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.


Meet the New Trade Policy, Same as the Old Trade Policy

Editors’ Note: MarketMinder favors no politician nor any political party. Our analysis of politics and policy is solely aimed at assessing potential market and personal finance implications.

The Office of the US Trade Representative (USTR) announced retaliatory tariffs against six nations’ digital taxes yesterday, concluding a process begun last summer. But it then immediately suspended these levies—against Austria, India, Italy, Spain, Turkey and the UK—for six months, during which the Biden administration hopes to finally hash out a global digital taxation regime. Now, the announcement of small, delayed tariffs that are ostensibly a negotiating tool generally isn’t a huge deal for stocks, and we don’t see anything here to make us say this time is different. But it does help flesh out President Joe Biden’s general trade policy, which looks a lot like his predecessor’s. To us, this illustrates a timeless investing lesson: Always watch what politicians do, not what they say—or what pundits say they will do.

Trade policy didn’t loom large in Biden’s campaign platform, but that didn’t stop many from presuming his trade doctrine would be a 180-degree turn from former President Donald Trump’s tariffs and tough talk. Pundits seemingly salivated at the possibility for Trump’s tariffs on China and others to go away, followed by a US return to the artist formerly known as the Trans-Pacific Partnership (TPP). But four-plus months in, what little action Biden and US Trade Rep Katherine Tai have taken largely extends the status quo. In a March interview, Tai logically pointed out that it would be an own goal to surrender a negotiating tool when the relevant negotiations aren’t over yet. Sky-high resources prices haven’t yet inspired Biden to lift Trump’s steel and aluminum tariffs. Ditto the tariffs on Canadian lumber, which Biden’s Commerce Department recommended doubling last week. He did suspend tariffs on UK goods tied to the ongoing dispute with the EU over Boeing and Airbus subsidies. But only because the UK isn’t in the EU anymore—the broader EU tariffs remain.

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Why Central Banks Aren’t Propping up Stocks

A few weeks ago, we pointed out that some central banks have started to taper their quantitative easing (QE) bond purchases without any ill effects, which shouldn’t be surprising since there weren’t any when they tapered over the past decade. But it seems the chorus of doom has only grown now that some Fed people have publicly alluded to taper talk being on the docket later this year. It could get louder, too, given the Fed’s announcement yesterday it will sell the (paltry) $14 billion worth of corporate bonds and corporate bond ETFs it amassed through its 2020 emergency facility by this year’s end. We think you can tune it all down. There is little reason to think tapering—or emergency credit programs ending—is bearish, as we will explain.

The main fear stems from the belief stocks’ recovery and subsequent new heights are due solely to central banks’ extraordinary policies. Supposedly, without the flood of liquidity the Fed (et al) unleashed, stocks would be struggling. As evidence of stocks’ artificial elevation, bull market critics point to allegedly sky-high valuations and outsized leverage. The implication: If central banks withdraw their monetary support, the house of cards will collapse. Hence, taper fears. Just talking about it is apparently cause for concern, breeding uncertainty and volatility, which attracts further attention—and dread.

While central banks’ financial lifelines may have helped calm the initial panic last March, don’t overrate them. (The Fed may even have precipitated some of that panic itself.) As we said then, beyond just being a lender of last resort, the Fed’s programs were a mixed bag. To the extent they allowed otherwise solvent institutions access to funds, we think they helped boost confidence. Verbally backing the corporate bond market—which they did more than through actual buying, as the tiny amounts in yesterday’s announced unwind shows—may have helped steady markets a bit. But it is a mistake to consider that monetary “stimulus.” (Similarly, emergency fiscal support has mostly replaced lost income.) Greasing the wheels to allow financial markets to function normally doesn’t automatically equate to overheating.

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The Complicated Reality of Those Inflation-and-Stock-Return Analyses

Throughout 2021’s great inflation scare, we have seen a few pieces arguing stocks will disappoint investors hoping their returns will outpace accelerating consumer prices. Some use rhetoric, arguing rising input costs will zap corporate earnings (and, in our view, ignoring that companies can raise prices of whatever goods and services they sell, preserving margins). Others purport to support their case with data showing a strong link between “rising inflation,” whatever that even means, and weak stock returns. But we have yet to see any show their math or data in transparent detail. There are embedded assumptions in every single one we have seen, and absent that transparency, you can’t really judge the accuracy. So to help you out, we ran a bunch of numbers. As we will show you, they suggest stocks do well in inflationary environments more often than not.

