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.

Currencies’ Short-Term Wobbles Balance With Time

As the dollar’s slide versus the euro continues hogging headlines, so do misperceptions about currency swings’ impact on portfolio performance. As we showed last month, yes, the weak dollar does add to US investors’ returns on eurozone stocks, since Americans get the stock’s actual return plus the currency appreciation. But we don’t think this should play much of a role in determining whether to emphasize eurozone stocks in a global portfolio. Currency cycles and geographic leadership shifts often don’t line up. Here is another reason not to get too hung up on currency moves for good or ill: Though they can affect returns in the short run, they tend to even out over time.

Exhibit 1 shows this darned near perfectly, in our view. It shows the MSCI World Index’s daily price return in euros and US dollars since the euro’s birth on January 1, 1999. As you will see, the two lines often deviated—sometimes by a decent margin. But now, despite all those fluctuations, they are in basically the same spot. In dollars, world stocks’ price return is 108.4% over this span. The euro-based return is a shade behind, at 106.1%.[i]

Exhibit 1: Different Journeys, Same Destination

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On the UK’s Trade Deal With Japan

Welp, so much for the UK ruining its international reputation and reliability as a treaty partner. When rumblings arose early last week of Prime Minister Boris Johnson’s government potentially violating international law by reneging on part of the Brexit deal, some politicians declared the UK’s reputation tarnished—near-guaranteeing no country would sign a free-trade agreement with them and that Brexit would be disastrous for trade. Yet last Friday, the UK turned this narrative on its head, agreeing in principle to a free-trade deal—its first agreement as an independent country in nearly 50 years—with Japan, the world’s third-largest economy. In our view, this is further evidence Brexit just isn’t the isolationist, protectionist nightmare headlines frequently portray.

According to the UK’s Department for International Trade, the agreement will boost annual trade between the UK and Japan by £15.2 billion ($19.4 billion)—with 99% of exports to Japan tariff-free.[i] For reference, the UK’s total trade (exports plus imports) with Japan amounted to £29.1 billion in 2018.[ii] The deal will liberalize rules of origin, allowing more products (e.g., UK biscuits and some types of clothing) to qualify for tariff-free trade. Some digital provisions—notably, data localization—mean companies won’t have to set up offshore servers to continue doing business, benefiting British financial services companies and Japanese game makers. Moreover, Japanese automakers will see tariff reductions for 92% of automotive parts, while UK dairy farmers will get tariff-free access to Japan for some of their cheeses—a notable compromise given the issue nearly derailed negotiations.

While some are pumping up the big-sounding headline numbers, reality suggests the economic benefits are modest given each country sends only about 2% of goods exports to each other.[iii] Yet the UK-Japan agreement is more significant for what it symbolizes, in our view. Namely, all the hubbub about an inward-turning, backtracking UK isn’t dissuading other countries from signing deals. The UK and Japan are even treating their deal as the next step for the UK to eventually join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—an 11-member free-trade agreement.[iv] Tied to that, UK Trade Secretary Liz Truss confirmed last week trade talks were back on with Canada.

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Suga Takes the Reins

Editors’ Note: MarketMinder is politically agnostic, and we favor no politician or party in any country. We assess political developments solely for their potential economic and market impact.

Japan’s Liberal Democratic Party (LDP) confirmed now-former Chief Cabinet Secretary Yoshihide Suga as its new president on Monday, paving the way for him to succeed Shinzo Abe as prime minister when the legislature votes on Wednesday. Aside from introducing a bit of political uncertainty over the potential for a snap election, we think the appointment mostly extends the status quo for Japanese politics—and their influence on the country’s economy and stocks.

