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.

About the Eurozone’s ‘Record’ Inflation Surge

Record-high inflation. Biggest-ever jump. Those are two common phrases commentators used to describe the eurozone’s November inflation rate, never mind the fact that the eurozone itself is scarcely old enough to drink. Records come easy in young datasets, and this latest one doesn’t mean a 1970s repeat is at hand. Rather, a quick look at the limited data available in the “flash” release for the eurozone and member-states shows that—as in the US—prices are up on the collision of three temporary factors: supply shortages, base effects and energy prices. That people think otherwise suggests there is a lot of room for stocks to climb the inflation wall of worry.

It is of course true that eurozone inflation, which hit 4.9% y/y, is relatively high and up sharply from October’s 4.1%.[i] But a lot of that comes from energy prices, up an astronomical 27.4% y/y and 2.9% m/m.[ii] Excluding energy, food, alcohol and tobacco (i.e., the eurozone’s version of “core” inflation), prices rose 2.6% y/y and just 0.1% m/m.[iii] Non-energy industrial goods rose 0.4% m/m, bringing their year-over-year increase to 2.4% as supply shortages continued, but services prices continued easing with a -0.2% m/m drop—a sign that reopening from lockdowns has largely run its course as an inflation driver.[iv]

But the base effect hasn’t petered out yet. As Exhibit 1 shows, the eurozone was still in deflation a year ago, lowering the denominator in late-2021’s year-over-year calculations. The impact is even clearer when you look at the two biggest member-states: Germany and France. German inflation jumped to 6.0% y/y in November, the fastest since reunification.[v] But French inflation barely inched higher, from 3.2% y/y in October to 3.4%.[vi] Not because France has stolen Germany’s traditional price stability, but because Germany experienced sharp deflation in 2020’s second half after the government temporarily slashed its value-added tax (VAT) in the name of COVID relief. France, which didn’t cut VAT, didn’t have deflation last year. That means its year-over-year calculation base is higher than Germany’s, subjecting today’s inflation rate to less artificial upward skew.

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Digging Deeper Into the 4% Rule’s Alleged Demise

Is the long-running 4% retirement rule about to go the way of the dodo bird? Some industry experts think so, pointing to stocks’ high valuations today as cause for lower market returns tomorrow, thus requiring retirees to update their spending plans. But we think this makes an awful lot out of one academic exercise—and falls prey to classic fallacies. We think planning retirement cash flows requires more nuance than simply using rules, but the general premise is well worth exploring.

The 4% rule holds that a diversified portfolio can support withdrawals of 4% of the starting value annually, adjusted for inflation, without premature depletion. Yet a recent Morningstar analysis purportedly called this into question. When running Monte Carlo simulations (which combine thousands of results across stocks and bonds to calculate the probability that a given asset allocation will support a given cash flow rate), they found that in a quarter of simulations, a half-stock, half-bond portfolio depleted within 30 years if withdrawals stayed at 4%. Most coverage attached some alarm bells to this, but we see a few caveats.

One, if a quarter of simulations ran out of money, that means three-fourths of them didn’t, rendering a roughly 75% probability of not outliving the assets. Two, a modest failure rate isn’t exactly a breaking development. You can see this for yourself in Fisher Investments Founder and Executive Chair Ken Fisher’s 2013 book, Plan Your Prosperity. In it, there are a handful of similar simulations modeling how different asset allocations could support various withdrawal rates over 30 years—at a time when stock valuations were theoretically more favorable than they are now. There was no 4% simulation, but there was one for 5%, and it showed a 78.2% probability of avoiding depletion within 30 years—and, on average, portfolios supported 28.8 years of withdrawals.[i] There are always risks and unknowns in investing, but we aren’t inclined to buy the this time is different argument we have seen since this report broke.