The most recent article that caught our eye on this front was in The Wall Street Journal last week. Citing a study from a UK asset management firm, it stated that “from early 1973 through last December, stocks have delivered positive inflation-adjusted returns in 90% of rolling 12-month periods that occurred when inflation—as measured by the consumer-price index—was below 3% and rising … But that fell to only 48% of the periods when inflation was above 3% and rising.”[i]

Upon reading this, we had a host of questions. Why start in 1973, considering the inflation everyone associates with the 1970s started in the late 1960s? What constitutes “rising inflation”—if CPI jumps one month, slows the next, then inches higher, is that in the dataset? Why exclude periods of decelerating double-digit inflation—don’t people still worry about fast-rising prices eroding their purchasing power in that environment, too? Alas, we nosed around, looked up reports, watched videos and found little that provided an answer.

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About Bitcoin and Inflation ...

Another day, another round of inflation chatter—and, inevitably, bitcoin chatter. For there is a rumor going around that bitcoin has stolen the title of Best Inflation Hedge from gold.[i] We have seen a steady stream of articles arguing that because of its limited supply and immunity to government and central bank chicanery, bitcoin is a hard currency that will keep its value—or gain value—when inflation rears its head for real. But that logic doesn’t pass basic scrutiny, and historical data don’t exactly support it either. Now, we don’t think big inflation is imminent. However, this bogus theory seems to be worth nipping in the bud now.

For something to be a genuine inflation hedge, it should ideally have a strong positive correlation with prices—as in, when prices rise, returns increase. The faster prices rise, the faster the hedge’s price rises (and, theoretically, vice versa). That correlation should also be a long-term phenomenon that holds cycle after cycle. Bitcoin doesn’t have a long term. It is only 10 years old, and most of those 10 years were one of the longest low-inflation stretches in recent memory. During this span, bitcoin drifted sideways for years, boomed, busted, boomed again and now seems to be busting again. Notwithstanding cumulative returns, that behavior is not what one would logically expect of a hedge during a period of overall modestly increasing prices.

Exhibit 1: This Isn’t What Inflation Hedges Look Like

Source: Global Financial Data, Inc. and St. Louis Federal Reserve, as of 5/27/2021. Bitcoin price in USD, 7/18/2010 – 5/25/2021, and year-over-year percent change in monthly CPI, July 2010 – April 2021. Linear scale used instead of logarithmic to avoid taming bitcoin’s booms and busts.

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Why Stocks Shouldn’t Bawl Over a Baby Bust

Earlier this month, the Centers for Disease Control and Prevention (CDC) reported the number of US births fell -4% in 2020 to 3.6 million—the lowest since 1979. This, plus similarly dreary birth data from other nations, rekindled a recurring concern: Will falling birthrates in the developed world and China set up future economic and market trouble? We don’t think so—recent demographic trends aren’t destiny, and they aren’t hugely relevant for stocks.

The 2020 data are the latest in a longer-running trend: Populations worldwide are graying. Besides the dip in births, America’s general fertility rate (the number of births per 1,000 women aged 15 – 44) and total fertility rate (the expected number of births a woman would have over her lifetime) each dropped by -4% last year, too.[i] These generational lows, which confounded many folks’ expectations for a lockdown baby boom, extend a longer-running decline—see the general fertility rate’s ongoing slide since 2007.[ii] Similar trends reign abroad. The EU’s total fertility rate has been falling over the past decade, while Japan has long been the posterchild for declining births—to the point some parts of the country give parents a cash grant for each child they have.[iii] Many experts now sound alarms about China’s slowing birth rates even with the abolition of the one-child rule in 2015.

Last year’s baby bust has spurred mostly pessimistic outlooks among the punditry. With birth rates below replacement levels (i.e., the number of births needed for a generation to replace itself), some worry economic growth will fizzle out eventually. If there are fewer young people, the thinking goes, who will produce tomorrow’s goods and services—and who will buy them? Where will ideas and innovations come from to tackle new problems? Who will take care of tomorrow’s elderly?

