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.


Don’t Buy Big Banks’ Q1 Earnings Bounce

Big banks kicked off Q1 earnings season with a bang. Firms reporting this week in the S&P 500’s banks and capital markets categories announced Q1 earnings growth topped 200% y/y, trouncing expectations for more pedestrian double-digit growth rates.[i] This has headlines claiming more gangbusters growth is in store and set to deliver a big positive surprise to stocks. Apologies for raining on a parade, but we think they are in for some disappointment. Not the bull-market-ending kind, but the kind that doesn’t fuel lasting outperformance in more cyclical stocks.

Banks’ blowout growth is wonderful news, but it is backward looking—and has questionable staying power. Simply, markets pre-priced all the economic activity that drove these earnings. Thinking they are predictive is backward. After last year’s March 23 low, the S&P 500 hit new highs in August, preceding economic recovery well in advance. The latest Q4 GDP figure still stands -2.4% below its Q4 2019 pre-pandemic high.[ii] While economists expect expansion this year, that—and its impact on bank earnings along the way—is old news to stocks.

The drivers behind Q1’s bank earnings are well known at this point—and they don’t look sustainable to us. For one, base effects from last year dominated. During Q1 2020, as lockdowns took effect, Financials’ earnings fell -40.6% y/y.[iii] That set up a low base, which alone virtually assured triple-digit growth rates as earnings return toward—and exceed—pre-pandemic levels. With 15 of 65 S&P 500 Financials reporting so far, their blended aggregate Q1 2021 earnings per share (EPS)—combining actual results with remaining consensus expectations—stand at $11.92, which would be 116% y/y over last year’s $5.53.[iv] But pre-pandemic, Financials’ quarterly EPS averaged $9.16 in 2019.[v] In this light, Q1 EPS more than doubling year over year seems much less extraordinary. Growth now has more to do with 2020’s devastation than anything in 2021, besides normalcy resuming.

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UK GDP and a Lesson on How Markets Work

One of the central tenets of our investment philosophy, which we have mentioned here often[i], is that we think stock markets are forward-looking, discounting expected events over the next several months. Economic data, by contrast, are backward-looking. Data released now reflect activity that happened in a previous month, quarter or year. Therefore, if you are looking at economic data for clues into what stock markets will do, we think you are probably mistaken, as prices likely already reflect that earlier economic activity—and have for some time. To see this clearly, here is a shining, timely example: February’s UK GDP, released Tuesday.

Most countries release GDP quarterly, but the UK—like Canada—produces a monthly report, giving more insight into the economy’s short-term twists and turns. That has been particularly illuminating during the pandemic, as it gives a more detailed look at the lockdowns’ varying economic impacts. The third UK lockdown took effect in early January, and that month’s GDP fell -2.2% from December.[ii] But in February, there was a slight recovery. GDP grew 0.4% m/m, even as strict nationwide business restrictions remained.[iii] To us, that is a noteworthy sign of the country’s economic resilience, which we think probably benefits many people at a personal level.

But to stocks, it is very old news. That would be true of any month’s GDP, but something that happened the day before the release ties a bow on it: Businesses began reopening from that third lockdown. That reopening has been scheduled since February 22 , when Prime Minister Boris Johnson announced it. Also widely known: The government’s plans to have all remaining restrictions lifted by June 21, provided the virus doesn’t escalate again. For nearly two months, the government’s reopening timetable has been common knowledge—a fact investors were likely well aware of as they bought or sold. This is what we refer to when we say markets anticipate expected events.

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Madoff Is Dead, but Schemes Like His Are Alive

Eleven years into a 150-year sentence for swindling investors out of nearly $20 billion in an elaborate Ponzi scheme, Bernie Madoff passed away on Wednesday. His arrest and subsequent downfall, during the throes of 2007 – 2009’s global financial crisis, put fraudsters in the spotlight globally. Numerous articles documented the tricks and lies he employed—as well as the signs his was a house of cards. Our firm’s founder and Executive Chairman, Ken Fisher, dedicated an entire book to teaching investors how to spot and avoid crooks: How to Smell a Rat, published in 2009 and still a great read. With the passage of time, Madoff and Ponzis fell out of the headlines. You could be forgiven for thinking his conviction shone a light on the approach, ending them. Sadly, that is far from accurate. Now, with investors growing more optimistic, some ne’er-do-wells likely see opportunity—investors lowering their guard. So, given that, let us once again review the biggest red flags to watch for.