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A Call for Calm After a Rocky Black Friday and a New Variant’s Emergence

Stocks weren’t in the holiday spirit on Friday, falling sharply on fears of a new COVID variant, chiefly hailing from South Africa, that the World Health Organization dubbed Omicron. The S&P 500 slumped -2.3%, notching its worst Black Friday session on record.[i] In response, the US, UK and EU imposed restrictions on travel from a group of southern African countries. It all adds to worries over a virus uptick this winter, with many fearing the variant will interrupt economic activity and hit stocks hard. Hence, economically sensitive sectors—e.g., Energy, Financials and Industrials—declined the most in reaction to the news.[ii] But stay cool—and think like stocks. Yet another variant can be troubling on a human level—and try one’s willpower. However, from an investment perspective, the past two years have shown the real market risk isn’t the outbreaks themselves, but governments’ reactions to them. On that front, there is little sign much of anything changed on Friday.

Besides being first identified in South Africa, we know next to nothing about the scope of Omicron. Health experts don’t yet know how infectious, contagious, severe or lethal this variant is. However, as legendary investor Benjamin Graham put it, in the short term, markets are voting machines—and the news of a new variant likely spooked investors on a day when US markets close early. Moreover, those shortened sessions can mean thin trading volumes in some markets, likely exacerbating fluctuations. However, we don’t think markets are likely to be flustered for long: They have seen this movie before.

While it may be tough to fathom, we have been living with COVID—the original outbreak and subsequent variants—for almost two years now. That recent history shows outbreaks themselves aren’t negative for stocks. Instead, the actual market risk arises from economic lockdowns. When governments worldwide suddenly implemented lockdowns in early 2020, stocks priced in the severe economic disruption, resulting in a record-fast bear market. But stocks also priced in lockdowns’ impact quickly—and moved on. They began rising in March 2020, long before lockdowns even lifted. They continued rising when caseloads rose that fall. In our view, markets dealt with the clear downside of lockdowns on economic activity—and looked beyond them.

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Don’t Overrate Black Friday—Even This Year

Well, today is Black Friday, and according to one of our favorite recent Internet memes, most of the country probably wasn’t in great shape for lining up for the annual retail frenzy before dawn. You see, everyone’s Christmas presents are supposedly stuck on container ships, leading Internet jokesters to claim lining up meant treading water or swimming for hours.[i] That may seem problematic given some retailers’ reputed reliance on holiday sales to turn a profit. But ports backlog or no, we recommend not getting hung up on Black Friday. Whether or not this weekend’s final tally is big, it won’t give you any insight worth basing portfolio decisions on.

We can understand the temptation to read the Black Friday tea leaves this year. Pundits often see it as a signal of economic health—perhaps doubly so this year, as many couch them as bellwethers of the country’s ability to withstand the supply chain snarl. They are also supposedly an early glimpse at whether expiring COVID relief and vaccine mandate-driven layoffs will weigh on consumption. But in our view, there are just too many moving parts to be able to isolate either issue. Plus, neither is exactly a surprise at this point, as pundits have been warning of these potential headwinds for months. So even if you could glean something negative from the results, it wouldn’t be earthshattering for stocks—it would probably just confirm whatever markets have already priced.

Even in a normal year, to the extent any year is “normal,” we wouldn’t overrate Black Friday. Yes, holiday sales are nominally important to retailers’ full-year profitability, but they are just one variable affecting two sectors of the stock market (e.g., Consumer Discretionary and Consumer Staples). Even then, Black Friday isn’t the be-all, end-all for holiday sales. Over the years, the traditional Black Friday discounts have spread beyond the day. First it was Black Friday weekend, then Black Friday week, then Black Friday month. This year, we started receiving holiday discount codes for several retailers in October. So we doubt that when the weekend’s sales totals hit the wires on Monday that it will be hugely telling about the month—or December, when an awful lot of holiday spending also occurs.

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Nine Things We Are Thankful For

Tomorrow is Thanksgiving, and on the surface, there is perhaps not a lot to be thankful for. The world is still dealing with the fallout of COVID—and the lockdowns and restrictions designed to slow its spread. Relatedly, supply chain woes linger, fomenting inflation fear. Debates over vaccine mandates, taxes and potential spending legislation add more angst. But finding joy amid trials is the key to getting through this thing called life, so here are some things we think all investors can be grateful for as we gather with family and friends over the year’s greatest feast.

1. The existence of worries like the above. Life is never great. But when bad things—whether real or false—lower investor sentiment, it keeps expectations in check and extends the wall of worry for stocks to climb. If everything looked and felt rosy, it would suggest the bull market’s pinnacle was nearby.

