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.

Why Price Controls Don’t Work

Editors’ note: MarketMinder is nonpartisan, neither for nor against any party, politician or policy. Though inflation has become a politically charged topic, our analysis focuses only on itsand surrounding developments’potential impact on the economy and markets.

If rising prices are hurting so many, why not just outlaw them? It sounds so simple. But, in practice, history has proven such price controls to be highly problematic in practice. Prolonged price pressures have raised calls for government action and led to some actual legislation—e.g., windfall profits taxes in Europe. In the US, there are efforts to go further, with prospective price control bills in Congress barring “gouging.” While passage doesn’t seem likely, we wouldn’t rule it out. We are watching their progress because, if adopted broadly, we think they could pose headwinds for the economy and markets.

Why are price controls such a bad idea? They distort price signals, which are core to markets’ functioning effectively and, not unrelatedly, economic growth. Prices balance supply and demand, coordinating production and consumption. They are signals, full stop. On the demand side, when they are high and rising, they encourage more people to cut back, substitute and economize. At the same time, high and rising prices imply greater potential profit, signaling producers to boost supply—which eventually helps keep prices in check.

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A Busy Summer Monday in European Politics

Summer Mondays are always a bit hard. You know the feeling—the kiddos are home for the summer enjoying lazy sunny days. The weather is warm and enticing. Vacation season is nearing full swing. Everything seems to move a bit slower. But not so this year: Global politics’ start to the season seems far busier than the norm, giving us plenty of market-related tidbits to consider. As always, we don’t prefer any politician or party in any country, and we look at these developments through a purely market-oriented lens. So what are the potential market implications of the Conservative Party’s move against UK Prime Minister (PM) Boris Johnson, the latest handwringing over this month’s French legislative elections and a potential Swedish government collapse? Let us explain.

Boris Johnson Keeps His Job … for Now

When last we left Johnson—last Thursday, to be specific—the PM was refusing renewed calls to resign over the latest revelations in the “Partygate” scandal. But that was before he got booed entering the service of thanksgiving for Queen Elizabeth II at St. Paul’s Cathedral on Friday, part of the Platinum Jubilee celebration. And before a memo arguing he was a surefire election loser went viral among Conservative members of Parliament (MPs) over the weekend. And before enough MPs submitted no-confidence letters to the party’s 1922 Committee, triggering a no-confidence vote Monday.

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This Week in the Commonwealth

As Britain gears up for Queen Elizabeth II’s Platinum Jubilee—celebrating 70 years on the throne—the Commonwealth she heads is having quite a busy week. In Canada, the central bank made another 50 basis-point rate hike while fanning inflation fears. In Australia, a solid Q1 GDP report did little to quiet the lucky country’s own inflation fears. And in the UK, the scandal known as Partygate flared up again, renewing calls for Prime Minister Boris Johnson to step down. What does it all mean for stocks? Read on!

Canada Takes a Hike

The Bank of Canada (BoC) hiked its benchmark rate by half a percentage point for the second straight time on Wednesday, bringing the rate to 1.50%—the highest among major developed nations. While the widely expected move didn’t ruffle many feathers, the press release raised eyebrows for saying the BoC is ready to “act more forcefully” if needed to tamp down inflation—a seeming change from April, when BoC head Tiff Macklem dismissed talk of a 75 basis-point move.[i] It went on to note that policymakers don’t think inflation has peaked, arguing inflation rates “will likely move even higher in the near term before beginning to ease.” Not only is the change in tone stirring uncertainty about more severe rate hikes from here, but it is further fanning inflation fears.

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The Latest Update on the EU and Russian Energy

Global energy markets got a big dose of seemingly bad news on Monday and Tuesday, with the EU announcing sweeping sanctions on Russian oil and Russia cutting off natural gas shipments to the Netherlands and some suppliers in Denmark and Germany. And in response, oil and natural gas markets … didn’t freak out. Brent crude oil prices and Dutch TTF natural gas prices (the European benchmark) inched higher but remain below their recent peaks, which they set shortly after Russian troops invaded Ukraine and the US and UK unveiled their bans on Russian energy. Notwithstanding the potential for further volatility from here, the relatively muted reaction doesn’t totally shock us. As we will discuss, while the latest developments aren’t great from an economic standpoint, they don’t appear likely to result in outcomes worse than the widespread fears markets have already priced in. Moreover, both moves should help put an end to questions over what will happen, which likely reduces uncertainty and helps markets move on.