This year alone, numerous examples have hit the headlines. Just last week, a would-be actor was accused of faking a production company, lying about big deals with Netflix, and spending his investors’ money on a lavish home and repaying astronomical credit card debt.[i] Last month, a San Diego woman was sentenced for bilking investors out of $400 million, claiming she would generate huge returns by extending high-interest loans to restaurants seeking liquor licenses.[ii] Prosecutors in Indiana just charged a man with wire fraud over elaborate schemes involving life insurance and food exports.[iii] A Nevada court slapped a $32 million judgment on a man who guaranteed investors 300% returns trading cryptocurrency options, then stole their money.[iv] A guy in North Carolina just got over 10 years in prison and a $6 million fine for telling people his non-profit would invest their money in charitable gift annuities and then, you guessed it, spending it on his extravagant lifestyle instead.[v] Rounding out the recent pack is a West Virginia pharmacist who just received a similar sentence after convincing family and neighbors to invest in a company she owned, claiming it had big contracts with the Department of Defense.[vi]

All of these followed the same basic playbook Madoff … well perfected is the wrong word, but you get the gist. Specifically, there are three common threads running through these and pretty much every Ponzi we have read about ever.

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The Mathflation Jump

We don’t often tip our hat to mainstream financial news coverage, but in the spirit of good sportsmanship, let us give credit where credit is due: The vast majority of financial outlets got inflation right. Instead of freaking out about CPI’s acceleration from 1.7% y/y in February to 2.6% in March and warning of runaway inflation ahead, they calmly explained the jump came from a math quirk known as the “base effect.”[i] We think that is a point worth reiterating here, as inflation isn’t the only data showing bigtime math skew right now—a key concept for investors to understand as they sift through economic results this spring and summer.

We first highlighted this early last month, after Fed head Jerome Powell started sprinkling base effect warnings in his public comments. Inflation rates, as we explained then, are calculated on a year-over-year basis. So March’s inflation rate is the percentage difference between CPI in March 2020 and March 2021. The “base” is that March 2020 level.

Last year, as lockdowns halted commerce in March, CPI started falling. It fell again in April and May, then started recovering in June. By August, it was back at pre-pandemic levels. Overall, prices surrounding that blip are in line with their long-term trend. But you will not know that from the inflation rates for the next few months as those year-ago bases bounce around. When you divide a given numerator (like March 2021’s consumer price index level) by a smaller denominator (March 2020’s), the result increases—just simple math. The denominator got smaller in March. It will get smaller still in April and May. That will boost annual inflation rates even if prices don’t change month to month. Then the annual inflation rates will probably slow significantly as the denominator gets larger again over the summer.

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Why Stocks Don’t Mind Widely Watched Forecasts

Tuesday, the IMF unveiled its latest World Economic Outlook, which revised its projections for global growth this year upward to the fastest-expected pace in decades. Yet the fast growth isn’t evenly distributed—the IMF expects America and China chiefly to drive the acceleration. Pundits had two general reactions to these forecasts. One camp celebrated the fast growth, thinking it has economically sensitive stocks set to soar. The other fears a divergence between America and China versus pretty much everyone else stoking instability and a world of equity market haves and have-nots. But in our view, extrapolating anything from such forecasts is a stretch.

