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.


Look Beyond 2022’s Rocky Start

Editors’ Note: Our commentary is politically agnostic, as we prefer neither party nor any politician. We assess political trends for their potential economic and market impact only.

Less than one week in, and 2022 probably feels a lot different from 2021. After finishing last year on a massive upswing, stocks have stumbled in the young New Year. Where stocks entered 2021 in a blaze of optimism, sentiment is now more muted, with fears seemingly lurking around every corner. Our advice: Take a deep breath. For while we think this bull market is very likely to continue and deliver solid full-year returns, the bulk of those returns probably come later in the year, with much more of a grind early on. For long-term growth investors needing market-like returns to meet their goals, we suspect patience is the watchword.

Note: This doesn’t mean the early part of the year is destined to be bad, or that the recent sentiment-driven swings are indicative of how it will play out. As we will show you shortly, midterm election years are routinely back-end-loaded, averaging small positive returns early, with more variability, before a second-half surge.

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The Euro at 20

Twenty years ago last weekend, people across Continental Europe started handing euro notes to shopkeepers and café servers—and a new physical currency was born. An experiment thus began playing out in real time: How could low-inflation northern European countries share a currency and monetary policy with higher-inflation southern Europe, especially if the bloc wasn’t a fiscal transfer union? Warnings about this north-south divide have dogged the currency ever since—and still hog headlines today, despite the euro surviving a trial by fire in the past decade’s regional debt crisis. Yet since the regional bear market that accompanied said crisis, this existential question—and the long-running, slow-moving efforts to solve it—have largely faded into the background, with little sway over stocks for good or ill. In our view, this is helpful to keep in mind as some once again warn the euro could split and send markets reeling. Stocks are very familiar with the euro’s structural issues, and there is little surprise power left.

The threat many still see: The north-south divide is too wide to surmount. At the heart of the debate is whether one monetary policy—the ECB’s—fits all, especially with German CPI inflation hitting a 30-year high in December. Pundits claim the ECB’s winding down its pandemic-spurred emergency monetary policy programs will prove too early for many countries still struggling (southern Europe). Or too late, risking overheating and runaway inflation in others (northern Europe).

This isn’t exactly a theoretical fear. The collapse of the European Exchange Rate Mechanism (ERM) in the early 1990s—and the subsequent European recession—illustrates the risks. Back then, Germany’s Bundesbank was keeping rates high to quell inflation after reunification, forcing all other participants in the regional currency peg to do the same. That didn’t work well for southern European nations, which needed lower rates to support the recovery from their economic contractions in 1990 – 1991. As countries first defended, then discarded the currency peg, it brought monetary chaos and a true double-dip recession.

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Amid Early-Year Fed Fretting, Stay Cool

The new year is off to something of a rocky start, particularly for Tech stocks, with many wagging an accusatory finger at the Fed. No sooner had the world finished digesting the central bank’s plans to double the pace of “tapering” its quantitative easing (QE) asset purchases, then minutes from the December meeting suggested monetary policymakers determined the economy has largely met their self-imposed criteria for hiking rates. Moreover, they said “it may become warranted to increase the federal funds sooner or at a faster pace than participants had earlier anticipated.”[i] Now Fed watchers think the first rate hike could come in March, when QE is scheduled to end, and they are pinning the blame for the S&P 500’s -1.9% drop Wednesday on this development.[ii] Perhaps—negativity can strike for any or no reason, and Fed pronouncements always get undue attention. But don’t dwell on short-term reactions. Over more meaningful stretches, there is no evidence rate hikes automatically hurt stocks.

Exhibit 1 shows the history of S&P 500 returns surrounding the first rate hike in all Fed tightening cycles since 1971. As you will see, returns were positive in the first year after the rate hike 7 out of 10 times. Returns over the next two years were negative just once. Nothing here screams that rate hikes are auto-bearish.