2. Midterm Congressional elections. Regardless of your personal feelings about the current Congress and the administration’s various proposals, stocks like gridlock—and midterms promote that. These contests, now less than a year away, give politicians incentive to avoid rocking the boat, which results in legislation getting watered down or scrapped outright, much as we have seen with the reconciliation budget bill.

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Why the Strategic Petroleum Reserve Release Isn’t a Game Changer

After weeks of signaling it was preparing to do so, the Biden administration announced today it will attempt to curb gas prices by releasing 50 million barrels of oil from the Strategic Petroleum Reserve (SPR), part of a coordinated release with China, Japan, South Korea, India and the UK. And in response to this forthcoming supply increase, global oil prices rose. Yes, a move designed to rein in oil prices seemingly had the opposite of its intended effect, illustrating the SPR’s complicated relationship with prices. While moves like these can have a short-term impact—predominantly through sentiment—they do little to change longer-term supply and demand fundamentals.

Oil prices are set globally, on world supply and demand fundamentals. The US’s 50 million barrel contribution to the global release represents less than 0.2% of global production.[i] The full global release will likely be around 65 to 70 million barrels, according to industry researchers’ calculations, which is nowhere enough to move the needle over any meaningful stretch.[ii] This is partly because OPEC also has a great deal of influence on global supply and is reportedly planning a counter move next week. Previously, OPEC was coordinating to increase output by 400,000 barrels per day. If the cartel decides to slow or pause production increases, it would likely neutralize the US’s coordinated supply release. In our view, markets are likely weighing the totality of the global supply landscape.

Even if OPEC sits tight, the SPR release likely has little long-term impact. It might help curb oil and gasoline prices by a bit in the near term, but it won’t alter the longer-term supply and demand landscape. That will depend on private producers boosting output, which is already starting. The US has added 67 oil rigs since the beginning of September, bringing total rig count to 461 as of last week.[iii] Last week’s industrial production report showed oil and gas well drilling rising 9.3% m/m in October, bringing the cumulative increase since July 2020’s low to 93%.[iv] The International Energy Agency (IEA) reported global oil production rose by 1.4 million barrels per day (bpd) last month and penciled in a further 1.5 million bpd increase over the rest of this year.[v] That is just a forecast, but it seems sensible to us based on the rise in drilling activity. As global output rises, it should help supply and demand come back into balance, which should help stabilize prices and ease the pain at the pump.

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Markets Respond to Price Signals

We have noted before that when markets are allowed to work, high prices are often self-correcting because they invite greater production—raising supply—and limit demand, which stabilizes or tugs prices back down. For example, after lumber prices hit record highs in May, sawmills ripped more boards, while some buyers balked, sending prices down -72.8% through the summer.[i] Though up a bit lately, they remain -53.8% off their May peak.[ii] We see this same dynamic playing out in myriad other areas. Let us take a tour.

Shipping backlogs? The Baltic Dry Index—a measure of bulk goods’ (like coal and steel) transport costs—hit a 13-year high in October, but it has since tumbled -53.2% as global port congestion eases.[iii]

Exhibit 1: Transport Costs Climb Down

Source: FactSet, as of 11/23/2021. Baltic Dry Index, 1/1/2021 – 11/22/2021.

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Meet the New Fed Head, Same as the Old Fed Head (Literally)

We have a decision! After holding the country in suspense for weeks, President Joe Biden announced on Monday that he has tapped Fed head Jerome Powell for another term. Fed Governor Lael Brainard, whom some observers had tipped as a potential replacement, got tapped as Vice Chair, while Powell will continue steering monetary policy. Naturally, pundits are now speculating at what the latest news means for monetary policy—an endeavor we think is fruitless and pointless. Yet the news does reduce uncertainty over Fed personnel—uncertainty that will likely fall further in the coming weeks, as Biden signaled he will soon fill the Fed’s open (and soon-to-open) seats. But we think it is a stretch to glean much impact beyond that.