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125 Years Old and Still Broken

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

Happy birthday to the Dow Jones Industrial Average (DJIA), which was born 125 years ago today. Since that first trading day, it has risen 83,737.4%, which is a very large and meaningless number—and not just because it is backward-looking.[i] Rather, because it is so poorly constructed that even with a 29-year head start on the S&P 500’s verified history, the S&P 500’s total return dwarfs it: 1,111,592.6%.[ii] Those figures are so vastly different for three simple reasons: Unlike the DJIA, the S&P 500 represents a broad swath of the US stock market, weights companies by size and includes reinvested dividends. The DJIA architects’ decision to use different methodology consigned it to a lifetime of being a broken, useless index for investors.

Now, we aren’t here to poke at Charles Dow and Edward Jones, who we reckon did the best they could when trying to create a way of measuring the overall market’s performance while having limited data and technology at their disposal. Back in the late-19th century, the non-financial segment of the US economy was mainly heavy industry and railroads, so creating two broad indexes—one for Industrials and one for Transports—more or less made sense. As did having a handful of companies in each, given the relative lack of publicly traded names. Weighting by price, not market capitalization, and excluding reinvested dividends also fit Messrs. Dow and Jones’ primary goal, which was giving people an easy way to see if the then-novel stock market was going up or down (which could then feature in The Wall Street Journal, where Dow was an editor). Share prices were visible and intuitive for the new-to-stock-investing masses to understand, so of course the creators just used an average of said prices. Using market cap instead would have required multiplication (share price times share count)—complexity!—as would factoring in dividends. Accurately gauging the overall value of Corporate America was just less important, in that situation, than tracking broad directionality.

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Levels vs. Rates: Navigating Pandemic-Skewed Data

Last week, economic data releases showed April UK car registrations spiked 3,176.6% y/y—bullish![i] The country’s inflation rate “more than doubled” to 1.5% y/y—perhaps not so bullish.[ii] Meanwhile, Japanese exports leapt 38.0% y/y, the “most in a decade,” while Taiwan’s export orders “surged” 42.6%.[iii] Then again, on the not so great side, Chinese industrial production growth dwindled to 9.8% y/y from March’s 14.1% (and from over 35% in January – February).[iv] Of course, lockdowns shuttering activity late last spring (early Q1 in China) heavily skewed year-over-year growth figures, driving the eye-popping results. So how can investors get a better sense of where the economy is today? Instead of focusing on skewed rates of change, look at economic series’ actual levels.

Headlines typically focus on rates of change. Take last Friday’s April UK retail sales report for example. In value-spent terms, UK retail sales “soared” 43.5% y/y, accelerating from 7.3% in March.[v] (Exhibit 1) That figure grabs attention, but a growth rate far above anything in recent history is out of context—it lacks needed perspective for investors. In this case, it mostly speaks to the low base a year ago—a shutdown-and-reopening-skewed look backward. It tells you zero—zippo, nada, nothing—about where the economy is going. For investors in forward-looking markets, that is what counts.

Exhibit 1: Record Year-Over-Year Growth Isn’t Quite What It Seems

Source: FactSet, as of 5/21/2021. UK retail sales value, January 2011 – April 2021.

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Speculations Went South Wednesday

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

The flashy highfliers fell fast and far Wednesday. If you have so much as peeked at the Internet today, you will have seen that bitcoin and other cryptocurrencies had a rough day, falling as much as -30% intraday at one point before clawing most of it back.[i] But even with that rebound, bitcoin is down by about -38% since early April.[ii] Meanwhile, using an ETF as a proxy, special-purpose acquisition companies (SPACs) are down about -30% since mid-February, dashing this year’s early enthusiasm that they were a one-way ticket to riches.[iii] We have seen ample chatter about these downdrafts spilling over into broader stock markets, with some pundits warning they signal the end of the road for Tech and other winning sectors over the last year. We think that is a stretch, but we do see some other interesting implications.

The first: sentiment. SPACs and cryptocurrencies have represented the speculative, frothy corners of the investment world for months now. Sometimes, when fringe mania erupt, they are early warning signals for everything else. That seems to be what many fear now. But that is generally the case only when fundamentals are overall deteriorating and the euphoric masses are too blind to see it. The prime example is 2000, when the dot-coms rolled over in March but the vast majority of the non-Tech market held up fine until autumn. Then, few worried about spillover—most portrayed Tech’s drop as a buying opportunity, a last chance to get in on New Economy stocks before they went to the moon. The simple fact that many people today see negative spillover potential in every fringe, niche asset’s drop shows sentiment isn’t broadly euphoric—a good indication to us stocks probably aren’t peaking.

