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.

Wrapping Up 2021 Financial Planning

Financial planning may be far from mind heading into the most festive part of the year, but as we close the books on this one, there is little time left to tick off any incomplete items on your to-do list. Here are a few things to consider before you pop the champagne to toast the New Year!

Tying up loose (RMD) ends. Congress suspended required minimum distributions—RMDs—from retirement accounts in 2020 for some relief that year, but they are back on in 2021, with the rule changes in 2019’s SECURE Act fully phased in. Your 2021 RMD is your ending retirement account balance from 2020 divided by the typical life expectancy for someone of your age, according to the IRS. Note: Roth IRAs (funded with after-tax dollars) aren’t subject to RMDs, but Roth 401(k)s are. One thing to look forward to: The IRS will use new tables next year reflecting lengthening life expectancies—and reducing RMDs, which should give more of retirees’ savings longer to grow.

In any event, if you are age 72 or older and you haven’t taken your RMD yet, don’t forget! You could be in for a hefty penalty—50% of the RMD amount—if you don’t take it by December 31. Unless you turned 72 this year, that is, in which case you have until April 1, 2022 to take your 2021 RMD—a bit of a reprieve. But if you go that route, remember you will also need to take 2022’s RMD (using the new life expectancy table) before yearend—2 in ’22. Also note, if you inherited an IRA or 401(k) from an owner who died after 2019, non-spousal beneficiaries must take RMDs from it—even if younger than 72—and withdraw the full amount within 10 years, although the timing is up to you. This includes inherited Roth IRAs (but if the owner had it for at least five years, you won’t owe taxes on withdrawals).

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Thoughts on Stocks’ Latest Pullback

Stocks had another rocky day Monday, bringing the S&P 500’s pullback to -3.0% in three trading days.[i] While short-term negativity can strike for any or no reason, most headlines blamed the Omicron variant’s surging case counts and a wave of new restrictions in Europe, not to mention anecdotal evidence of the virus curbing economic activity in major US cities. The prospect of stalling consumption and more supply chain hang-ups seemingly have investors globally in the doldrums. As ever, we don’t think it is possible to predict short-term volatility or how governments will respond to rising cases, as the political calculus varies from country to country. However, we do have compelling evidence that renewed restrictions don’t automatically sink stocks.

The variant may be different, but COVID policy throughout Europe this autumn looks a lot like it did a year ago, when the UK and most of the Continent were battening down the hatches in hopes of containing COVID’s second wave. The partial lockdowns ramped up in October, November and December 2020, and most countries extended them in full or in part through April 2021. They weren’t a repeat of the draconian, global measures in early 2020, but they were enough to deliver a temporary setback to the recovery. In the UK, GDP growth slowed from 17.4% q/q in Q3 2020 to 1.1% that Q4, then output contracted -1.4% in Q1 2021.[ii] German GDP followed a similar path, progressing from 9.0% q/q in Q3 2020 to 0.7% in Q4 and -1.9% in Q1 2021.[iii] As did Spain, growing 16.8% q/q in Q3 2020 before slowing to just 0.2% in Q4, then shrinking -0.6% in Q1 2021.[iv] France and Italy each contracted in Q4 2020 and barely grew in Q1 2021. The broader eurozone, which is about 15% of global GDP, shrank -0.4% in Q4 2020 and -0.2% in Q1 2021—a mild but true double-dip recession.[v]

Yet stocks moved on well before that damage became apparent, finishing 2020 with a bang. As Exhibit 1 shows, European and global stocks did endure a brief pullback in October 2020, falling -9.4% and -7.4%, respectively.[vi] But they bounced fast, hitting new highs a week and a half after their lows. Even with its deeper pullback, the MSCI Europe Index soared 20.3% from 9/30/2020 to 3/31/2021, edging out the MSCI World Index’s 19.6%.[vii] Stocks quickly priced in the new restrictions’ likely impact, then moved on.

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On Inflation and Portfolios, Think Ahead—Not Behind

As US inflation journeyed toward its nearly 40-year high of 6.8% y/y in November, seemingly the entire country has focused on higher grocery bills and the pain at the pump. Now another conundrum is surfacing in headlines: What can people do to keep their savings from losing purchasing power? As Wall Street Journal columnist Jason Zweig’s latest piece highlighted, some are flocking to a complex stock fund that boasts 7% yields, with little regard for how that payout is generated (spoiler alert: it isn’t pretty[i]) and the risk of loss magnified by the fund’s leverage. Others tout niche government savings bonds limited to relatively small sums, inflation-linked Treasurys, high-dividend stocks and other high-yielding securities—some fringe, some mainstream. We could poke holes in any and all of these, but we think there is a deeper issue to address: the fundamental flaw of basing forward-looking investment decisions on backward-looking information.

