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.

Tech Isn’t Too Big

Editors note: MarketMinder doesn’t make individual security recommendations. Any company mentioned below serves only to illustrate a broader investment theme we wish to highlight.

Is Tech getting too big for its britches? Many note the Tech sector and Tech-like industries’ swelling share of S&P 500 market capitalization and see 1999’s dot-com bubble inflating all over again. At first blush, maybe this seems sensible. Tech has led the bull market that began in March. It led in the downturn and in the preceding bull market. Big returns plus big market cap share may hint at froth. But this surface-level look doesn’t hold water, in our view. A look at fundamental drivers reveals faults in the comparison, suggesting to us Tech’s big share doesn’t reflect an unsustainable bubble.

Tech and Tech-like behemoths do comprise a record-high share of US markets—in a sense. The Tech sector currently amounts to 28% of S&P 500 market cap.[i] While that isn’t quite the 35% share at 2000’s tech-bubble zenith, comparing Tech now and then isn’t quite an apples-to-apples exercise.[ii] The way the S&P 500 classifies stocks is a bit different today than two decades ago. For example, index providers place bookseller-turned-everything-store Amazon in the Internet & Direct Marketing Retail industry within the Consumer Discretionary sector. Several other giants moved recently from Tech to the newish Communication Services—lumped together with the sector formerly known as Telecommunications Services. Tech and these two groups account for nearly 40% of S&P 500’s market cap, exceeding Tech’s 2000 heyday—and spurring many claims the sector is overinflated.[iii] Some even argue a single sector’s exceeding 20% of the S&P 500’s market cap, like Financials in 2006 or Energy in 1980, spells its downfall. The fact Tech (in its broad sense) is now twice that, the thinking goes, means double trouble.

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Election Questions From the Mailbag

Editors’ Note: Our political commentary is intentionally non-partisan. We favor no political party nor any candidate and assess political developments solely for their potential economic and market impact.

With Election Day now a week away and mail-in voting in full swing, investors’ nerves seem to be on edge, to put it mildly. To help keep both your fears and hopes in check, here is our take on some of the most common questions we have encountered.

What will the results mean for COVID restrictions and reopening? President Donald Trump winning re-election means everything opens, and former Vice President Joe Biden winning means a big “closed” sign, right?

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Rounding Up Europe’s New Response Measures

Volatility flared up again Monday, with the S&P 500 and most other major indexes globally down nearly -2%.[i] Most observers blamed news of COVID spikes and new restrictions in Italy and Spain, raising the specter of a second global lockdown. Germany’s IFO business sentiment survey, also out Monday, showed folks fear restrictions will soon bite there, too, and across the Continent, expectations are now for any GDP growth from Q3 to prove temporary and recession to resurge in Q4 as lockdowns tighten. That is one possible outcome, and a second sweeping worldwide lockdown could drive weakness. Yet in our view, it is worth noting how far we are from that outcome at the moment. There is another key difference between now and February, too: Then, a global lockdown was unthinkable, but now, with everyone expecting it, we suspect a lot of the surprise power is gone. That is key to consider as you weigh the potential market impact of COVID this autumn and winter.

With the heightened rhetoric surrounding the latest restrictions on activity, it may be tough to get a handle on how draconian they are. Statements like Italy implements harshest restrictions since national lockdown ended are abundant and … not helpful, in our view. So to put everything in perspective, we have catalogued the latest restrictions from Continental Europe and the UK.

Exhibit 1: New Restrictions at a Glance

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Some Reminders as Tax Year 2020 Winds Down

Presently, November 3 is the date that seems to dominate most investors’ minds. But not so far behind it lies another date of some importance to investors: December 31. Yes, 2020 is coming to a close[i], and with it the books on the tax year. With that in mind, here is a quick roundup of some pre-yearend considerations for investors.

Tax Loss Harvesting

While you may have already addressed this, if you realized capital gains (meaning, you sold a security at a profit) this year, it may behoove you to review your portfolio and find positions you currently hold that are at a loss. If this is you, you may wish to consider selling the security to realize the loss. Realized losses can offset gains dollar for dollar, limiting your potential capital gains exposure. Alternatively, you can deduct up to $3,000 in losses from your income (reducing tax exposure there). If by chance your realized losses exceed your gains, you can carry them into future years and use them to offset realized gains.

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Turning Down the Volume on Some Noisy US Data

Several widely watched US economic data reports—including September retail sales and industrial production and a couple of October regional manufacturing surveys—have given experts plenty to discuss in recent days. Yes, consumers have been spending—but is it sustainable? Sure, manufacturing has been resilient—but are the latest readings a setback? As pundits and economists debate their meaning, we suggest investors think like markets instead. Stocks are highly likely looking well past these noisy readings and digesting the far future—the long end of the 3 – 30 month range we think they anticipate.