Exhibit 1: S&P 500 Returns Surrounding Initial Rate Hikes

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Your 2021 Stock Market Scorecard

Editors’ Note: MarketMinder is politically agnostic. We prefer no politician nor any political party and assess political developments for their potential economic and market impact only. Additionally, MarketMinder does not make individual security recommendations. The below merely represent a broader theme we wish to highlight.

Ah, another year over, a new one just begun.[i] We will publish our stock market expectations for 2022 in due time, but first things first: With the final results in, let us take a look back at the year that was. Which categories within the MSCI World Index did best and worst in 2021, and what lessons can investors learn?

Best Sector: Energy. Yes, headlines are preoccupied with the biggest Tech and Tech-like stocks, which also did quite well last year. But Energy outpaced the competition with its 40.1% return, well ahead of second-place Tech’s 29.8%.[ii] Energy stocks tend to move with oil prices, as oil producers’ earnings depend more on the price of crude than on production volumes. After getting hit hard in 2020’s lockdowns, oil prices bounced back sharply in 2021. Crude surpassed its pre-pandemic price in March and continued rising for much of the year. Autumn’s Europe-led natural gas crunch added more fuel to the fire, as it spurred demand for alternate energy sources, including oil. This all drove a smashing recovery for Energy companies’ earnings, which were abysmal in 2020. But don’t let this give you fear of missing out if you didn’t have a huge Energy weighting in your portfolio last year. Energy began the year as just 2.7% of MSCI World Index market capitalization, so anyone making great fortunes on the sector last year may not have been adequately diversified.[iii] Taking big sector risks might look nice when they pay off, but they can also be severe setbacks when things don’t go as you anticipated.

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For the Big Batch of IPOs, 2021 Was Boom and Bust

It was the best of times, it was the worst of times … for initial public offerings (IPOs) in 2021, that is. In terms of the number of offerings and dollars raised, IPOs had a banner year, with US issuance (including special-purpose acquisition companies, or SPACs) topping $300 billion year to date—almost double 2020’s previous record, according to a Wall Street Journal report.[i] Yet according to the Journal’s analysis, banner deals haven’t brought banner returns: Among the 384 companies going public the traditional way this year, 255 are now trading below their offer price.[ii] An index tracking SPACs, meanwhile, is down -15.3% year to date and -33.1% from its mid-February peak.[iii] In a refreshing turn, we aren’t seeing many folks call this a repeat of 2000’s dot-com crash. But there is a school of thought arguing rising interest rates are the main culprit, allegedly making it less attractive to pay a premium for growth stocks’ future earnings. We think this is a stretch—one of many takeaways from IPOs’ 2021 boom and bust.

We weighed in on the lack of relationship between Tech stocks and interest rates a couple of months ago, and the same logic applies to interest rates and growth stocks in general—a point we won’t rehash here. More interesting, in our view, is how IPOs square with growth stocks’ overall returns, which are pretty darned good. Growth is beating value by a smidge year to date—and by a mile since mid-May, when value’s brief countertrend rally (tied to vaccine cheer) fizzled out. It sure looks to us like investors are happy to pay a premium for future earnings regardless of interest rates’ wiggles.

Yet when you break growth stocks into small and large, a stark divide appears. Small-cap growth, the category many fresh non-SPAC IPOs fall into, soared during the first phase of the post-lockdown rally that began in March 2020, rising 101.7% from 3/23/2020 through that year’s end while large-cap growth delivered “only” 79.4%.[iv] Both outperformed global stocks’ 70.0% return in that span, but smaller names were the clear winners—likely helping fuel enthusiasm for IPOs this year, just in time for that trend to reverse.[v]

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2021 in Markets: The ‘Wild’ Year That Wasn’t

Raise your hand if you have heard that 2021 was a “wild” year for stock markets.[i] Or perhaps topsy-turvy, rocky, fearful, choppy or some other synonym for “volatile.” We have seen this characterization in just about all of the year-end retrospectives filling the financial news world this week, which we find a bit perplexing. Yes, a lot happened this year. There were big swings in some companies, sectors and speculative assets like bitcoin. But for the broad market, volatility was shockingly ordinary. Understanding this today can help you see more clearly when actual volatility spikes, which can happen at any time—for any or no reason.