Powell’s reappointment extends the status quo, and not just of the last four years. For the most part, Powell’s Fed was an extension of former Chair Janet Yellen’s Fed, which mostly extended the policy of her predecessor, Ben Bernanke. All three were cut from the same technocratic cloth, and all three have headed committees of economists and academics. All have followed the same quantitative easing (QE) playbook and left the Fed’s traditional toolkit mostly untouched. We don’t think this has been terribly beneficial, but it is an approach markets are quite familiar with, and stocks have been largely fine with it.

Some argue Powell’s reappointment changes the calculus a bit. The logic goes like this: Powell was holding off on rate hikes or other supposedly major moves in order to raise the likelihood of being reappointed, and now that his job is safe, the coast is clear to tighten monetary policy. Brainard, meanwhile, allegedly would have been more likely to keep rates lower for longer. We think this errs on multiple fronts. One, had Brainard gotten the job, her resume wouldn’t have helped predict her actions, as Fed heads often defy their own past writings and experience. When asked about this, former Fed head William McChesney Martin quipped that when you become head of the Fed, they make you take a little pill that makes you forget everything you once knew, and it lasts as long as you are in the job. When questioned about his own unorthodox decisions, Martin’s successor and rival, Arthur Burns, joked he took “Martin’s little pill.” We think plenty of other Fed heads have also fallen prey, making predictions useless.

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The Shocking Truth About Today’s P/E Ratios

Have you heard the one about stocks being really expensive? We sure have, with most of the chatter centering on the S&P 500’s above-average price-to-earnings (P/E) ratio. Some pundits argue this sets up a weak 2022. The Fed got in on the action this week, warning in its semiannual Financial Stability Report that high valuations make stocks “vulnerable to significant declines should investor risk sentiment deteriorate, progress on containing the virus disappoint, or the economic recovery stall.”[i] While the Fed’s analysis was measured, some pundits took the headline and ran, taking it on faith that surging valuations pose a risk. So it might interest you to know that valuations are, well, down over the past year-plus. Mind you, we don’t think valuations are predictive, but we think this is a shining example of pundits ignoring the denominator—earnings—and drawing off-base conclusions as a result.

Exhibit 1 shows the S&P 500’s trailing P/E—that is, price divided by the past 12 months’ earnings—since the end of 2018. In our view, this metric is inherently backward-looking, as stocks move on expectations for profits and fundamentals over the next 3 – 30 months. Markets today are pricing in next year’s profitability, not last year’s. Yet trailing P/Es are oft cited as evidence of stocks’ being overvalued, so let us take a look.

Exhibit 1: Checking In on Trailing P/Es

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The Real Takeaway From Headlines’ Fixation on Turkey

Editors’ Note: MarketMinder does not make individual security recommendations. Those mentioned below merely illustrate a broader theme we wish to highlight.

Here is something of a sign of the times: Today’s biggest financial news story, by far and away, was a rate cut and currency slide in Turkey. A country that is just 0.3% of the MSCI Emerging Markets (EM) Index’s market cap.[i] This is part of a recent trend we have noticed, in which events of little fundamental significance to global markets get bigtime attention simply because they are new and different. The flipside of this? There is actually precious little in the way of news right now, which we have long found to be a nice backdrop for stocks. In our view, no news is usually good news, giving the market plenty of latitude to do its daily work of pricing in longer-term fundamentals.

We aren’t denying that Turkey’s news is interesting. Today’s cut lowered the benchmark rate from 16.0% to 15.0% despite Turkish inflation clocking in at 19.9% y/y last month.[ii] Calling the move unorthodox is an understatement. But it also caps President Recep Tayyip Erdogan’s long history of meddling with monetary policy, including firing prior central bank governors who didn’t share his belief that high interest rates cause, rather than tame, inflation. He fired prior central bank governor Naci Agbal in March after a series of rate hikes, replacing him with Sahap Kavcioglu—a former newspaper columnist who espoused monetary views similar to Erdogan’s. Kavcioglu’s move today followed cuts from 19.0% to 18.0% in September and to 16.0% last month, likely keeping the boss happy, yet the lira is now down to historic lows versus the dollar, driving Turkish people to switch their bank accounts to more stable currencies.[iii] Some analysts suspect this could finally break Erdogan’s political grip, teeing up some political uncertainty as chatter about early elections escalates.

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