For folks frustrated at seeing inflation erode their cash reserves, emergency funds and perhaps even the fixed income portions of their portfolio, we understand the desire for a shield. We also understand why people might feel the urge to get creative, what with savings accounts paying around half a percent and even 30-year US Treasurys a paltry 1.81%.[ii] Yet we see two problems at work—one practical, one philosophical. The practical flaw is that none of these alleged hedges are quite as magical as some proponents allege. US Treasury Inflation-Protected Securities (TIPS) have basically zero default risk, but their yields are negative across the entire TIPS yield curve. That doesn’t mean you pay to own them, but it does mean you are buying at a premium, and the inflation-adjusted interest and principal payments may not be enough to offset that. Inflation-linked savings bonds (I-bonds), meanwhile, are generally limited to $10,000 in annual purchases per citizen, have lock-up periods and carry early redemption penalties—which runs counter to the purpose of an emergency fund. High-dividend stocks, meanwhile, offer return of investment rather than return on investment—their share price falls by the amount of every dividend issued. We like dividends just fine, as they are part of stocks’ total return, but they are technically zero-sum if you don’t reinvest them, not an inflation hedge.

Moreover, we think there is a deep fallacy at the heart of the great inflation hedge hunt: trying to position your portfolio to compensate for an inflation rate that represents price increases over the prior 12 months. Those price increases sting, but you can’t go back in time and hedge against them. That ship has sailed. Arguably, if you owned a diverse portfolio of stocks over the past year, strongly positive 2021 returns already hedged you against that inflation plus quite a bit.

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Monetary Policy’s Big Week Continues

One day after the Fed doubled the pace of its reduction to its “quantitative easing” (QE) monthly asset purchases, the Bank of England (BoE) and European Central Bank (ECB) made some moves of their own. Amusingly, most coverage interpreted the BoE’s teensy rate hike and the ECB’s fresh QE taper as curiously “divergent” monetary policy, which suggests the ECB’s attempt to camouflage another taper worked. We wouldn’t make much of either move, as neither will have much impact on inflation and growth—something stocks already know, even if people broadly don’t.

Of the two, the BoE’s move is more straightforward. In an 8 – 1 decision, the Monetary Policy Committee (MPC) voted to raise the Bank Rate from … 0.10% to 0.25%. Headlines couched this as the end of stimulus and a new era of inflation fighting, which we find just mildly hilarious. In any other known universe, after all, a 0.25% policy rate might as well be zero. Actually, when the US Fed was employing “zero interest rate policy,” 0.25% was the upper end of the targeted range. It was also the BoE’s lower bound in its extraordinary “stimulus” after 2016’s Brexit vote. But evidently, the direction of rates matters more to onlookers than the level.

In all seriousness, we fail to see how raising short-term interest rates by 0.15 percentage point will do, well, anything—and not just because supply shortages, energy prices and post-reopening distortions are the primary culprits for UK inflation. Even if excess money supply were to blame, a 0.15 percentage point hike wouldn’t exactly address it. Money creation and circulation aren’t functions of short-term interest rates alone. They depend on the yield curve and how much higher the long end is than the short end. In modern financial systems, banks create most new money through lending. Their business model is simple: borrow at short-term rates, lend at long-term rates, and pencil in the difference between those rates as their profit margin on the next loan. They are also for-profit entities, so as a general rule, wider spreads will encourage more lending.

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Digging Into November’s Tepid Retail Sales Report

Retail sales missed expectations in November, rising just 0.3% m/m—far slower than the 0.8% rise analysts anticipated.[i] In our view, there are a few potential reasons for the miss, which we will explore momentarily. But here is one deduction we don’t think the data support: that inflation is hurting consumer spending. Not because of anything unique to November’s report, but because of the simple fact that retail sales are but a slice of spending—and one that isn’t adjusted for inflation. (Nor would that explain big October retail sales amid similarly hot inflation readings.) We will all have to wait for November’s personal consumption expenditures report for more insight. In the meantime, though, let us look at some potential explanations for the disappointing results, which we think illustrate why investors shouldn’t lean too hard on backward-looking data.