The IMF’s upward forecast revision was its second in three months. It now expects annual GDP for the whole world to rise 6.0% in 2021, up from January’s 5.5% projection. For a bit of perspective, global GDP hasn’t grown this fast since 1973, according to World Bank data. Big components of that: the IMF’s forecast for 6.4% and 8.4% US and Chinese GDP growth, respectively. While it has only been about a decade since China eclipsed 8.4% GDP growth, America hasn’t topped 6.4% since 1984.[i]

Many take economists’ brighter outlook—not just the IMF’s—as a fresh sign markets will boom, favoring economically sensitive value stocks. The trouble? The fact so many expect fast growth means it likely has little power over markets. Beyond the IMF, private forecasts also show 2021 US growth surging. Presently, the median of 67 forecasts puts this year’s GDP growth at 5.8%.[ii] But this isn’t a new development. A year ago, several were already publishing 2021 US growth forecasts above 6%. The same is true for China. Many private forecasters penciled in upwards of 8% Chinese growth last April.

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The Global Minimum Tax: Tough Sellin’ for Yellen

Editors’ Note: This piece touches on politics, and as such, we remind you that MarketMinder favors no political party nor any politician. We assess developments solely for their potential market impact.

On the heels of President Joe Biden pitching and stumping for his infrastructure plan—and its embedded corporate tax hike from 21% to 28%—Treasury Secretary Janet Yellen has been doing some related stumping. Yellen, it seems, is championing a 21% global minimum corporate tax rate. Wednesday, the G-20 said they will discuss her idea this summer, which has pundits treating her plan as if it is—or is soon to be—a fait accompli. But, friends, whether you love or loathe this plan, we suggest keeping your emotions in check. This is going to be some very difficult sellin’ for Yellen.

The rationale behind Yellen’s proposal is straightforward enough. A central tenet of economic theory holds that people (and businesses) respond to incentives. Taxes are one such incentive. The more you tax something, the more you incent a business to find ways around it. Worldwide, nations’ approach to taxing corporations varies pretty widely. Hence, multinational corporations have long sought to domicile in nations with friendlier systems. Yellen and Biden, perhaps rightly, fear hiking US corporate taxes could lead some US multinationals to seek friendlier shores elsewhere.

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Nearing the Topps? How a Baseball Card Company Illustrates Sentiment Now

Editors’ Note: MarketMinder does not provide individual security recommendations. The below merely represent a broader theme we wish to highlight.

On Saturday afternoon, I wandered into Target to complete a normal springtime ritual: buying a few packs of Topps Heritage baseball cards. It is usually easy. You just walk in around Opening Day, head to the trading cards rack by the cash registers, grab what you need and hand over your  hard-earned cash. But this time, no such luck. All I found was a bunch of empty shelves, some dusty Pokémon packs and a tumbleweed. The rumors were true: Baseball cards were back, resellers had cleaned out the inventory, and longtime hobbyists like me were shut out. Then my mind flashed to the two new card shops in town. It felt like 1993 all over again. But this article isn’t about the Junk Wax Bubble that wrecked baseball cards in the mid-1990s. Nope, it is about something more interesting that happened on Tuesday: Topps, the age-old trading card company, announced it was going public via Special Purpose Acquisition Company (SPAC). To assuage would-be investors worried that the company is a one-trick baseball card pony at the mercy of the hobby’s weird ups and downs, it hyped its many new forays into the weird world of non-fungible tokens (NFT). With that, the newly public company put itself at the center of a Venn Diagram depicting pretty much all of today’s investment fads.

Exhibit 1: A Venn Diagram of Fads

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Economic Data Are Springing Higher, but Stay Level-Headed

Spring has sprung, and so has the US economy. Last Friday’s employment report showed non-farm payrolls jumping by 916,000 in March, dropping the unemployment rate to 6.0%.[i] ISM’s Services Purchasing Managers’ Index (PMI), released Monday, jumped to a record-high 63.7, far above 50 (the dividing line between growth and contraction) while the Manufacturing PMI rose to 64.7.[ii] IHS Markit’s PMIs, which have less history but include more companies, put Manufacturing at 59.1, Services at 60.4 and the composite of the two at 59.7.[iii] Headlines from coast to coast are hyping these results. Consistent with recent trends, pundits aren’t looking for gloom buried under the hood. Nor are they couching this as a temporary boom. Instead, they see much more in store, with stimulus and hiring sure to fuel a lasting surge. While it pains us to be party poopers, we think a reality check is necessary, lest hot expectations prompt you to chase returns in corners of the market unlikely to do well amid slower economic growth.

