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.

European Politicians Are Having a Busy Week

Editors’ Note: MarketMinder favors no political party nor any politician. We assess political developments for their potential economic and market impact only.

When it comes to European politics right now, most of investors’ attention is centered on Ukraine and the prospect of a Russian invasion. Yet there are also some fresh developments on the traditional political front, which we think are contributing to elevated early-2022 uncertainty. Italian lawmakers have now gone through three rounds of presidential voting and are no closer to selecting a (somewhat ceremonial) head of state. Portugal holds a snap election Sunday. France’s late-April presidential contest is heating up. All three, in our view—along with Australia’s upcoming general election—probably contribute to jitters in the near term, but they also create opportunities for falling uncertainty to be a tailwind for markets in much of the developed world later this year.

Inside Italy’s Stalemate

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Correction or Pullback, January’s Swings Call for Calm

If you had better things to do Monday than watch the stock market’s every tick—and we hope you did—you might think the day’s 0.3% rise signaled a pretty uneventful day.[i] Boring, even. But that isn’t the full story. The S&P 500 began the day with a steep slide, hitting -4.0% at around 9:30AM Pacific time, as a cacophony of headlines shrieked about thousand-point Dow drops and the S&P 500 entering a correction.[ii] (A correction is a short, sharp, sentiment-driven drop of -10% to -20%; at the low today, the S&P 500 price index was -12.0% from January 3’s record high.[iii]) Stocks then spent the rest of the day rallying, undercutting those headlines and forcing market reporters to change their tune. Now, no one knows whether this reversal will mark the end of the year’s early, sharp pullback. Maybe it does. Maybe stocks reach correction territory in the days ahead. Regardless, we think investors’ best course of action is the same: Stay calm and exercise patience.

Magnitude aside, the downdraft to start 2022 looks a lot like a correction—and not much like a bear market. The lockdown-induced, warp-speed 2020 version aside, bear markets usually begin gradually—with long rolling tops early. As the old adage goes, bear markets typically “start with a whimper, not a bang.” They usually begin amid euphoria, with investors generally poking fun at bearish theories. And they are driven by fundamental negatives—real doozies investors either don’t see or dismiss as phony, teeing up major downside surprise when reality dawns on them.

Corrections are different. They normally begin with a bang, for any or even no reason, with stocks falling steeply from a prior high and plunging fast. Typically, they have some big fear or scare story associated with them many presume is driving the negativity. After a swift fall that has most expecting worse to come, stocks turn around and snap back higher—usually about as fast as they fell—with no warning.

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On the Bump in Bund Yields

Hear ye, hear ye—a momentous event occurred Wednesday: Germany’s 10-year bond yield turned positive! Just barely, and not for long—it ticked back down to -0.013% a short while later.[i] But the brief blip above zero was enough to spark a flurry of commentary warning rising German yields would suck money out of US Treasurys, sending long rates here higher—and hurting stocks in the process. However logical that chain of events might seem, we think it has little grounding in reality.

For one, arguing a German bund yielding a whisker more than nothing will pull capital away from a US Treasury note paying 1.83% focuses too much on yields’ direction.[ii] All else equal, money flows to the highest-yielding asset, which remains US Treasurys. The gap is wide enough that even if bunds are positive, European investors can likely still buy US Treasurys, hedge for currency risk and come out ahead. If you were managing a European pension fund and trying to balance long- and short-term obligations, which would you choose? We suspect many, if not most, would likely pick the higher-paying option.

Then again, yields aren’t static. Suppose Germany’s barely positive yield did attract a flood of buyers, who sold their US Treasury bonds. If markets are at all efficient, German yields would swiftly fall back below zero as buyers bid prices higher (bond yields and prices move in opposite directions). Bonds move on supply and demand, after all, and German bond supply is extremely tight, so it wouldn’t take much of a demand increase to tug yields lower. Meanwhile, the world would see a chance to buy Treasurys on the cheap, quickly bidding prices up and yields down and leaving everyone wondering what all the fuss was about.