Most of the commentary on Suga centers on his somewhat unusual background for a high-ranking politician. Unlike every other prime minister in the past two decades, he doesn’t come from a prominent political family. Rather, he comes from a rural town where his father was a strawberry farmer (yum) and his mother a school teacher. He worked at a cardboard factory to put himself through school. He is also famous for his love of pancakes, sit-ups and a morning walk. Of course, stocks don’t care whether a country’s leader has a sweet tooth or a strong core—policy is what matters, and on that front, Suga likely continues his predecessor’s initiatives. As cabinet chief, he was not only Abe’s personal fixer—the guy who corralled the vast bureaucracy—but also reportedly the architect of Abe’s economic initiatives. Therefore, it seems unlikely the government will suddenly begin lobbying the Bank of Japan to let up on quantitative easing bond purchases. Fiscal policy probably won’t change much, either. Suga has mooted a third consumption tax hike, but for now the chief priority appears to be shepherding an economic recovery while managing COVID-19, which a tax hike would likely not help much.

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Cutting Through 2020 Election Fears

Editors’ note: MarketMinder is nonpartisan, favoring no party or politician, as political bias blinds and leads to investment mistakes. Our sole purpose here is to analyze the election’s potential economic and market impact.

With elections moving into high gear and polarized rhetoric hitting fever pitch, all the sound and fury might be a bit disorienting. But this is a normal part of the election cycle—and nothing that we think should prompt hasty portfolio moves. While it may not seem like it, markets are very good at sifting through possibilities and whittling them down to probable outcomes as November nears. That falling political uncertainty usually provides a tailwind for stocks, in our view, and 2020 should be no different.

When fears abound, it is crucial to keep perspective. Admittedly, this can be hard, especially when pundits—and campaigns—are prone to spinning extreme scenarios to attract attention and voter interest. At a partisan level, the hype and fear seems to go both ways. Some warn Democratic candidate Joe Biden would preside over the most leftwing agenda since FDR if he were to win and his party took Congress, dooming markets. Even though Biden’s platform left out some of the more contentious proposals floated during the primaries, including Medicare for All, it did include several items championed by his more progressive challengers. On the other side, many envision President Donald Trump doubling down on his China stance, upending global commerce and supply chains (not to mention starting a new cold war). There is growing fear that the TikTok and WeChat bans are only the tip of the iceberg, and that Chinese retaliation will damage American businesses in China heavily in a second Trump turn.

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What Seasonal Adjustments Do and Don’t Tell Us

Last Thursday, the US Department of Labor (DoL) announced seasonally adjusted initial jobless claims fell by 130,000 to 881,000 in the week ending August 29—dipping below the previous week’s level of around one million.[i] As much of the coverage noted, this decline in initial claims wasn’t the only story. You see, the drop in part reflected a change in how the DoL calculates seasonal adjustments—part of their effort to eliminate lockdown-driven reporting issues. To us, this is a timely reminder that interpreting economic data well requires understanding esoteric nuances like seasonal adjustments.

Many economic data series fluctuate depending on the time of the year. For example, US retail sales tend to be higher in November and December due to holiday shopping. Similarly, the utilities subcomponent of US industrial production is usually up during the winter months due to increased heating demand. Reporting agencies try to account for this expected skew by applying seasonal adjustments, thereby facilitating month-to-month comparison and clarifying trends. Exhibit 1 illustrates this, showing the enormous seasonal volatility in a non-adjusted series versus the clarified seasonally adjusted view.

Exhibit 1: US Retail Sales, Seasonally Adjusted vs. Not Seasonally Adjusted

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Today in Brexit, Day 1,538

Editors’ Note: As always MarketMinder is politically agnostic. We favor no politician or political party and have no position for or against Brexit or similar geopolitical developments. We assess this and all political issues solely for their potential economic and stock market impact.

With COVID-19 dominating 2020, one of the past few years’ biggest headline grabbers had taken a backseat eight months in. But now Brexit is back—and stealing headlines with a vengeance. Some are going so far as to claim the UK government has introduced legislation that violates the exit agreement it struck with the EU last year, rekindling the risk of a messy, de facto no-deal Brexit. However, while the specific twists that bring it back to the fore are new and lead many to project potential damage to Britain’s economy, we believe the takeaway remains the same: However it plays out, stocks should gradually gain clarity as the year progresses, and even a no-deal Brexit shouldn’t bring disaster.