As we write, 2021 has one trading session left, so there is still time for things to get volatile! But as it stands, the S&P 500 has had a calm year by most measures. For one, it didn’t have a bear market (typically a long, deep decline of -20% or worse with a fundamental cause). Nor did it have a correction (a sharp, sentiment-fueled drop of -10 to -20%). It had just two pullbacks of -4.0% or worse—the largest being a -5.2% decline from September 2 through October 4.[ii] Compare that to last year, with its fastest-ever bear market of -34% in February and March and a near-correction in September.[iii] Or 2018, with its twin corrections.

Stocks’ climb was pretty evenly dispersed, too. In the first half, the S&P 500’s total return was 15.0%.[iv] As of yesterday’s close, the second-half return was 12.3%.[v] Returns topped 6.0% in three of four quarters, barring a big decline tomorrow, with a flattish Q3 the outlier. The MSCI World Index charted a similar course, albeit with somewhat milder returns due to large Tech and Tech-like firms’ lower weight in markets outside the US.

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Why Use a Global Benchmark

With a few days left in the year, the S&P 500 is up 29.2%—poised to outperform developed-world stocks outside the US.[i] Some might add, “again.” You see, since the post-lockdown bull market began in March 2020, US stocks are far ahead of the rest of the world, which comes after the overall US-led 2009 – 2020 bull market. This may have some questioning the benefits of global diversification. Why invest globally, when the US has led so frequently of late? But in our view, that notion is recency bias at work. Take a longer view to see that no country—not America nor any other—is likely to lead forever.

Exhibit 1 shows why investors shouldn’t ignore the rest of the world. In the eight world bull markets since 1970—including the current one so far—the MSCI World Index excluding the US led the S&P 500 in three, drew about even in two and lagged in three.

Exhibit 1: World Bull Markets, Non-US and US Returns

Source: FactSet, as of 12/28/2021. MSCI World ex. USA return with net dividends and S&P 500 total return, December 1969 – November 2021. Note: Returns use month-end data, which won’t match returns using daily data. *So far.

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Italy’s Debt Still Looks Like a False Threat

If we had to make a list of habits investors can’t shake, fighting the last war would be near the top—whenever a big event roils markets, people look out for a repeat for years afterward. So it is today, with Italian debt fears storming back into headlines. Due to the one-two punch of last year’s steep economic contraction and the borrowing binge to fund relief measures, Italy’s debt-to-GDP ratio is jumping again—from 134.3% at 2019’s end to 155.2% as of Q3 2021.[i] Now that the ECB is poised to close its pandemic-related “emergency” quantitative easing (QE) and reduce monthly bond purchases to €40 billion next April, an old worry is back: Italian debt. Without the ECB buying massive amounts of Italian bonds, many fear the country’s debt costs will surely soar, delivering the long-awaited debt crisis—big trouble for Italy’s economy and stocks. In our view, a quick trip in the way-back machine debunks this handily.

As Exhibit 1 makes abundantly clear, Italy’s bond yields don’t depend on ECB QE. For one, the first QE program didn’t even start until March 2015, by which time Italy’s 10-year yield had fallen from north of 7% in 2011 to just 1.33%.[ii] Yields actually rose for a spell after bond purchases began, but they were back below 1.5% by the time the ECB increased its monthly asset purchases from €60 billion to €80 billion in March 2016. After the ECB’s December 2016 announcement it would slow bond buying to €60 billion monthly the following April (the bank’s first non-taper taper), Italy’s 10-year yield moved mostly sideways for almost a year and a half. It wiggled higher as the program neared its December 2018 end, but then it plunged below 1.0% in September 2019. That is when the ECB announced it would resurrect QE in November—and yields rose. In our view, there is just no discernible relationship here.