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Don’t Extrapolate Slow Chinese Q4 GDP Growth

Stocks’ choppy January continued Tuesday, as the S&P 500 dropped -1.8%.[i] Fed rate hike jitters once again got most of the blame, but headlines also dwelled on another bit of news: Chinese GDP’s sharp Q4 slowdown. Though 4.0% year-over-year growth modestly beat expectations, it was the weakest expansion since lockdowns induced an economic contraction in early 2020, and pundits warn new regional lockdowns could cause further damage from here.[ii] That is possible, and it won’t shock us if weak Chinese data weigh on sentiment for a while, contributing to the grinding returns we expect in the first half (or so) of this year. Yet we also think China is likelier than not to continue contributing to global growth, eventually rendering fears false.

Under the hood, economic trends remained largely unchanged from prior quarters. Exports and manufacturing continued driving growth, with the former up a whopping 20.9% y/y in December—a figure not inflated by lockdown base effects.[iii] But consumption remained lackluster, with retail sales crawling just 1.7% y/y higher in December and property investment contracting for the first time since early 2020’s lockdowns.[iv] In our view, it is important to remember that this weakness is largely self-inflicted, stemming from the government’s zero-tolerance COVID approach and efforts to reduce leverage in the property sector. This is key because, new lockdowns aside, there is some evidence of these policies softening at the margins. The government is already going easier on less-distressed property developers, and Monday’s twin interest rate cuts should help cushion them further.

Lockdowns and the zero-COVID policies are wild cards, especially with the Beijing Olympics looming. However, political considerations suggest a hardline policy stance is unlikely to last indefinitely. President Xi Jinping still appears to be intent on securing an unprecedented third term at this autumn’s National Party Congress. That makes ensuring social stability paramount, so ensuring economic stability seems vital to us. If policies impact growth materially from here, officials will likely do whatever they can within reason to shift course and stoke the economy.

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Bad Breadth Doesn’t Stop Bull Markets

Across the financial press, a common theme has begun emerging: Fewer and fewer stocks are performing well—so-called narrowing market breadth—which, to proponents, means this bull market is fragile. Don’t buy it—in our view, this is faulty logic. Narrowing breadth is normal as bull markets mature, and there is no preset level indicating the bull market’s end is near. To us, it is just another sign this less-than-two-year-old bull market is acting late stage. However, we think widespread fear of typical bull market behavior is yet another indication stocks have more room to run.

There are several different ways to measure market breadth. Some look at the number of stocks hitting new 52-week lows, which are currently far outpacing new highs. Others track the “advance-decline line”—the ratio of advancing stocks to declining ones. Early this week, some touted the fact daily NYSE and Nasdaq decliners outnumbered advancers by about four to one.[i] Our preferred measure is the percentage of stocks outperforming the index average. For the S&P 500, this jumped to 61% during value’s early 2021 countertrend rally amid optimism over mass vaccine rollouts and global economic reopening. But it has steadily declined since last May, with only 44% now beating the index on a rolling 12-month basis. (Exhibit 1)

Exhibit 1: Narrowing Market Breadth Doesn’t Always Spell Doom

Source: Clarifi, as of 1/13/2022. Percent of S&P 500 stocks beating the trailing 12-month S&P 500 total return, 12/31/1975 – 1/12/2022.

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Nope, Today’s Inflation Doesn’t Call for Gold

In recent weeks, from Internet banner ads to television commercials to radio and podcast spots, we have heard a clarion call: Put your IRA in gold now to protect against inflation! We are told gold is the only insurance policy against a devaluing dollar. That converting your IRA or 401(k) to store physical gold is wise, low-cost and risk-free—seemingly ignoring that the courts have cracked down severely on the process, costing some people hundreds of thousands of dollars.[i] Aside from the potential costs, low liquidity and other fine points, we see a giant problem with this alleged inflation hedge: It just doesn’t work.

As we now know, courtesy of December’s CPI report, US consumer prices rose 7% last year.[ii] For something to work as an inflation hedge, it would have to rise by more than 7%. Global stocks easily fit the bill, returning 21.8% including reinvested dividends. If you are keeping score, that is three times the inflation rate, suggesting real (inflation-adjusted) returns were fine. Gold? Well, gold fell -4.3%. Yes, as the inflation rate hit a 40-year high, gold lost value in absolute terms.

