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.

The Dollar Cools Off

As stocks’ frustrating and disappointing 2022 winds down, it is worth noting that several of this year’s big fears have started to fade. Oil and gas prices are down, with US average unleaded prices a few cents from pre-2022 levels.[i] The inflation rate is easing, and forward-looking inflation indicators (e.g., money supply growth, shipping costs, food and commodity prices) point to further relief. Long-term interest rates are down lately, too, and the Fed is jawboning about slowing its rate hikes. Also pulling back from extremes: the US dollar, whose year-to-date rise versus a broad currency basket is down from 11.5% in late September to just 5.9%.[ii] In our view, this movement isn’t inherently good or bad for stocks. But headlines have spun a lot of gloom about the strong dollar in recent months, and its easing should help quiet another source of sour sentiment.

We think the dollar’s rise this year is more a symptom of stocks’ woes than anything causal. It is pretty normal for the dollar to strengthen during a bear market as part of the general flight to quality mentality that reigns during downturns. The dollar has also benefited from the Fed’s fast rate hikes and the rise in long-term US Treasury yields, as money tends to flow to the highest-yielding asset (all else equal). So to us, the dollar’s movement this year seems pretty typical, with the record high it notched in the process mostly trivia.

Headlines didn’t portray it this way, however. Whenever the dollar swings hard in either direction, pundits jump on it as a huge influence over the economy and earnings—usually a negative one. A weak dollar spurs chatter about the trade deficit and rising import prices, alongside warnings that import-heavy US businesses will be unable to shoulder rising costs. If you looked abroad over the last few months, you would have seen exactly these fears in Europe, as the pound and euro fell. When it is strong, the dollar prompts warnings that US businesses’ overseas revenues will decline (since sales in foreign currencies will convert to fewer US dollars, requiring businesses to either take a hit on currency conversion or raise prices and withstand the blow of lower sales volumes). That is the claim we have heard ad nauseam in America since the summer. S&P 500 earnings might have continued growing, but pundits warned the pain was coming as companies exhausted ways to delay it.

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The Trouble in Conflating Illiquidity and Stability

Notwithstanding November’s rally in stocks and bonds, publicly traded assets have had a rough ride this year. For many investors, it isn’t just the broader declines that sting, but the wild back-and-forth that adds to the emotional havoc. It is one thing to know that all of these swings tend to even out in the long run, rewarding those with the patience to stick it out. It is another to conjure the necessary discipline when stocks are up one week and down bigger the next—with pundits warning more pain is in store. Enter what seems to many like the holy grail: assets that aren’t publicly traded—seemingly insulated from near-term ups and downs yet still have long-term return potential. Think non-traded REITs, property, private equity funds, venture capital investments, hedge funds and the like. If you are a longtime MarketMinder reader, you might be familiar with our hatred of non-traded REITs, which generally reward brokers more than investors and have no identifiable edge over their listed counterparts, in our view. This article isn’t about that. Rather, we think it is important to understand unlisted assets’ lack of volatility is illusory.

Any asset, regardless of whether it is listed publicly, is worth only what others are willing to pay for it. That, always and everywhere, is the price. Publicly traded assets like stocks—or securities traded often over-the-counter, like US Treasurys and many corporate bonds—have near-countless price reference points. Anything that trades constantly has near-instant price quotes, making price volatility apparent to all who look.

Unlisted assets, on the surface, may seem different. Many unlisted funds—non-traded REITs, private equity funds, hedge funds, venture capital funds—report valuations at set intervals, perhaps quarterly or annually. Start-ups get valuations whenever they complete a round of fundraising, as in, venture capital firm X takes a Y% stake that values the company at $Z billion, with much of the calculation based on models, hype and guesswork. Property values are similarly fuzzy: Unless your house is on the market and receiving bids, estimates of its value probably rest on assumptions based on what similar neighbors have sold for. That may or may not match what you can actually receive, especially if you have to sell in a hurry or if the market has shifted.

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What to Make of German Recession Chatter

Last Friday, Germany released its revised estimate of Q3 GDP, and its 0.4% q/q growth was better than the initial estimate announced in late October—which also beat expectations. While backward-looking Q3 growth doesn’t mean Germany will sidestep recession, economic reality has been faring better than most anticipated. In our view, this is the type of positive surprise that often underlies a stock market recovery. 