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Will US Retirement Rules Shift Again?

While most chatter about potential legislation is focused on taxes, infrastructure and “stimulus,” we are tracking a new bill on a wholly separate topic circulating at the Capitol: the “Securing a Strong Retirement Act of 2021.” It passed the House Ways and Means Committee May 5 with unanimous bipartisan support and stands a reasonable chance of enactment, in our view. Now, we don’t usually comment on a bill until it is much closer to passing than this (or grabs wide attention), but we are making an exception today for one with potentially broad implications for retirees. Here is the lowdown.

The bill, colloquially dubbed the “SECURE Act 2.0,” follows and builds on 2019’s SECURE Act, updating a number of its provisions that might affect readers’ retirement planning and cash flow strategy. In broad strokes, it would:

  • Raise the required minimum distribution (RMD) age to 75 over time. Congress has tweaked the rules requiring many retirees to take a minimum sum out of traditional IRAs in each of the last two years. First, the SECURE Act (version 1.0, that is) raised the age from 70.5 to 72. Then, as part of the CARES Act—the first COVID response bill—Congress suspended RMDs for 2020. RMDs are back for 2021, but SECURE Act 2.0 could change the rules again. It aims to further increase the RMD age in stages, to 73 in 2022 (if passed), 74 in 2029 and 75 in 2032. This means those with traditional IRAs and 401(k)-type accounts wouldn’t need to withdraw funds until later, letting their funds grow tax-deferred longer.
  • Boost catch-up contribution limits for those nearing retirement. Workers age 50 and over can now contribute an additional $6,500 on top of the regular $19,500 annual 401(k) contribution limit. The new legislation would raise catch-up contribution limits for those ages 62 – 64 to $10,000 and index that limit to inflation. The legislation would also index the current $1,000 additional IRA contribution for those age 50 and over to inflation.
  • Increase retirement savers’ tax credit threshold. Lower-income workers currently enjoy a 50% tax credit on 401(k) and IRA contributions up to $2,000 for a net $1,000 benefit. For higher earners, that falls to 20% and eventually 10% before phasing out at relatively low adjusted gross income (AGI) levels (current thresholds are $66,000 for married couples and $33,000 for individuals). The proposed bill changes this, offering a 50% tax credit for contributions up to $3,000 for couples with an AGI of up to $80,000 ($40,000 for individuals)—income levels it would also index to inflation.
  • Allow employers to make matching retirement contributions for workers paying down student loans. Presently, those making student debt payments rather than retirement contributions also forgo any employer-matching retirement contributions. This provision would permit employers to match qualifying student-loan payments with contributions to the employees’ 401(k) retirement accounts.
  • Mandate automatic enrollment into workplace savings plans. Employees would automatically have 3% of their pay put into 401(k)s, with that percentage rising one point annually to 10%. Workers would still be able to opt out though and decide for themselves whether they can afford to defer that much.
  • Raise the qualified charitable distribution (QCD) limit to $130,000. Presently, the QCD limit is $100,000. Raising this would also up the amount of donations retirees can count toward satisfying their annual RMDs.

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Quick Hit: Reopening Drove Up April’s Prices

Almost a week after the report hit, April’s US Consumer Price Index (CPI) reading is still garnering tons of attention—and stoking lots of fear in the process. We have spilled many pixels on this already, arguably too many, and we don’t intend to belabor the point here. However, one aspect that we think is going underreported is just how much skew reopening drove. Here is a quick look under the hood that reveals this quite clearly.

First, to be clear, we aren’t referring to the 4.2% y/y inflation rate.[i] That, as we noted recently, was a garbage number—hopelessly skewed by the depressed April 2020 reading that serves as the denominator. Rather, we are referring to the 0.8% m/m rise—the largest since June 2009.[ii] Actually, without rounding, that figure was 0.77%.

Underneath that headline number, there are a couple hundred or so subcategories. Five of them—used cars, car and truck rental, airline fares, admissions (to the movies and sports events) and lodging away from home (hotels/motels)—accounted for 0.448 percentage point of April’s monthly increase. These five categories, which account for 5.061% of the overall CPI basket, accounted for more than half the monthly gain. Exhibit 1 shows you this visually, if you are that kind of learner.

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