After years and years of widespread skepticism, sentiment’s optimistic turn is a refreshing change. But questioning prevailing sentiment is always one of investors’ key tasks, whether the universal emotion is more fearful or greedy. So when we see an abundance of cheer over data, we think it is time to apply some tests. Is the cheer rational? Are people missing something? Making logical errors?

In the realm of unemployment, we think they are, for a simple reason: Labor markets are late-lagging indicators. In this case, March data reflect a rush of businesses reopening as restrictions eased throughout the country. From Texas lifting basically all restrictions to California restarting limited indoor dining and movie theaters—and everything in between—services businesses finally had cause to bring back many employees furloughed over the past year. That is what they did, adding 597,000 to payrolls.[iv] Judging from public sector payrolls’ 136,000-person jump, non-essential government workers are also trickling back to the office.[v]

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Volatility Strikes China

Editors’ note: This article touches on political matters, which MarketMinder takes no sides on, favoring no party or politician anywhere. We assess political developments solely for their potential market impact—or lack thereof.

Volatility has struck Chinese stocks,[i] leading many globally to question: Is this the start of something bigger and longer-lasting? Most coverage associates China’s market volatility with familiar concerns in the developed world: prospects for monetary policy tightening, slower economic growth and a regulatory crackdown on Tech and Tech-like sectors crippling recent high-fliers. We don’t disagree that some Chinese companies are facing some regulatory uncertainty on both sides of the Pacific, but the key consideration is how much negative surprise power remains from here. In our experience, markets are pretty efficient at dealing with things like this, and we think the surprise power from here is more likely to be positive than negative. 

In US dollars, the MSCI China Index—a broad gauge of Chinese shares listed in the mainland, Hong Kong and America—is in a deep correction, off -16.7% from its February 17 high.[ii] Now, it may be worth noting the index isn’t entirely accessible for global investors, as 20% of its market cap represents A shares, which are restricted mostly to Chinese mainland investors. But its largest shares by market cap are ADRs—Chinese companies that list and trade in the US. These have encountered trouble thus far this year, tied largely to escalating delisting talk.

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Keep COVID Relief Payment Expectations in Check

In one sign of today’s widespread optimism, February’s bigger-than-expected consumer spending dip—reported late last week—didn’t trigger the usual handwringing and grousing over American consumers’ health. Most coverage rationally noted the weakness was likely temporary. However, the brighter outlooks didn’t stop there, as many turned their gaze forward to a coming spending surge, buoyed by federal COVID relief. Many pundits suspect that will push economic growth to a higher plateau. While a short-term bounce wouldn’t shock us, we don’t think a lasting boom is likely—worth keeping in mind, especially when it comes to monitoring how expectations align with reality.

February personal consumption expenditures (PCE)—a broad gauge of US consumer spending—fell -1.0% m/m, slightly worse than expectations for -0.6%.[i] As many economists observed, the month’s severe weather likely knocked spending. Winter storms forced many retailers and restaurants to temporarily close and kept many Americans home, particularly in the Northwest, Midwest and South. But as many financial outlets sensibly noted, it is now spring. Winter storms probably aren’t a future headwind. Less rational, in our view: the broad anticipation of a stimulus-fueled spending surge forward.

We have seen many extrapolate COVID relief payments now rolling out to many nationwide into huuuuuuuge new consumer spending, but these projections have some holes. For one, it is tough to peg how exactly recipients will use their payments, as survey data reveal. A National Bureau of Economic Research (NBER) survey found nearly 60% of the first direct payments were either saved or went to pay off debt.[ii] A Federal Reserve Bank of Philadelphia survey reported a similar development: COVID relief checks had multiple uses, including going to savings or debt payments.[iii] That trend didn’t abate with the second round of checks, either. According to the Census Bureau’s Household Pulse Survey, which aims to track the pandemic’s impact on American households, about half of recipients reported using their second check to reduce debt.[iv] Now, surveys can’t provide exact breakdowns, but these findings throw cold water on the notion relief payments turned immediately into new spending.

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