Germany’s initial GDP estimate doesn’t have a component breakdown beyond statisticians’ general commentary about what drove growth, but now we have the detailed numbers. As national statistics agency Destatis hinted at earlier, household spending was a key contributor, rising 1.0% q/q.[i] The agency noted sharp price increases didn’t dissuade consumers from spending in Q3—especially on travel, with nearly all of the country’s COVID restrictions removed. Though gross fixed capital formation fell -1.4% q/q in construction, investment in machinery and equipment was up 2.7%.[ii] Trade was resilient, too, with exports (2.0%) and imports (2.4%) both up on a quarterly basis—a sign of solid external and domestic demand.[iii] Considering these data are all adjusted for inflation, activity appears to have held up despite high prices. On a sector basis, manufacturing surprisingly contributed on a gross value added basis, as did most services industries.[iv] German Q3 GDP also climbed above its pre-pandemic level for the first time—a fun, if arbitrary, milestone.

The growthy data are notable considering many think Germany is on the precipice of a recession, if not already in one, primarily tied to the ongoing economic ripples from Russia’s invasion of Ukraine. Moscow responded to Western sanctions by throttling natural gas flows to Europe, hurting Germany in particular. Not only was Russia Germany’s top supplier pre-invasion, but the country depends on natural gas for energy and feedstock to power its large chemicals industry.

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Taking Industrial America’s Temperature

Unemployment and consumer spending data out later this week are set to steal the spotlight—understandable, given consumer spending is over two-thirds of US GDP and unemployment’s (flawed) reputation as an all-telling barometer. Lost in the shuffle lately but still worth a check-in? Heavy industry. A review of recent manufacturing data reveals that, despite some mixed figures, factories overall are contributing to growth.

Let us start with the most timely figure, November’s S&P Global flash manufacturing purchasing managers’ index (PMI). It fell below 50—suggesting more respondents reported contraction than growth—with new orders also sinking. Is that a harbinger of worse to come? Perhaps, but it isn’t assured. Because PMIs measure only growth’s breadth, not its magnitude, manufacturing’s dip to 47.1 from October’s 50.7 doesn’t necessarily mean falling output.[i] If the majority of manufacturing firms surveyed see contraction, but the minority’s actual output is larger, growth could still occur overall—we will have to wait and see. It is also the first reading below 50 since June 2020, and we caution against drawing big conclusions from any one data point, for good or ill.

Meanwhile, regional PMIs representing a broad swath of Fed districts were mixed in November. (Note: Regional PMIs’ dividing line between contraction and expansion is zero.)

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On Consumer Spending, Look Past Sentiment Surveys

The Conference Board’s US Consumer Confidence Index slipped again this month, hitting its lowest level since July. With pessimism mounting just in time for the holiday shopping season, pundits warn sales—and the largest chunk of GDP—will disappoint. While that may yet come true, we don’t think weak consumer sentiment is sound evidence of it. Surveys like this aren’t great at predicting actual consumption, which we think investors would do well to keep in mind.

While it seems logical consumer confidence would lead spending, it doesn’t usually work that way in the real world. Confidence is a coincident indicator of people’s feelings, typically influenced by what they read, hear, see and experience in the period immediately before they are surveyed. So it isn’t surprising that confidence tumbled this month as headlines continued beating the dour drumbeat of inflation, midterms, rate hikes, layoffs and more. Yet none of this means the same consumers aren’t simultaneously spending. Consider Exhibit 1, which shows the past 10 years of consumer confidence and inflation-adjusted consumer spending. As you will see, spending has risen in times of waxing and waning confidence alike. Even this year, with confidence on a downswing, spending has risen much more often than not.