The EU’s measures, announced Monday, were both worse and milder than many feared. Milder because while the EU announced it will ban all seaborne imports of Russian crude oil, the sanctions exempted shipments via pipeline in order to avoid handicapping landlocked nations, like Hungary, that don’t have the infrastructure to replace Russian crude. That gives the most Russia-reliant nations—and the bloc overall—some needed flexibility. But the measures are also heavier than expected, as they will ban all EU insurers from covering seaborne shipments of Russian oil—a provision that wasn’t a part of the initial public debate. Given European insurance companies presently insure the vast majority of tankers carrying Russian oil, this restriction aims to prevent Russia from continuing to sell discounted crude to China, India and other Asian nations. As many observers note, this is likely the more important of the measures. If it worked exactly as intended and stranded Russia’s oil, it would probably have a material impact on global oil supply.

But that is sort of a big if. For one, these actions don’t take effect immediately, giving room for the global oil trade to readjust. The insurance ban doesn’t come into force for six months. Two, it is unclear to us that banning EU insurers from covering tankers ferrying Russian crude will really stop up the drain. European insurers may cover the majority of shipments for now, but they aren’t the only game in town. Insurers from nations that aren’t participating in sanctions, including India and China, could fill the void. Some observers suggest the Russian government could write its own insurance.[i] Then too, Russia could simply ship more oil and gas to these nations via pipelines and rail, as these links are already established (and the former are expanding).[ii] Heck, black and gray markets could even flourish. Maybe Russian crude makes its way to refiners and ports in other nations and takes to the sea in disguise. It isn’t even clear Russian oil products are sanctioned, providing the refining or blending takes place in a third-party country like India.

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China Resumes Reopening

Investors got a fresh dose of Chinese economic data overnight Monday, this time with the official May Purchasing Managers’ Indexes (PMIs) signaling continued contraction in May. The rate of decline eased significantly from April, but it still doesn’t point to growth. That is the bad news. The good? Shanghai is lifting its lockdown, and life there will start returning to a semblance of normal on Wednesday. Beijing also reportedly eased some curbs over the weekend. Local officials have also announced a raft of measures to help support a rebound. Now, we don’t think any of this points to a rapid acceleration in Chinese GDP growth—but we also doubt that is necessary for Chinese or global stocks at this point. Rather, the combination of reopening and targeted fiscal and monetary assistance should help reality turn out better than widespread fears of a deeper malaise—a positive surprise.

PMIs are what those who love economic jargon call “soft data.” They don’t report growth rates. Rather, they are surveys measuring the percentage of businesses reporting increased activity in a given month. Readings over 50 indicate expansion and under 50 contraction—with growth and/or contraction theoretically getting faster the further readings get from 50. So from that technical standpoint, May’s PMIs showed some signs of stabilization. The official manufacturing PMI rose from 47.4 in April to 49.6—still shrinking, but barely.[i] The sub-index for large manufacturers even rose to 51.0, returning to growth.[ii] The non-manufacturing PMI, which includes the increasingly important services sector, jumped from April’s 41.9 to 47.8, with most of the increase coming from forward-looking new business.[iii] Note that these signs of stabilization arrived despite some main economic hubs reportedly remaining under strict COVID restrictions, which we think points to some underappreciated resilience.

It also sets the baseline for what comes next, as those restrictions are starting to end in Shanghai. Starting on Wednesday, people in “low-risk” areas of the city can leave their house for more than a few hours at a time. They can return to work. They can use public transit. Those who have slept at work due to the severe restrictions on movement can finally return home. Indoor dining will remain banned, but shops will be able to operate at 75% capacity. Now, this isn’t a full return-to-normal, as frequent mandatory testing persists and there is no indication that the federal government has abandoned its zero-COVID aims. A resurgence in cases could bring some restrictions back. But for now, relaxation should help enable a recovery.

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Our Perspective on Britain’s Oil and Gas ‘Windfall Profit’ Tax

Editors’ note: MarketMinder is politically agnostic—we aren’t for or against any party, politician or policy. Our analysis seeks only to determine political actions’ potential economic and market impact.

Thursday, bowing to public pressure, Prime Minister Boris Johnson’s government seemingly reversed a late-March decision and announced it would impose a 25% windfall profit tax on oil and gas firms—that is, it raised the tax rate on their profits from 40% to 65% temporarily, starting May 26. Perhaps it was rising prices’ impact on the voting public that changed their minds. Maybe political winds shifted amid the Partygate investigation’s release, sapping support for Johnson’s ruling Conservative Party. Maybe it was some of each. Regardless, for markets, windfall taxes aren’t great—especially for the UK’s Energy sector. But it is small in scope when viewed globally—and smaller than originally feared in Britain, which likely limits its impact.

UK Chancellor of the Exchequer Rishi Sunak designed the energy levy to fund subsidies for households facing higher energy bills as rising energy prices force Britain to ratchet up its price caps. That already happened once in April, and now energy regulator Ofgem has warned of a 40% hike looming in October—so the popularity of such a measure is understandable. Although we sympathize with households’ plight, we don’t think redirecting the Energy sector’s profits is necessarily the best way to alleviate energy price pressures.

