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.


Our Perspective on the ‘Rocky Week’ You Might Have Missed

Last Friday, July 16, the S&P 500 Index closed at 4,327.16.[i] If you had made like Rip Van Winkle from that moment through yesterday’s close, you would likely have awakened and surmised you missed a pretty “meh”-yet-up span, with the index finishing Thursday at 4,367.48, a gain of 0.9%.[ii] [Yawn.] But those who weren’t taking an extended snooze may have had a different experience. After Monday’s -1.6% selloff (which was more than -2% intraday), pundits from Australia to Austria and pretty much all points in between argued this represented the Delta variant giving “investors a reality check”—a prelude to worse.[iii] In our view, this is emblematic of 2021’s dominant sentiment feature: myopia. Investors would do well to remember this week the next time one or two volatile days throws commentators for a loop.

First, to be clear, we get it: Rising caseloads tied to the Delta variant aren’t good. This is perhaps most true in the developing world, where vaccines, treatments and overall medical care are scarce. But even in the developed world, caseloads are on the rise, and many fear it will get worse before it gets better.

However, for investors, it is worth remembering: Caseloads alone didn’t bring the downturn we saw in early 2020. Lockdowns, then a major, unprecedented shock that suddenly interrupted economic activity, were behind it, in our view. Even when a vast rise in caseloads led governments to bring lockdowns back last autumn and winter, investors weren’t caught wrong-footed. Why? Efficient markets weigh all manner of opinions. They hear talk of variants, waves, the disappointing “Freedom Day” in Britain and more. They have heard all the similar talk for months. Hence, we don’t think markets ever expected a smooth slope to recovery.

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A Primer on Digital Currencies

With cryptocurrencies increasingly fashionable, it isn’t surprising the Fed, ECB and other central banks would want to get in on the action with so-called “central bank digital currency” (CBDC). While payments have been electronic for decades, what makes CBDCs different and what form might they take? How would they differ from mainstream cryptocurrencies like bitcoin and “stablecoins,” asset-backed cryptos with a fixed value? While we don’t think this debate intersects much with stock markets, a brief primer on the main players seems in order.

Cryptocurrencies, in general, strive for an electronic equivalent of handing someone cash. Mobile payment apps using dollars may seem to have that ease of use, but they are based in the banking system, using much of the same plumbing as checks, wires and other bank transfers. Payments can still take days to clear and settle through multiple intermediaries. That lunch bill you split with the payment app on your phone ultimately links back to a bank account you authorized to transfer funds—much more complicated than if you had handed your pal a fiver.

Enter bitcoin and its fellow cryptocurrencies, which operate outside the banking system. Once in possession of a token, you can direct it to anyone else who has an address on its blockchain (i.e., the digital ledger tracking transactions and possession). Bitcoin addresses are long alphanumeric keys, not names and other personal data, giving the perception of anonymity—much like physical cash—although that anonymity isn’t guaranteed, and the EU is now pushing to end it altogether. Blockchain settlement is also real-time, final and irreversible. But cryptocurrencies are only as good as what you can exchange them for—no one is legally obligated to accept them outside of El Salvador, and not everyone does. You can’t pay taxes with them—whereas the IRS does tax cryptocurrency transactions.[i]

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Two Points From 2020’s Two-Month Recession

Yesterday, the National Bureau of Economic Research (NBER) announced that the recession accompanying last year’s lockdowns officially came to an end … in April 2020. That means the official arbiters of US recession dates have decided the recession ended two months before they declared it to be underway in June 2020. This illustrates two key—if simple—points for investors to bear in mind now and always. One, recession dating is far too lagging to be of any use when trying to identify bull and bear market turning points. Two, it is yet more evidence last year’s recession was too short and bizarre to qualify as a typical reset of the economic cycle, which we think explains why growth stocks have led during the recovery—and should keep doing so.

Let us rewind for a moment to last year. Western society started reacting to COVID with voluntary and involuntary limits on event attendance and overall economic activity in mid-to-late February. Stocks began falling at about the same time, peaking on February 12 globally and February 19 in the US. After a steep, weeks-long drop, they bottomed out on March 23. But we didn’t get the first hint of negative economic data until March 24, when flash purchasing managers’ indexes for March showed broad contraction. Over the next several weeks, monthly indicators flashed deep declines for March and April. But NBER didn’t make the recession official until June 8, when they declared activity had peaked in February 2020—something basically every data series in America had already demonstrated. As had stocks, which had endured an entire bear market before economic data began registering lockdowns’ damage.