Exhibit 1: Consumer Confidence Doesn’t Predict Spending

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What to Glean From the Latest Crypto-Firm Collapse

The fallout from cryptocurrency exchange FTX’s collapse continued Monday, claiming its latest crypto victim: BlockFi, a smaller exchange that also offered crypto-backed loans. Its bankruptcy, which became official Monday, was largely a foregone conclusion after it halted withdrawals last month due to “significant exposure” to FTX. Another crypto lender with deep FTX ties, Genesis Global Capital, has also suspended withdrawals and is exploring its restructuring options but hasn’t filed for Chapter 11 yet. More crypto companies could follow. Yet stocks are looking past this saga, which seems right to us. There is no logical reason for a contagion in traditional financial markets—no transmission mechanism. In our view, this should gut worries about crypto’s woes spilling over.

If you simply look at crypto and stock prices over the past couple of years, we guess it is easy to see why some would presume there is a link. They have been highly correlated at times, with both up nicely in 2021 and both down this year. Whenever financial markets move concurrently, it can be tempting to presume causality. More often, it is a case of two asset classes having occasionally overlapping drivers—in this case, we think the overlapping factor is investor sentiment. Last year, we saw some evidence euphoria was beginning to emerge in some areas of markets. Crypto was a prime landing spot, as were special purpose acquisition companies and other niche corners of the stock market. This year, when sentiment soured greatly over inflation, Fed rate hikes, rising long rates, energy prices, sanctions and so much more, we think it hit stocks and crypto alike—with crypto crashing harder after booming much higher in 2021. Said differently, sentiment pushed crypto to a classic boom-and-bust while stocks endured a more traditional bull-to-bear market transition. Same directionality, different magnitudes, sentiment at the center.

Crypto’s crash was the prelude to FTX and the related collapses. Digital coin exchanges and lenders are backed by cryptocurrencies themselves (typically a mix of proprietary and third-party tokens), tying their balance sheets to the crypto market’s whims. A collapse in FTX’s self-issued token, FTT, is what eventually exposed the exchange’s apparent mishandling of client assets, which the authorities are now investigating. Meanwhile, the collapse of bitcoin and other cryptos hammered BlockFi over the summer, destroying the collateral backing the loans it had issued, leading it to take emergency funding from FTX—paving the way for this week’s Chapter 11 filing. This is all in line with how these things typically unfold: Asset crashes, companies with exposure to that asset fail, bankruptcies work their way through the system.

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Reasons for Gratitude in a Challenging Year

To put it lightly, this has been a tough year. The global bear market has tested investors’ patience since February, and perhaps especially as a summertime rally gave way to new October lows. There is no shortage of things to fret, market-related or otherwise, and I don’t dismiss any of today’s problems or issues. But this week is a reminder, in my opinion, that things aren’t all bleak—there are some developments to be grateful for this Thanksgiving. Here are a few that leap to mind.

Europe’s Adaptation to the Feared Energy Crunch

After Russia’s invasion of Ukraine in February, many warned Western sanctions and Russian retaliation would drive oil prices to $200 a barrel—or even as high as $380 under a “worst-case” scenario—ensuring a eurozone recession in either case.[i] Yet after registering a year-to-date high of $133 on March 8, Brent crude prices have retreated (currently around $88) while eurozone GDP has grown through Q3.[ii]

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Annual Reminder: Black Friday Is No Economic Barometer

Dear readers, it is nearly time for that great November sporting event. No, not the Buffalo Bills at the Detroit Lions. Nor the New York Giants taking on the Dallas Cowboys or the New England Patriots suiting up against the Minnesota Vikings. Nor are we referring to the “other” football’s World Cup or international Test cricket. No, we are talking about the most competitive of all: Black Friday shopping. Every year, the advertised discounts flood our inboxes. And every year, some local news station grabs fresh footage of shoppers trampling each other for “doorbusters.” And every year, headlines hype it as the biggest, most telling test of America’s consumer-driven economy, and they parse the final tallies for clues. We have never been fans of this practice and have long encouraged people to downplay Black Friday. This year, we suspect it is even less useful than usual as an economic barometer.