With free-trade negotiations between the UK and EU restarting, Prime Minister Boris Johnson introduced legislation called the Internal Market Bill. His government portrayed it as a “legal safety net” for the UK in the event that the country fails to ratify a free-trade agreement with the EU by year-end, when the post-Brexit transition period expires. The aim was to set out the legal framework (including customs rules) for trade with the EU if Brexit happens without a trade deal in place—injecting more clarity for businesses and investors.

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What August’s Jobs Numbers Say About Depression Comparisons

The BLS released August’s job report last Friday, which showed ongoing improvement. As usual in an early economic recovery, headlines fretted slower hiring and the long road ahead to regaining pre-pandemic employment. Fair enough, and for those suffering joblessness, slower hiring isn’t good news. Yet it also isn’t out of step with a typical recovery. In a way, that is the most interesting thing about August’s report—how much less extraordinary the numbers are starting to look. That guts the popular theory in April and May, which held that Depression-level unemployment would hinder the recovery and stocks. Consider this the latest evidence that employment numbers are late-lagging indicators.

At unemployment’s April apex, 23 million people were out of work, the unemployment rate hit 14.7% and the U6 rate that includes discouraged workers was 22.8%.[i] Many feared worse to come and drew comparisons with the early 1930s. The implication: that with tens of millions jobless, this wasn’t just a temporary economic contraction tied to forced business closures, but something much longer-lasting—an L-shaped recovery for the economy and, by extension, stocks. We never bought that, as unemployment is a late-lagging indicator and, in this case, the downturn’s most unique feature was that most layoffs were temporary, with workers set to return as counties lifted COVID-related restrictions. A deeper look at August’s nonfarm payroll report confirms that. Nonfarm payrolls rose by 1.37 million.[ii] Excluding big government hiring (mostly for the census), the private sector added just over a million jobs. That brings the cumulative total of new non-government hires to 10.5 million since April, cutting job losses since February in half.[iii]

Notably, all of this improvement comes from the temporary unemployment category. At April’s peak, 18 million workers were on temporary layoff and 2 million reported their job loss as permanent.[iv] Now roughly 6.2 million report being temporarily unemployed.[v] It seems fair to assume at least some of those temporary losses became permanent, considering the tally of people reporting permanent job loss rose to 3.4 million.[vi] Businesses small and large unfortunately had to dismiss workers as they cut back in hopes of surviving longer-than-expected restrictions on commercial activity—or folded altogether.

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What the Options Whale Watchers Miss

Editors’ Note: MarketMinder doesn’t make individual security recommendations. The below simply represents a broader theme we wish to highlight.

Market volatility is as old as markets themselves. It has always sprung randomly, for any or no apparent reason, catching folks off guard and testing disciplined investors’ patience. Enduring these normal wobbles is, unfortunately, the price that comes with stocks’ long-term returns. Market history shows reacting to volatility is usually a recipe for error. We think that is true of this latest volatility as well. Tuning down the noise associated with quick drops is usually key to maintaining discipline. But that isn’t the natural response, especially among financial commentators. Instead, the search for a cause—and, very often, someone to blame—seems to hog most folks’ energy. We are seeing a lot of that now, with most coverage landing on sensational technical reasons—rather reminiscent of 2010’s Flash Crash. Usually, this search for a story is a sign of a sentiment-driven correction, not a bear market, and we don’t think this time is different.

When Tech first sold off last Thursday, the consensus explanation was old-fashioned “profit taking” or that stocks were “exhausted” after a big August climb. That is a technical term for “we can’t see any rational reasons or underlying problems, and these companies are strong, so people are probably just locking in some gains.” But this isn’t much of a story, and to many, no story isn’t satisfying. So the hunt continued. It didn’t take long for many pundits to land on a whale: SoftBank, the Japanese Tech conglomerate turned de-facto investment fund, which a Financial Times report revealed had bought several billion dollars’ worth of call options on individual Tech stocks. A Wall Street Journal analysis gave some more specific numbers, saying: “The Japanese Technology conglomerate has spent $4 billion on options tied to $50 billion of individual technology stocks. The company also disclosed last month that, as of June, it owned nearly $4 billion worth of tech stocks like Apple and Tesla. It is unclear how much of those positions SoftBank is still holding.”[i] Combine that with reports of retail investors’ indulging in a call options frenzy in recent weeks, and now we have a volatility story: A whale and a school of little fish joined together in a unidirectional bet on Tech stocks, creating a rally built on sand and euphoria and setting things up for a big drop when the cheer wore off.