First, high gasoline prices are doing what they normally do: pulling spending from discretionary categories. Higher gas prices can be frustrating, for consumers and retailers alike, but it also illustrates that gas prices aren’t an economic driver. Just as sales at gas stations are part of overall retail sales, spending on gas is part of overall consumer spending. Gas prices don’t detract from disposable income, which is the primary determinant of consumer spending. Rather, they just affect where that income goes. When gas prices fall, it frees up money for other purposes—saving, investing or spending on more fun things. When gas prices rise, it generally leads to people saving less or spending less on discretionary items and entertainment. That appears to have happened, at least to some extent, in November. Sales at gas stations rose 1.7% m/m, compounding October’s 3.7% rise, while sales everywhere else rose just 0.1%.[ii] Excluding gasoline and food, sales fell -0.05%.[iii]

That isn’t great, and it does suggest pricier essentials are robbing discretionary categories to some extent. But we also hesitate to read much into it, because there is a secondary explanation for weakness in discretionary categories: a funky holiday shopping season. October was quite strong for sales outside of food and gasoline, which rose 1.7% m/m.[iv] Electronics and appliances (3.1%), department stores (2.5%) and online sales (4.1%) were all strong that month.[v] But the first two reversed sharply in November, falling -4.6% m/m and -5.4%, respectively, while online sales flatlined.[vi] One potential explanation, which we highlighted on Black Friday, is retailers’ starting holiday discounts in October, far ahead of the traditional season. Another is consumers’ pulling purchases forward due to supply chain worries. With headlines warning of empty shelves come Thanksgiving, getting an early start likely seemed to be a sensible option for many. 

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2018 Doesn’t Prove Rate Hikes Are Bad for Stocks

Buckle up! That largely sums up pundits’ reaction to the Fed’s decision to “taper” its quantitative easing bond purchases faster than initially planned, reducing monthly purchases by $30 billion instead of $15 billion. The Fed’s statement also set expectations for “similar” monthly reductions from here, a path to ending QE in March—which many presume would tee up a fed-funds target rate hike in 2022’s first half. There is also ample chatter about the “dot plot” of Fed members’ forecasts, showing they collectively project three rate hikes in the year (based on the economic conditions they anticipate, which is hardly etched in stone). That, rather than QE’s impending end, has preoccupied most Fed coverage over the past couple of weeks, with many pundits blaming 2018’s stock market decline on that year’s Fed hikes. While we (nor anyone) can’t predict Fed policy from here, we can correct the record on 2018, which we think had very little to do with the Fed.

As best we can tell, the theory that rate hikes drove 2018’s negativity rests on two observations: The Fed hiked rates throughout the year, and its last increase—on December 19—roughly coincided with the S&P 500’s Christmas Eve low. Yet zeroing in on those facts is a bit too selective, in our view. Consider: The Fed started its rate hike cycle way back in December 2015. The S&P 500 did fine in 2016, rising 12.0%.[i] The next rate hike arrived that December, and three more followed in 2017. Stocks’ party continued, with the S&P 500’s 21.8% return defying rate hike fears.[ii]

Even in 2018, stocks’ woes didn’t align with the Fed’s moves. As Exhibit 1 shows, while full-year returns were negative in a year the Fed hiked four times, that negativity was concentrated in the autumn. After suffering a brief correction (a sharp, sentiment-fueled move of around -10% to -20%) in the winter, the S&P 500 climbed through spring and summer and hit the year’s high point in late September, enduring two rate hikes along the way. In our view, saying the Fed’s decision to raise rates twice in the autumn, for a total 0.5 percentage point increase, caused the S&P 500’s -19.4% decline from that September 20 through Christmas Eve strains credulity.[iii]

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The EU’s New ‘Green’ Taxonomy Remains a Work in Progress

Last Thursday, the EU passed its initial rulebook defining what it considers climate-friendly and sustainable investments, slated to take effect January 1. The rulebook is part of the EU’s long-term plan to connect finance with the bloc’s sustainability goals. But as still-unresolved internal disagreements show, it remains very much a work in progress. In our view, the EU’s guidelines are noteworthy, but investors wanting to manage their funds according to environmental, social and governance (ESG) guidelines should still do their own due diligence if they want to ensure their portfolios align with their personal preferences.