Eight days after NBER’s press release hit the wires, the US Commerce Department announced retail sales had jumped in May. Other positive indicators began rolling in, showing broad recovery in May and June. But that nascent rebound wasn’t enough to erase all of April’s deep decline, so Q2 GDP still registered a significant contraction. However, the broad, reopening-related recovery started showing in Q3, and growth continued in Q4 and Q1 2021. GDP finished that quarter just -0.9% below Q4 2019’s peak.[i] In a few days, we will see whether Q2 growth was strong enough to eclipse that, technically moving the economy out of recovery and into expansion. In other words, NBER waited until GDP was nearly at breakeven to declare the recession over. That isn’t a knock on NBER, which always deliberates over these things and announces turning points at a delay, once it is crystal clear a new trend is underway. But the fact that stocks began rising about a month and a half before we now know the economy began improving—and nearly three months before that improvement showed up in the data—demonstrates the market’s forward-looking prowess.

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Slower Growth Shouldn’t Sway Stocks

With “stimulus” hopes in doubt and some data coming off the boil of late, pundits are increasingly seeing the recent growth-rate pop as fleeting—and worrying it spells trouble. In the UK, May’s weaker-than-forecast monthly GDP reading caught some experts off guard. In the US, research outfits are already projecting slower-than-average GDP growth—and the possible implications—after government aid elapses. Now, we have long argued the reopening-driven growth surge would fade fast. But we disagree with the worried conclusions. Stocks can do great in a slow-growth economic environment—worthwhile to keep in mind for investors.

When pundits argue a development or trend is good or bad for markets, it is worthwhile to review history. The past may not foretell the future, but it can frame probabilities—and provide data to test claims. Before last year’s pandemic-driven economic contraction, US annual GDP growth averaged 2.5% from 1989 – 2019.[i] Over that period, there were stretches when strong GDP growth coincided with strong US stock returns. For example, from 1996 – 1999, annual GDP growth averaged 4.4%, and the S&P 500 delivered four years of returns above 20%—including 33.4% in 1997. But markets don’t need strong growth to surge. US stocks rose 37.6% in 1995—its best year of the decade. Yet GDP grew 2.7% that year, its weakest reading of the 1990s expansion.

Moreover, periods of weaker-than-average US GDP growth haven’t hurt US stocks, as evidenced by the last bull market. From 2009 – 2019, US annual GDP growth averaged 1.9%—a percentage point below its 2.9% average from the preceding 20 years.[ii] But the S&P 500 spent just one year in the red during that stretch—2018, when GDP grew 3.0%, its second-fastest rate of the period. American stocks’ best year was 2013 when they rose 32.4%. Yet GDP grew just 1.8% that year—its third-weakest during the expansion. More broadly, the S&P 500 was up 351% from 2009 – 2019, far exceeding the non-US developed world. Slower-than-average GDP growth didn’t stop American stocks’ world-leading ascent.[iii]

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Our Take on Biden’s Executive Order Targeting ‘Competition’

Editors’ Note: Our political analysis is intentionally nonpartisan. We favor no politician nor any party and assess developments solely for their influence on markets and personal finance.

Last Friday, following days of rumors, President Joe Biden unveiled a new, far-reaching executive order aimed at promoting competition in the US economy. It discusses what the administration alleges are anti-competitive practices across a range of major industries, from shipping and Tech to pharma and medical devices. Since then, financial news has teemed with analysis of this-or-that plank, with many presuming it is a huge deal for the economy and, by extension, markets. But, in our view, this is little more than a mission statement, or statement of philosophical intent, with little actual action underlying it. There would need to be downstream actions by regulators for it to accomplish much of anything.

This is pretty much par for the course as it pertains to executive actions. The president doesn’t have carte blanche to effect big change via this avenue. They are limited to interpreting laws and giving enforcement guidelines. But they come out of the blue and often use language that makes them seem to pack a big punch. This was the story behind folks’ overrating both of the last two presidents’ orders and it seems to be at work now, too.