First, the numbers. September retail sales rose 1.9% m/m, the fifth straight positive month. However, September industrial production (IP) dipped -0.6% m/m—missing expectations for 0.6% growth and breaking a four-month positive streak—with the manufacturing subcomponent down -0.3% m/m. Elsewhere, two Federal Reserve regional manufacturing surveys’ divergent October readings muddled analysis further. The Philadelphia Fed’s Manufacturing Business Outlook Survey surged to 32.3 from September’s 15.0 while the New York Fed’s Empire State Index slowed to 10.5 from September’s 17.0 (readings above zero indicate monthly activity rose). The data spurred the usual interpretations: Ongoing retail sales growth continues to surprise, though many think weakness looms; others see IP’s September contraction signaling a slowing economic recovery—which recent surveys may or may not corroborate.

While it is grand to have a snapshot of the latest economic developments, we recommend not drawing sweeping conclusions. There is just too much noise, too many one-off variables and too many conflicting signals. Consider these seemingly contradictory tidbits from the retail sales and industrial production reports. Automobile and other motor vehicles sales were up 4.0% m/m, its second-straight positive month—yet production of automotive products fell -4.1% m/m, its second-straight negative month.[i] Were factories pulling back as retailers slashed prices on the last model year to clear old inventory that piled up in the pandemic? Maybe. Does this really mean much on a forward-looking basis? Probably not.

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Election Clarity: Possibly a Bit Delayed, but Still Coming Soon

Editors’ Note: MarketMinder is intentionally nonpartisan. We favor no political party or politician and assess political developments solely for their potential economic and market impact.

T-minus 14 days to Election Day, when we will finally know … well, perhaps not much. With several states slated to take days (or weeks) to receive and count mail-in ballots and both parties already lawyered up, unless there is a massive landslide in the initial tally, we are almost certain to face several days of extended uncertainty over whether President Donald Trump or former Vice President Joe Biden will be inaugurated next January. Pundits have warned for weeks of chaos and a host of outlandish possibilities, arguing sharp market volatility (or worse) is a virtual certainty. We always encourage investors to brace for wobbles—not because we expect them, but because volatility can arise at any time, for any or no reason. Regardless, we think investors would benefit from approaching the election with clear-eyed expectations of how election clarity will likely unfold.

COVID has had a huge impact on each party’s voter turnout strategy, making this election like none we have ever seen. The Republican Party claims to have built the biggest ground game in its history, reportedly with 1.5 million trained field workers knocking on doors, registering voters and helping people get to the polls on November 3. But the Democratic Party can’t go this traditional route, as it would conflict with the way its leaders have responded politically to the pandemic. You can’t make social distancing a key issue and then knock on doors and volunteer to drive people to the polls. So instead of the traditional ground game, they have deployed their considerable war chest on an “air game”—TV ads and other channels to encourage mail-in voting. The result will largely hinge on which effort is more successful. Will Republican turnout offset Trump’s relatively weak personal polling in toss-up states? Or will Democratic turnout tilt the playing field toward Biden?

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SPACs Aren’t 2000 IPO Mania’s Second Coming

Editors’ note: MarketMinder doesn’t make individual security recommendations. Those mentioned herein simply represent a broader theme we wish to highlight.

What do a space travel company, orbital tugboat builder, electric truck maker, next-generation battery developer, self-driving bus startup, fantasy sports operator, “aspirational lifestyle” retailer and a century-old snack maker have in common? All recently went or plan to go public, but in an unconventional way: as buyout targets of special-purpose acquisition companies, aka SPACs or “blank check” companies. As initial public offering (IPO) booms—particularly niche ones—usually do, SPACs’ sudden proliferation has prompted many pundits to draw parallels with 2000, citing froth and fervor. We think this is a bridge too far, although it is wise to be aware of the risks you may be taking on if you choose to dive into this space.

SPACs are a way for private companies to go public without the traditional (and costly) rigmarole of an IPO. Essentially, they are shell companies with one purpose: to acquire existing, privately owned firms using funds raised on the public markets. If we were into analogies, we would probably call them “midwives for startups” or something similarly reductive, but then all analogies are bad analogies. To set that aside, here is how it works: First, a SPAC registers with the SEC to go public through an IPO. A SPAC usually starts with a few high-profile backers to give it gravitas and attract would-be investors, and it quickly IPOs the traditional way to raise more capital on the open market. Its initial “business model” is only to merge with one or more private companies that don’t want to go through the hassle themselves, and investors are buying the potential of that merger. But it is frequently a grab-bag, as SPACs generally don’t have a target in mind. Instead, the SPAC’s capital usually sits in a trust while the principals hunt for a company to buy within a predetermined window. If all goes according to plan, the SPAC finds a target, buys it and, essentially, becomes that company.

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Chinese GDP Regains Pre-Pandemic High

Chinese Q3 GDP took headlines by storm today as the quarter’s 4.9% y/y growth put GDP above pre-pandemic levels. This triggered a bunch of commentary comparing recoveries in China and the West, with the takeaway being that China is winning and the US and Europe would do well to take a few lessons. We think it is worth turning a critical eye on that thesis, particularly because stocks—the ultimate leading indicator—don’t appear to be drawing a similar distinction between China and the US. While pundits focus on COVID-related developments in the here and now, we think markets are looking much further ahead.