One frequent question about ESG investing, which aims to make money while also targeting goals beyond traditional financial metrics, is how well it accomplishes its purported non-financial goals. Many decry what they call “greenwashing”—firms cloaking business-as-usual in environmentally friendly euphemisms to attract funds. The underlying problem as some see it: Without standardized ESG definitions and accountability, it is hard to separate the wheat from the chaff—the investment equivalent of “organic” food labeling before the US government stepped in to establish industry standards.

Enter the EU, which seeks to reduce greenwashing and meet its own sustainability goals, such as reducing net carbon emissions to zero by 2050. To do so, it created a classification tool for investments it thinks will help meet those objectives—the EU Taxonomy. To be labeled a “sustainable investment” by EU definitions, an investment must:

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Inflation’s Fix: Patience, Not Policy

Friday, the US Bureau of Labor Statistics (BLS) unveiled November’s Consumer Price Index (CPI) report, which has been a key focus for investors and analysts all year, given lofty readings. The report didn’t disappoint all the antsy analysts, with the CPI rising 6.8% y/y, the fastest rate since June 1982.[i] It all compounds inflation fears, which have many pushing the Fed to respond with a faster wind-down of quantitative easing bond purchases and rate hikes. But in our view, the likelier fix for quick-rising prices of late is simply patience, not monetary policy—much of the influence on prices is outside the Fed’s control.

That 6.8% y/y rate got most of the media attention this morning, but it isn’t all that meaningful. As we have noted many times on these pages, calculation quirks in year-over-year mathematics are inflating the headline figure. Consider energy prices. As Exhibit 1 shows, November 2021’s CPI Energy component notched an index level of 259.1. This has risen steadily over the past year as oil prices ticked up. But in November 2020, the index level was 194.4—down markedly from the January 2020 pre-pandemic mark of 213.0.

Exhibit 1: CPI Energy Index’s Lingering Base Effect

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Why Britain’s Latest Political Turmoil Isn’t Tumultuous for Stocks

Editors’ Note: MarketMinder does not favor any political party or politician. We assess political developments for their potential economic and market impact only.

It is probably both a great and a terrible week to be UK Prime Minister Boris Johnson. Just this morning, he and wife Carrie welcomed a baby girl, adding a second set of pitter-pattering little feet in 10 Downing Street. Yet the joyous occasion was but a brief respite from a political firestorm. Dozens of Conservative Members of Parliament (MPs) are threatening to revolt over his latest COVID restrictions—which he unveiled amid a furor over revelations that his government didn’t quite follow its own COVID rules during 2020’s holiday party season. Voters are angry, the opposition Labour Party is now polling ahead of Johnson’s Conservatives, rivals are sharpening their knives, and speculation on Johnson’s ouster is running rampant. We won’t wade into that, but we do think gridlock is the likeliest near-term result, keeping the UK’s political backdrop for stocks largely benign as the year closes.

Echoing the trend in most of the developed world, the newest COVID restrictions are less draconian than in the past. For now, there is no lockdown. Instead, the rules include mandatory masking, working from home where possible and vaccine passports for large entertainment venues. People who come into contact with the virus can now test regularly instead of self-isolating. In his press conference announcing the restrictions, Johnson jawboned about a vaccine mandate, but his spokesperson quickly scratched the idea. The restrictions will probably hurt leisure, hospitality and retail in city centers, which will once again lose foot traffic from office workers, but businesses aren’t forced to close for now. So overall, the economic impact appears likely to be quite mild, and UK stocks are (rightly, in our view) taking them in stride.

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Can Can Can They Kick the Can Can?

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

If you have the time, please spare a thought for the poor debt ceiling: Congress keeps kicking it, again and again, just a month or two out. The poor thing is covered in dust and bruises and just wants to be extended properly so it can have time to heal. Is that too much to ask?

Perhaps not, judging from the latest plan circling the Capitol—which could cool down some politicized rhetoric and ease uncertainty a bit. Senate Majority and Minority Leaders Chuck Schumer and Mitch McConnell struck a very strange deal yesterday that, if passed, would enable Senate Democrats to quickly pass an increase along party lines—without using budget reconciliation or risking a filibuster. The plan passed the House last evening and is now percolating through the Senate, where McConnell is trying to round up 10 Republican votes. If it and subsequent legislation to lift the ceiling pass—which political observers think is likely—it would spare us all from another round of (misguided) default chatter, giving stocks one less thing to fret as the new year approaches.

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