Exhibit 1: Italian Bond Yields Seemingly Ignored QE

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Stimulus … or Stimu-Less?

When the $1.75 trillion budget bill known as Build Back Better reached an apparent impasse in the Senate on Sunday, political spectators got a heavy dose of theatrics—but the US economy did not lose out on “stimulus,” which we think was a misnomer from the start. Love or loathe the proposal, we think these things rarely (if ever) have the economic impact advertised, and pundits regularly overstate their benefits for the economy and stocks. To see the latest example, let us look to the EU, which passed a huge public investment package in July 2020—which hasn’t demonstrably created demand.

At the time, the world hailed the EU Recovery Fund as a landmark “stimulus” package that, in addition to pooling EU nations’ sovereign debt for the first time, would deploy nearly €700 billion worth of new investments over the next five years. That, supposedly, would juice economic growth in the short and long term. To ensure this, the fund’s regulatory framework stressed that “EU funds should be used to the Union’s overall benefit and/or in line with EU priorities and do not replace national spending that Governments would, anyway, implement.”[i] (Boldface ours.)

That seems crystal clear. But new research from the European Network for Economic and Fiscal Policy Research, known as EconPol Europe, suggests this hasn’t gone according to plan. Instead of launching new projects, Germany, Austria and Spain allocated “the largest share of their grants to finance projects that were either already planned or to extend/continue projects that were already existing.”[ii] In other words, these nations swapped EU money for national funds they would have spent anyway. It was an accounting maneuver, not stimulus.

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The Overlooked Lesson From the UK’s November Retail Sales

In one of the UK’s last major economic data releases of the year, retail sales grew for a second straight month, rising 1.4% m/m in November.[i] Some headlines touched on the report’s positive takeaways, but many worried the good cheer may be short-lived due to Omicron and the UK government’s latest containment measures. That fear gained momentum this week after the Confederation of British Industry’s (CBI) latest survey suggested December retail sales growth eased. While it is possible the government’s response to Omicron chills retail activity in the near term, we think investors benefit from keeping retail sales’ longer-term trend in mind—especially as speculation swirls about renewed COVID restrictions and a potential UK return to lockdown.

November retail sales volumes, which strip out inflation’s impact, were generally growthy. Though food stores sales volumes dipped mildly (-0.2% m/m), non-food stores sales (2.0% m/m) and automotive fuel sales (3.7% m/m) rose.[ii] Many retailers attributed strong activity to Black Friday, which the UK imported a few years back, and holiday shopping in general. This year’s November reporting period included Black Friday but not Cyber Monday, though the ONS has accounted for this particular holiday-spending skew in its seasonal adjustment calculation since 2013. While some coverage focused on a few positive, November-specific tidbits—e.g., clothing stores sales passed their pre-pandemic levels for the first time—we think the more interesting takeaway is UK retail sales’ broad-based improvement since the start of the pandemic, despite early-2020’s deep contraction and multiple lockdowns. In our view, it is confirmation of what stocks were looking ahead to as they recovered from last year’s bear market.

Consider: UK Prime Minister Boris Johnson announced the first UK lockdown on March 23, 2020. Correspondingly, retail sales fell -5.6% m/m in March and plunged -17.7% m/m in April (and -22.4% cumulatively from February – April).[iii] Once the government started easing lockdown measures about seven weeks later, retail sales also began recovering, rising 12.6% m/m in May and 14.0% m/m in June.[iv] Taking a longer view, despite restrictions and partial lockdowns’ returning in late-2020 and lingering into the spring and summer, November retail sales volumes were 7.2% higher than February 2020, the last month of pre-pandemic data.[v] Moreover, sales volumes at food stores and non-food stores are up 3.2% and 6.7%, respectively, over that same timeframe while fuel sales volumes are just -1.9% off pre-COVID levels.[vi]

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