Our typical reasons for not reading into Black Friday still stand. Though headline-grabbing, it is but 1 day of one of 12 months in a year. It has also morphed more into a season than a day: In years past, we have started seeing holiday deals early in October. That front-running has waned somewhat this year, but many discounts have still been running for over a week now, likely inspiring many folks to buy early to avoid the dreaded “sold out” placards. Discounting also runs well into December, and we have it on good authority that plenty of holiday shopping happens during that month, often with even deeper discounts than the markdowns Black Friday is reputed to feature. So if you like using the holiday season as an economic check-in, you probably have to wait for December’s retail sales figures to hit the wires in January. Perhaps that is useful in a backward-looking sense, but it will be no help in forecasting the economy, never mind forward-looking stocks. Whatever holiday demand is now, it will largely be a function of the economic conditions already in place—it will likely tell us little about how those conditions change in the future. Besides, spending on physical goods is just over one-third of consumer spending. Holiday sales won’t tell you about spending on services, which is the vast majority.

This year, holiday sales watchers will have to deal with another question: What constitutes a “good” result? Ordinarily, a modest increase over the prior year gets high marks. But the annual inflation rate is still running rather high, notching 7.7% y/y in October.[i] Does year-over-year holiday sales growth have to top that to avoid a failing grade? Or, what about the fact toy prices are up only 3.1% over the past year while televisions are down -16.5% and book prices are flat?[ii] Holiday shoppers may have a lot more wiggle room than headline inflation suggests.

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Britain’s Intraparty Gridlock Takes Center Stage

Editors’ Note: MarketMinder prefers no politician nor any political party, and neither do stocks. We assess developments for their potential economic and market impact only.

Falling uncertainty and gridlock. These are the twin political forces we think are likely to help lift stocks over the period ahead—not just in the US, with midterms splitting Congressional control by the slimmest of margins, but across the developed world. In countries with divided coalition governments, like Sweden and Germany, this is probably self-evident. But in nations with—on paper—single-party governments with strong majorities, it is stealthier. Case in point: the UK, where political uncertainty is down bigtime after two leadership changes this fall. That has helped UK stocks jump more than 18% since late September, beating the MSCI World Index by several percentage points over this stretch.[i] Now the secondary tailwind—gridlock—is taking shape, as divisions within the ruling Conservative Party become clear to all.

The internal strife, as ever, centers on two fronts: fiscal policy and—sigh—Brexit. Starting with the latter, over the weekend, the ever-reliable unnamed senior government sources told The Sunday Times that the UK would embark on a path to sign a Swiss-style deal with the EU within the next decade. For those unfamiliar with the intricacies of EU treaties—and if that is you, we envy you—this would entail the UK having free access to the EU’s single market. But, in exchange, it would have to sign on to all EU laws and regulations, including basically all the things the British people voted to get away from when they chose Brexit in 2016. As you might imagine, this did not sit well with a lot of people, including many in the current cabinet and the Conservative Party in general. Prime Minister Rishi Sunak leapt to damage control, vowing this wasn’t under consideration, while Chancellor of the Exchequer Jeremy Hunt said that, while he will seek freer trade with the EU, it won’t include signing on to the bloc’s diktats. Other cabinet ministers and government spokespeople joined the fray, declaring the report categorically untrue.

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What to Glean From the UK’s Ho-Hum Autumn Statement

Editors’ Note: MarketMinder favors no politician nor any political party, assessing developments solely for their potential market and economic impact.

Last Thursday, the UK’s fiscal drama took another turn as Chancellor of the Exchequer Jeremy Hunt delivered the widely watched Autumn Statement. After the recent fireworks when former Prime Minister Liz Truss’s chancellor, Kwasi Kwarteng, announced a plan including allegedly irresponsible “unfunded” tax cuts and a plan to aid households struggling with high energy bills, Hunt had promised to take tough “austere” actions aiming to fill a hole forecasted to hit the UK government’s finances in the coming years. Still, some expected market fallout, but they got very, very little. That predictably led to claims he had successfully assuaged markets, but we think that is personality politics, not analysis. In our view, the answer is much simpler: Hunt’s plan can best be described as a package of rather meager tax hikes and the usual not-so-austere slower pace of spending growth. It seems more likely to us the market’s big collective yawn was related to the sheer lack of anything surprising in this budget. We think the more telling thing about this plan—and the analysis around it—is just what it shows about sentiment toward the UK economy today.

First, here are the particulars of the new fiscal plan, which replaced the mini-budget, which amended the budget, all in a matter of a few months.

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