As for China itself, the results were overall encouraging. Monthly data showed retail sales and imports back in positive territory year-over-year in September, suggesting domestic consumption is recovering nicely—undercutting widespread fears that the broader recovery is a mirage of infrastructure spending. Even if you don’t own any mainland Chinese stocks, broad growth in the world’s second-largest economy is a plus for global GDP and demand for goods produced elsewhere.

Some commentators took things a little too far, however, in arguing China’s apparently faster rebound is a product of unique success in staving off COVID-19. We think this is a stretch on a couple of fronts. One, we saw numerous pieces arguing the country has avoided a second wave. That may be true as far as the official numbers are concerned, but we think this strains credulity. For instance, last week officials mandated—and reportedly completed—testing for every last person in Qingdao after discovering 13 cases of local transmission. That is 11 million people. They turned up … zero new cases.[i] That seems like just a bit of a stretch in light of those 13 cases and what researchers have discovered about how the virus spreads over the past 9 months. We aren’t saying it is impossible, just highly improbable. Particularly when the international medical community has warned for months that virus data from China are suspect given the regime’s well-documented lack of transparency.

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Interest Rates Influence, but Don’t Dictate, Stock Market Trends

Ten months into 2020, global high dividend yielding stocks are trailing their non-high-yielding brethren by a significant margin. Including reinvested dividends, the MSCI World High Dividend Yield Index is down -8.0% thus far this year—while the MSCI World itself is up 5.5%.[i] Some might see this as a reminder that there is no automatic superiority to high dividend stocks—which is a valid point. But there is another angle to this that we find more interesting: It undercuts the notion that low interest rates fuel a hunt for yield, driving stocks up and leading dividend payers to outperform. Interest rates are important, but they don’t dictate stocks’ direction alone.

For most of the last decade-plus, short- and long-term interest rates have been low by historical standards. In the last bull market, this led many pundits to presume investors were selling low-yielding bonds and buying dividend paying stocks—the much-ballyhooed “hunt for yield.” Many claimed these low rates fueled stocks’ rise from 2009 to early 2020.

Exhibit 1: Rates Have Been—and Most Certainly Are Now—Historically Low

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The Facts and Fiction of Fedcoin

Fedcoin! Ever since the rise of cryptocurrencies in the mid-2010s, some pundits have theorized that the Fed is secretly working on its own cryptocurrency to rival bitcoin and Facebook’s nonexistent Libra. Fed members themselves have occasionally fanned the flames, too, fueling mounting speculation a digital dollar (or thereabouts) awaits us. The chatter escalated once again in mid-August, when Fed Governor Lael Brainard said, “the Federal Reserve is active in conducting research and experimentation related to distributed ledger technologies and the potential use cases for digital currencies.”[i] Since then, we have seen a litany of newsletters warn this is the end of the dollar as we know it, with everyone’s savings eventually coming under government control (and subject to confiscation). Even on the less hyperbolic, more reputable side of the financial commentary world, pundits are ruminating over “Fedcoin” potentially disrupting digital payments and altering the currency landscape. A theoretical paper on central bank digital currencies released by seven central banks and the Bank for International Settlements this week added even more fuel to the fire. But whatever the Fed eventually does, we rather doubt any of these spectacular scenarios come to pass. It all actually seems pretty dull to us.

The way most commentary explains the situation, the rise of bitcoin and other cryptocurrencies revealed a huge global appetite for digital money, incentivizing central banks to create their own digital coins to ensure money creation stays under centralized control. At the same time, central banks throughout the developed world have adopted or flirted with negative interest rates, raising the question of how effective a negative rate can really be if people can avoid it simply by stashing paper bills under the mattress? Academics and newsletter writers theorized official digital coins could solve this dilemma, as they would replace cash and central banks would control their value. This, as best as we can tell, is the genesis of all the “Fedcoin will destroy savings” warnings we have seen.

As is typical of most fearful frenzies, however, there is little grounding in reality. Lost in 99.9% of coverage we have seen on the matter is the simple fact that the US already has a digital currency, and it is called the dollar.[ii] Chances are, you own it and transact with it regularly! Any money in your bank account isn’t stashed in a vault—it is a digital accounting entry. Whenever you shop online, you are paying with digital dollars. When you use your credit or debit card at brick-and-mortar stores, you are paying with digital dollars. The Fed doesn’t even need to create systems to enable these digital payments, because they already exist. Your bank and credit card companies administer them. So do PayPal, Square, Apple and Venmo—not to mention Starbucks’ smartphone app, which stores so many digital dollars in the form of gift cards that we have occasionally wondered if it should be regulated as a bank. All of these were born in the free market, without central banks guiding them, as many innovations are.

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