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Surveys Still Say No to Global Recession

With each passing day, we see more and more headlines warn of impending global recession. Yet economic data still generally don’t support that argument, in our view. The latest business surveys imply ongoing growth—another overlooked positive amid today’s dreary sentiment backdrop.

Though most major developed countries’ flash May purchasing managers’ indexes (PMIs) missed consensus expectations, they were also uniformly well above 50—suggesting expansion. (Exhibit 1) On an individual nation basis, many headlines focused on the UK’s weakest services PMI reading in 15 months, as survey respondents blamed economic and geopolitical uncertainty for the slowdown in client demand.[i] What got a little less attention: PMIs out of the eurozone and its two largest economies, Germany and France, continued showing growth despite myriad warnings that the Russia – Ukraine war would roil economic activity on the Continent.

Exhibit 1: The Latest PMIs

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Why We Don’t Think Valuations Should Worry You

With stocks flirting with bear market territory lately, negative analyses abound as fearful headlines tout reasons things will only get worse. One subject cropping up: valuations, which many claim are still too high. Some take a near-term, cyclical view, suggesting today’s valuations aren’t at trough levels. Others suggest current valuations point to historically low long-term returns ahead. But we think you can set such worries aside: History and data show valuations predict neither short-term nor long-term returns.

Valuations, especially price-to-earnings (P/E) ratios, are among the most watched market metrics out there. Hence, many have noticed the big drop in the S&P 500’s 12-month forward P/E, to use one example. (Though forward earnings are only estimates, analysts often prefer using them in P/Es’ denominator because investors typically own stocks for future, not past, profits.) From 23 at the year’s start, it has fallen to 16 now, a roughly 30% discount.[i] Cheaper! However, 16 is about average historically.[ii] Similarly, trailing 12-month P/Es, which compare current prices to the past 12 months’ earnings, are also around average. Even broader indexes like the MSCI World show something similar.

To hear many bargain hunters say it, average isn’t cheap—or at least, it isn’t cheap enough for the market slide’s bottom to be near. It especially isn’t cheap enough for Tech, a high-flyer up until this year. But as we showed last September, P/Es don’t predict turning points in markets—or returns over the next year. Using a statistical measure called R2, which tells you how much P/Es can explain the next 12 months’ returns—ranging from 0 (not at all) to 1 (fully)—the R2 is 0.01.[iii] Whatever valuation stocks are at—high, low or average—it is a coin flip what direction stocks will go from there. “Expensive” stocks can always become more expensive. “Cheap” stocks can always get cheaper.

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The Lingering Uncertainty Set to Fall After Australia’s Federal Election

Editors’ Note: MarketMinder favors no party nor any politician, assessing political developments solely for their potential impact on markets and economies.

After nine years in power and three prime ministers (PMs), Australia’s Liberal-National Coalition (L-NC) and (now-former) center-right PM Scott Morrison are out. The center-left Australian Labor Party (ALP) won Saturday’s federal election, and its leader—Anthony Albanese—was sworn in as PM Monday morning. In our view, the market takeaways from this vote are pretty limited. There is the potential, much-discussed in the press, for a sharper climate shift in policy. We aren’t passing any judgment on the wisdom of that, but for investors, it is worth watching for potential effects on Australia’s huge mining industry. That said, we wouldn’t overrate the chances of a sharp turn. This seems like lingering election uncertainty that should fall in the coming months as that becomes more clear.

The exact scope of the ALP’s victory is still being tallied. As we type, the Australian Electoral Commission reports it is ahead in 75 of 151 House of Representatives races, well ahead of the L-NC’s 55.[i] A smattering of smaller parties lead in 14, and there are roughly 7 seats still too close to call. The ALP could still eke out a House majority, as the tally above implies. Somewhat surprisingly, this matches the outcome polls predicted—unlike 2019’s election.

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Last Week in Oils

Another week, another flurry of activity in oil markets. Or rather, oils—crude and, perhaps less top of mind for most folks, palm. The EU revealed details of its plan to wean itself off Russian fossil fuels, Russia continued to find buyers for its discounted crude, and Indonesia lifted its ban on palm oil exports. What does it all mean for investors? Let us explore!

The EU’s Plan Is a Little … Lacking

For weeks now, the world has eagerly anticipated Brussels’ explanation for how and when it will wean the EU off Russian energy. The concerns are at the fore today given Europe’s energy needs water down sanctions, ensure Europe continues funding Russia and raise the risk that Russian retaliation leaves the EU (to some extent literally) in the dark. But it has also been a long-running sore spot, especially with Russia occasionally throttling pipelines in order to exert political pressure and gain concessions from EU leaders. So a long-term pivot away from Russia has been talked of for years.

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