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Inside June’s CPI Jump

Inflation unexpectedly accelerated in June, leaving economists and pundits from coast to coast scrambling to explain the year-over-year CPI inflation rate’s bump from 5.0% in May to 5.4%.[i] After all, consensus expectations were for a deceleration to 4.9% y/y, and CPI’s rise in June 2020 meant the base effect was less of a factor.[ii] Some coverage found the right culprit: a third consecutive jump in used car prices. Other outlets hit on false scapegoats and, in doing so, showed the perils of not looking deep enough at economic data. But from our vantage point, few if any pundits rightly noted that outside of the narrow categories affected by supply shortages and resurgent post-lockdown demand, we actually saw a fair amount of disinflation for the third straight month. In our view, despite the headline jump, this report strikes us as more evidence accelerating inflation is temporary and investors won’t have to reckon with a 1970s repeat.

Last year’s lockdowns are still upwardly skewing the year-over-year calculation and will for a few more months. Later this year, as the denominator in the year-over-year comp rises more—reflecting the demand bump from last year’s reopenings—it will probably push the annual inflation rate lower. So here, to strip that out, we will focus on the seasonally adjusted month-over-month inflation rate.

That accelerated to 0.9% m/m, defying expectations of 0.5%, which would have been the second straight monthly slowdown.[iii] The biggest single contributor, for the third straight month, was used car and truck prices. Those rose 10.5% m/m, compounding May’s 7.3% and April’s 10.0%.[iv] Transportation services, which includes airfares and car rentals, drove headline prices higher for the third straight month. Hotel accommodations, which shot up 8.8% m/m in April but rose negligibly in May, jumped another 7.9% to contribute almost one-tenth of the headline increase. None of those are terribly surprising, considering all relate to the reopening economy—a combination of tight supply and burgeoning demand. About the only major swing in June was Energy: After detracting from headline inflation slightly in April and May, it made a big contribution in June as gas prices jumped just in time for office workers to rejoin the daily commute and summer travelers to hit the highways. You can see all of this in Exhibit 1.

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The ECB’s ‘Strategy Review’ Yields Little New

Hailed as a big shift last Thursday, the ECB concluded its 18-month strategy review seeking more effective monetary policy. Emerging from the shift? A “new” twist on inflation targeting and a loose plan to help fight climate change. But if you tune down the noise to look at reality, we think you will see the new strategy is pretty hard to distinguish from the old.

The chief change to the ECB’s target inflation rate appears almost imperceptible. Instead of “close to, but below” 2% y/y, now it is a “symmetric” 2% target.[i] According to the ECB’s announcement, this means deviations above and below 2% are “equally undesirable.” That may be, but markets are more interested in what the central bank would do about them. Many pundits assumed the ECB would tolerate above-target inflation for a while if it was below before, like the Fed’s new inflation targeting approach. Not so. As German Bundesbank head Jens Weidmann—1 of 25 members on the ECB’s Governing Council—noted, the new strategy doesn’t try to make up for past misses. The lauded “new strategy” simply gives policymakers theoretical cover for trying to lift inflation toward the 2% y/y target, should it fall below that mark. The differences between this and the “extraordinary monetary policy” of the last seven-ish years when inflation ran sub-target seems pretty semantic to us.

In our view, that verbal cover underscores the ECB’s inability to hit its target. This isn’t a knock on the ECB specifically—there is no evidence any central bank can reliably hit inflation goals. On this score, the ECB is in the same boat as the Fed, Bank of England and Bank of Japan. Despite their extraordinary efforts and proclamations, all have mostly undershot their inflation targets after installing them.

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Chart of the Day: Growth and Value Trends Are Global

Friday morning, a widely syndicated Bloomberg article caught our eye. As we summarized in our coverage in MarketMinder’s “What We’re Reading” section, it theorized that since European value stocks have lagged US value stocks this year—while US value stocks have beaten their growth counterparts—European value must be due for some catch-up and major outperformance. As qualitative evidence, it offered Europe’s relatively delayed COVID vaccine rollout and reopening, presuming those factors are value stock fairy dust. We see a few glaring problems with this thesis, and they are worth spending a bit of extra time on, lest our readers be fooled into basing hasty portfolio decisions on flawed logic.