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Thoughts on a Tough Thursday

After a mostly placid and strongly positive August and start to September, volatility struck on Thursday morning. As we type this at 10:20 AM Pacific Daylight Time, America’s S&P 500 Index is down -3.5% on the day.[i] In another reversal from this year’s dominant trend, big growth stocks are leading the way lower—the Russell 3000 Growth Index is down -5.0% while the Russell 3000 Value Index is down -2.1%.[ii] We have already seen pundits deploying arguments that a reversal was “due,” as stocks were “exhausted” and valuations “stretched” after the record-fast bull market put stocks back at all-time highs. But to us, it is wildly premature to think this is anything other than a brief countertrend. Perhaps—and we stress perhaps—it is the start to a correction (a short, sharp, sentiment-driven drop of -10% to -20%). But rather than a call to action, we see today’s swings as a call for calm.

Most coverage of the move notes there is no real “cause” or “trigger” for today’s swings. Economic data out Thursday contained no surprises: US initial jobless claims report showed filings fell; services purchasing managers’ indexes (PMI)—surveys tallying the breadth of growth—were above 50 (implying more respondents reported growth than contraction) in pretty much every noteworthy nation except Spain, Italy and Australia, which were all narrowly below this mark. The JPMorgan Global Composite PMI, which combines manufacturing and services, hit 52.4, a 17-month high. There were no big earnings misses or corporate proclamations; no huge political developments; no Fed announcements for commentators to blow out of proportion; no big negative developments on the coronavirus front. As we have often said, market volatility—even corrections—can strike for any or no reason. Thus far, Thursday’s drop looks like a classic example of the latter.

Sentiment-driven drops like this are uncomfortable, but they aren’t hugely uncommon in bull markets—even strongly positive early bull markets. During the record-long 2009 – 2020 bull market, the S&P 500 experienced 22 daily drops that exceeded -3%.[iii] Some occurred during corrections, like the four in 2018 (two in that year’s early correction; two in the second, late-year one). But there were also four in the bull market’s first 12 months—a period in which US stocks rose 72.3% and had no corrections at all.[iv] Volatility can be just random; we would caution against overthinking it. No bull market in history has been smooth sailing—a feature that very often bites investors that react to volatility.

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After the Shortest Bear Market Ever, How Long Can the Bulls Run?

How long can this bull market last? That is a question we hear often, with the common presumption now being that the shortest bear market of all time, followed by the shortest-ever recovery to prior highs, must mean this will be a short bull market. Perhaps that is doubly true, considering this cycle has acted more like an oversized correction than a traditional bear market—and it all follows history’s longest bull market. But in our view, there is no realistic way to assess how long this bull market will last—you must assess conditions as they evolve. One thing, however, is clear: Age and the prior bear market’s length don’t really mean anything. All bull markets end one of two ways: when investors have run out of worries and developed irrationally high expectations, or when something wallops the expansion before its natural peak.

Exhibit 1 shows the length of every S&P 500 bear market—and ensuing bull market—since WWII ended. As you will see, short bear markets don’t mean much. Prior to 2020, the two shortest bear markets on record were 1987’s and 1990’s. The bull market that followed 1987’s crash was relatively short at 31 months. But 1990’s bear market was almost exactly as short. The bull market that followed the second was the 1990s’ boom—at 10 years, it is history’s second-longest. One short, one long, no pattern.

Exhibit 1: S&P 500 Bear and Bull Market Lengths (in Months)

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