Exhibit 1: Gold and Global Stocks in 2021

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What December’s Jobs Report Says About Sentiment

US economic data have garnered significant attention over the past week, including 2021’s last monthly jobs report, released last Friday. December nonfarm payrolls rose by 199,000 while the headline unemployment rate fell to 3.9%.[i] Both widely watched figures continued their recent trend of bucking the consensus—in conflicting ways. While the number of jobs added in December was well short of the 400,000 estimated—and below 2021’s average monthly job growth of 537,000—the unemployment rate beat expectations of 4.1%.[ii] While the numbers themselves are no doubt interesting, what caught our eye most was onlookers’ general reaction to the data. In our view, that is telling about sentiment—illustrating the prevalent mix of skepticism and optimism near perfectly. 

Many blamed the big jobs miss on Omicron. While past variants led to COVID restrictions that temporarily knocked consumer demand and forced some people out of work, Omicron is driving big absenteeism. Millions of workers are calling in sick, impacting industries from airlines and schools to hospitals and garbage collection. Many think the situation is worse than the data show since the jobs report’s cutoff is mid-month and doesn’t capture Omicron’s late-December surge, which has carried over into January.

We don’t dismiss Omicron’s economic headwinds or personal inconveniences, and we won’t be shocked if January’s jobs data show a bigger effect. Perhaps this spills into other, output-related data series, too. But there is a big difference between the economic impact of absenteeism and lockdowns. Consider airlines. United Airlines just announced more than 4% of its workforce tested positive for COVID and the majority isn’t working, forcing the airline to cut flights.[iii] But delays and cancellations don’t cause travel to cease: Over the past month, the average number of travelers passing through TSA checkpoints per day was about 1.8 million.[iv] Compare that to the average of 213,153 travelers per day in the month following March 17, 2020—the day when strict shelter-in-place orders started taking effect in California’s Bay Area, followed by similar measures nationwide in subsequent weeks.[v] Now, TSA checkpoint numbers aren’t seasonally adjusted, so comparing a traditionally busy holiday travel period to a late-winter stretch isn’t apples to apples. But in our view, the raw numbers reveal absenteeism’s challenges are a far cry from lockdowns’.

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The Rise and Fall of UK Political Uncertainty in 2022

Editors’ Note: MarketMinder favors no political party nor any politician. We assess political developments for their potential economic and market impact only.

While the latest filibuster chatter and November’s midterm elections are hogging most political headlines in the US, there is no shortage of theater abroad—and no shortage of uncertainty. Some of it is electoral, with contests looming in France and Australia. Some relates to shaky coalition building, which may soon be reality in Italy if Prime Minister Mario Draghi gets tapped as president later this month. And some is just good old fashioned scandal and parliamentary revolt, which happens to be the situation in the UK. Yes, Prime Minister (PM) Boris Johnson is—once again—facing calls to resign over some Downing Street socializing during 2020’s lockdowns. There is even speculation a police investigation could lead to formal charges for violating lockdown rules. We won’t hazard a guess on whether Johnson’s days are numbered, but we do think this is a textbook example of how high uncertainty early in the year is likely to fade gradually into gridlock—which should be a bullish tailwind later this year.

Until this week, Johnson somehow managed to maintain plausible deniability about his knowledge of gatherings that broke the rules. Even when a picture emerged last month of him enjoying wine and cheese with staffers in the Downing Street garden in May 2020, rumbling about a “work event” held the wolves at bay. But that was before someone leaked the email from one of his senior aides inviting over 100 staffers to “make the most of the lovely weather” and “bring your own booze” on May 20, 2020, a time when normal Brits weren’t allowed to gather in groups larger than two—even outdoors. As you might expect, people are now posting videos of police breaking up gatherings the same day, along with pictures of dying relatives they weren’t allowed to visit. Labour leader Keir Starmer (who was previously caught having a tipple indoors with staffers despite a ban on indoor gatherings) is urging Johnson to resign, which isn’t new—but Scottish Conservative leader Doug Ross is also calling for his head, which is. So are several backbench Members of Parliament (MPs), a broad swath of the public and some Conservative-leaning columnists.