For one, markets deal efficiently with widely known information. It has been readily apparent for months that European trends, overall and average, would probably trail the US by a couple of months. When events are that widely anticipated, stocks don’t just sit around and wait for them to happen—they reflect them well in advance. So, in our view, to say European value stocks don’t yet reflect vaccines and reopening there is to say markets aren’t efficient, which we think is dangerous territory to base any theory on.

Beyond that, the European value catch-up thesis misses a key point about growth and value leadership trends: They are global. If value isn’t leading in the US, it probably won’t lead in Europe. In our view, the reasons for this are twofold. One, market cycles are generally global, not local, and growth/value leadership ties into the broader bull/bear cycle. (See this for more.) Two, growth/value trends also stem from global economic trends, and you rarely get wide divergence among developed-world countries on that front. We are slowly moving out of the reopening mini-boom and into what looks likely a post-pandemic trend of slower growth. Yes, even in Europe, considering GDP there is quite close to its pre-pandemic peak. In slower-growth environments, investors usually flock to big companies with recognizable brand names and a proven ability to crank out earnings through thick and thin. In other words, growth stocks.

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2021’s Astoundingly Average Volatility

Dearest readers, we have an apology to make. You see, yesterday afternoon we were hard at work pulling data on the S&P 500’s volatility this year, and we were quite eager to show you that, despite what headlines have implied, stocks’ volatility this year has been amazingly … average. So, of course stocks had to tumble at today’s open, hitting about -1.5% intraday before clawing a good chunk of it back to finish down just -0.9%.[i] What we are trying to say is, if you believe in jinxes, then we must begrudgingly accept that there is a chance our not-so-high volatility research triggered the market, which Fisher Investments founder and Executive Chairman Ken Fisher often calls, “The Great Humiliator” to throw some egg in our faces. Then again, we also think today’s market movement proves our initial point: If headlines resort to hyping a -0.9% day as impressively volatile, then that seems to us a good indication of just how placid this year has been—and how myopic the world is right now. Let us show you.

To put this year’s wiggles in perspective, we downloaded historical data from FactSet—93 and a half years of it, to be precise. First we gathered the S&P 500’s daily price return for every day since January 4, 1928 through June 30 this year—cutting it off there so we could easily equalize a half-year with 93 other full years. Then we used some Excel, umm, wizardry to calculate the average magnitude of the index’s daily price movement for each year.[ii] In other words, the average amount the index moved up or down on a given day in each year from 1928 to the present. We were after magnitude, not direction, because volatility is technically about how much the market moves over a given period, not whether that movement is up or down. Never forget volatility cuts both ways—0.9% up is just as volatile as Thursday’s dip.

The wildest year, on the basis of average daily return, was 1932. Then, the average daily price movement up or down was a whopping 2.59%. The calmest year was 1964, with an average daily wiggle of just 0.26% in either direction. The average for all years? 0.76%. The median, if you are into that sort of thing, is 0.65%. And through June 30, this year’s average daily movement up or down was … wait for it … 0.64%. That is about as typical as you can get.

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Why Jobs Don’t Sway Stocks

Jobs! According to many pundits, the Bureau of Labor Statistics’ (BLS) Employment Situation Report (aka, the unemployment report) is the biggest economic data announcement all month. For those who are unemployed and looking, that emphasis is understandable. But it also has many reading a lot into last Friday’s June release, like what it means for the economy, monetary policy—and stocks. For investors, we suggest tuning it out. Jobs data are backward looking, with little significance for markets.

There were several interesting tidbits,[i] including the headline figures many cited. Nonfarm payrolls added 850,000 workers in June. Leisure and hospitality accounted for over 40% of the total, leading the way and continuing a string of strong gains since February.[ii] That still leaves some ways to go before employment regains pre-pandemic levels. For perspective, nonfarm payrolls remain -4.4% below February 2020’s peak. Leisure and hospitality is -12.9% below then.

Meanwhile, June’s unemployment rate ticked up to 5.9% from May’s 5.8%, which may seem like it is heading in the wrong direction.[iii] But that uptick stemmed from more people without jobs saying they sought work in the month. This increased the number of people the BLS deems unemployed versus “discouraged” and out of the labor force, boosting the unemployment rate. But it doesn’t mean a bunch of people lost their jobs.

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