWII and the Korean War.

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As Britain’s Mini-Budget U-Turns…

Editors’ Note: MarketMinder is politically agnostic. We prefer no politician nor any party and assess developments for their potential economic and market impact only.

UK politics keep moving at warp speed, continuing bond markets’ wild ride. When last we left you Friday evening, Prime Minister Liz Truss had replaced Chancellor of the Exchequer Kwasi Kwarteng with Jeremy Hunt and U-turned on her prior plans to cancel the corporate tax hike scheduled for April. At the time, Hunt was due to unveil the government’s new economic plans on Halloween, and Truss had seemingly managed to shore up her position a wee bit. But after a weekend of leaks and rumors about an intraparty coup, Hunt unveiled the new economic plans two weeks early and U-turned on the vast majority of Truss and Kwarteng’s prior proposals, leaving most Westminster insiders speculating that her days are numbered. The UK’s 10-year Gilt yield fell over 41 basis points to 3.97% in response, mid-to-longer-term European 10-year yields fell modestly in sympathy and medium-term US Treasury yields inched lower, while the S&P 500 jumped 2.6% on the day.[i] We see all of this as a sentiment reaction—much ado about a lot of political wrangling and very little actual change. Moving on from this saga, however it resolves, probably reduces uncertainty and gives markets one less thing to stew over.

Hunt’s new package keeps a handful of Truss and Kwarteng’s earlier proposals. The reversal of April’s 1.25 percentage point (ppt) increase to the tax that funds Britain’s National Health Service, which has already begun its journey through Parliament, will go forward. So will the low-tax “investment zones” and the increased threshold for “stamp duty” on home purchase, which will rise from £125,000 to £250,000. The cap on bankers’ bonuses will still be scrapped, and households will still get relief from higher energy prices … with a catch. Where the original plan ran through the next two winters, Hunt’s version will end in April, and he hinted that it would be means-tested.

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The Latest Twists in Westminster

Editors’ Note: MarketMinder prefers no party nor any politician. We are politically agnostic and assess developments for their potential economic and market impact only.

What a difference a day makes. Twenty-four hours ago, Jeremy Hunt was a backbench Member of Parliament (MP) in the UK with two failed Conservative Party leadership bids and no Cabinet position in three years. Now he is Chancellor of the Exchequer, responsible for executing the economic vision of Prime Minister Liz Truss. That is a bit awkward considering he supported her leadership opponent and economic policy foil, former Chancellor Rishi Sunak, in the final stage of this summer’s leadership contest. Out, just days into his tenure, is now-former Chancellor Kwasi Kwarteng, who has endured the insult of getting sacked by Truss simply for trying to fulfill her campaign proposals. Yes, UK politics are getting messy. Again. Breeding immediate policy uncertainty. Again. But the dust shouldn’t take long to settle, which should reveal the country’s deep gridlock and help investors get past today’s jitters.

When last we left Truss and Kwarteng, they were dealing with the fallout from their “mini-budget,” which they tried to sell as a growth-boosting suite of tax cuts and help for households dealing with sky-high energy costs and a cost-of living crisis. When they unveiled the measures, the majority of global think tank/political-types labeled them an irresponsible pile of debt-fueling “unfunded tax cuts.” We didn’t—and don’t—think either viewpoint is right. As we wrote at the time, the plan merely undid one very small, six-month-old rise in the tax that funds Britain’s National Health Service; reduced the basic income tax rate to partly offset tax bands’ not rising with inflation; removed the top 45% tax rate on incomes over £150,000 (leaving the top rate at 40% on income over £100,000); and canceled a corporate tax hike from 19% to 25% scheduled to take effect next year. All in, these changes would have reduced some, but not all, of the stealth tax hike Brits endured this year.

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