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On Inflation, Trust the Market

Ouch. That about sums up the collective reaction to the news that December’s US CPI inflation rate hit 7.0% y/y—the fastest rate since 1982.[i] Considering the inflation rate a year prior was just 1.4%, the sharp acceleration has jarred many households and businesses, which are wrestling with higher costs.[ii] But if you were invested in stocks over the past year, it is worth noting your investments probably provided a nice hedge, as global markets rose much faster than consumer prices. In our view, this is critical to remember as inflation continues topping the list of investors’ fears in 2022.

US inflation has morphed into a hot button political issue in recent months, with people on both sides of the aisle trying to spin it to their advantage. Even the discussion of its causes has become hotly politicized. So please understand that when we discuss inflation and its stock market implications, we aren’t making ideological or political statements. This isn’t even about whether faster inflation is good or bad—obviously, if prices rise 7% in a year and make it harder for people and small businesses to make ends meet, that isn’t good. Yet at times like this, it is crucial to think about events and risks as markets do. Stocks don’t view things in terms of “good” or “bad” in the absolute sense. That debate is squarely in the human, societal realm. For stocks, the question is at once more simple and more complex: Is there any material trouble left that markets haven’t already priced in? Is there any negative surprise power left? A strong likelihood of a bad outcome that investors haven’t already considered?

That last question is the linchpin, in our view. It is almost cliché to say markets are efficient and forward-looking, so please don’t get annoyed with us for going there. But overwhelmingly, we have found that in any sufficiently liquid market, be it stocks, bonds or what have you, prices reflect all widely known information at any given time. “Information” includes facts, figures and data. It also includes interpretations of those facts, figures and data, and the hopes and fears that emerge from that analysis. And it includes forecasts, which are really just opinions on how said facts, figures and data will evolve in the future—and, perhaps, what that evolution will mean for asset prices.

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No, Dollar Strength Doesn’t Mean Weak Stocks

Market volatility may not be predictable, but the behavioral quirks it spawns usually are. Take, for instance, headlines’ tendency to tout new fears to either explain the dip or argue there is much worse to come. We have seen the latter in recent days, as the dollar has returned to the fore. This time, some pundits argue a stronger dollar will hit US stocks’ earnings—particularly US Tech’s earnings—as overseas sales lose value, storing up trouble for the S&P 500. That may seem plausible enough on the surface, but a quick run through basic economics and market history shows it doesn’t hold true.

Now, we aren’t so sure the dollar will soar from there. Arguments that it will rest on the presumption that Fed rate hikes will drive long-term Treasury yields higher, causing overseas investors to flock to Uncle Sam’s IOUs. Those inbound currency flows, allegedly, will drive the greenback skyward. Problem is, this isn’t how markets work—they look forward, pricing in widely expected events well in advance. Rate hike chatter is widely known, as is America’s elevated inflation rate. If either of these were a material forward-looking driver for long rates, yields would already reflect it. Yet 10-year Treasury yields, while up about a quarter of a percentage point since late December, are basically flat since mid-March 2021.[i] Arguing pending rate hikes create material upside in long-term yields from here is tantamount to arguing markets aren’t efficient at all. In our experience, that is usually the losing side of the debate. With that said, range-bound long-term rates might still attract overseas capital, but here, too, currency markets are extremely liquid and efficient—and Treasury yields’ premium over their European and Japanese counterparts is also well known and likely priced in. That doesn’t preclude short-term swings, but we think it argues against a sustained move higher.

And if we are wrong? That still doesn’t mean earnings gloom awaits. Yes, all else equal, when the dollar strengthens, if US-based multinationals don’t raise prices overseas, it reduces the value of overseas sales. This is just plain currency math—pounds, euros, yen and all the rest convert to fewer dollars when the buck strengthens. Yet this same currency math also reduces US-based companies’ overseas costs—crucial, given the volume of labor and resources sourced abroad. Very, very few goods are 100% sourced and produced in the US (or any other major country)—especially Tech hardware. The effect may not be perfectly zero-sum for all companies or even in aggregate, but it often means earnings hold up much better than expected. Stocks move not on absolute reality, but on the gap between reality and expectations. While dollar uncertainty might weigh on sentiment in the short term, eventually a positive earnings surprise would likely bring big relief to stocks.

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