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.

The Low-Down on Q1’s US GDP Downtick

Editors’ Note: MarketMinder doesn’t make individual security recommendations. Any stock mentioned herein is merely incidental to the broader topic we aim to highlight.

Thursday morning, the US Bureau of Economic Analysis (BEA) released the advance estimate of US Q1 2022 GDP, which contracted -1.4% annualized.[i] Coming against expectations of 1.1% growth and amid widespread recession fears, this result likely surprises many and may add to widespread recession worries. Yet under the hood, we find little here surprising—or troubling for stocks. Let us show you.

First, consider the details. The pure private-sector GDP components—consumer spending and investment in non-residential structures, equipment, intellectual property and housing—rose and accelerated from Q4 2021, when headline GDP grew 6.9% annualized. (Exhibit 1)

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Weighing Russia’s Gas Halt to Poland and Bulgaria

After threatening for weeks to cut off gas flows to European countries who don’t pay in rubles, Russia has officially halted flows to Poland and Bulgaria. Several pundits warn this raises the likelihood of a European recession, especially if it is a prelude to stopping flows into Germany and other big Russian clients. Let us take a look and assess the impacts—for the affected countries, Europe and stocks.

Russian President Vladimir Putin has jawboned for over a month about requiring his “unfriendly” customers to pay for gas in rubles rather than euros or dollars, signing a formal decree mandating this at March’s end. This might sound like a strange move for a country that needs dollars and euros to continue servicing its foreign debt and can’t access most of its international reserves. But Putin and Central Bank of Russia (CBR) head Elvira Nabiullina are also trying to put a floor under the ruble. Those purchasing Russian gas in rubles will have to buy those rubles. Or, more specifically, it seems most are opening foreign currency accounts at Gazprombank (the state-owned financial offshoot of Russian gas giant Gazprom), depositing euros, converting those euros to rubles, and paying. So instead of the CBR spending down its reserves to buy rubles, it gets to import hard currency via Gazprombank while forcing European clients to effectively support the ruble. Putin then gets to use those same rubles to continue funding the war effort without having to fire up the printing presses and risk hyperinflation.

That naturally raises the question: Is this legal under sanctions? Gazprombank is subject to British and American sanctions, but not EU sanctions.[i] Where the EU has sanctioned other large Russian banks, it exempted energy-related transactions—largely to keep the gas and oil flowing. Gazprom has told customers its preferred payment mechanism doesn’t violate EU sanctions. Some EU leaders say it does, but Bloomberg reported today that 10 European energy companies had opened the required accounts and 4 had already paid in rubles.[ii] Given the huge political and business risks at stake, we have a hard time seeing companies opening these accounts and completing these transactions without consulting EU regulators, but stranger things have happened.

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Finding Flowers in Springtime Economic Data

Elevated inflation has dominated headlines over the past 12 months, and many now worry high prices along with the Russia-Ukraine war have delivered a big setback to the global economy. Last week the IMF reduced its 2022 and 2023 global growth projections, following the World Bank and other private forecasters.[i] But the latest economic data add to what many executives have recently said, leading us to conclude reality likely isn’t as dire as feared.

The Latest PMIs Still Say Growth

S&P Global’s April “flash” purchasing managers’ indexes (PMIs) implied ongoing economic growth in major developed nations. (Exhibit 1) Readings above 50 suggest expansion, although they measure only growth’s breadth, not its magnitude.

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A Broad Look at Corporate America’s Comments on the Economy

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

S&P 500 Q1 2022 earnings season is underway, and while it is early days, the results are encouraging. With 135 companies reporting, earnings are up 7.2% y/y and revenues 11.6%.[i] Now, given some COVID restrictions remained in place a year ago, it is fair to say these figures got a small boost from the base effect (meaning, a depressed year-over-year comparison). But more interesting to us is just how optimistic so many businesses are about American consumers right now. While conventional wisdom would have high inflation denting consumer demand, businesses broadly don’t report seeing that. Don’t take our word for it, though. Here, courtesy of FactSet’s wonderful repository of earnings conference call transcripts, are some observations from America’s corporate executives.

First, though, let us reiterate our editors’ note above. We highlight the calls below not because we mean to issue security recommendations—we don’t, ever—but because we find the comments telling from a macroeconomic standpoint. When the entire world seemingly fears inflation causing a US or global recession, first-hand observations from the folks with their proverbial boots on the ground can help you put sentiment in perspective. After all, markets move on the gap between reality and expectations.

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Our Perspective on April’s Return to Rocky Markets

War and atrocity. Food and energy price spikes. Widening Chinese lockdowns and supply chain disruption. Big swings in both stock and bond markets. Thus far, 2022—which features this bull market’s first correction (typically a short, sharp, sentiment-driven -10% to -20% pullback)—has been difficult for many investors. After March 8’s low, stocks rose to close the month, only to see renewed volatility in April send markets close to retesting that mark on Tuesday. That seemingly has fear and frustration spreading among investors. But, while such volatile times like this can be hard, we think they aren’t atypical during corrections. They call for calm—and perspective. Corrections are never easy, but they are a normal part of bull markets. Patience is likely to be rewarded, in our view.

Corrections are chiefly sentiment swings, which often start with some plausible seeming negative story. In this case, it seems inflation, war and more recently China’s latest lockdowns underpin the move, with tragic news out of Ukraine stirring investors’ emotions alongside volatility. Being sentiment-driven gives corrections one of their toughest features: They are impossible to predict—and time. We aren’t aware of anyone with a proven history of circumventing sentiment-driven negativity and corrections. Such shifts happen suddenly. There won’t be any warning one is about to start—and no all-clear signal when it is over. The beginning and end are apparent in hindsight only.

But there is a silver lining: Recoveries are usually about as fast as the drop, with stocks normally continuing to churn higher thereafter. Exhibit 1 shows all historical S&P 500 corrections since 1928. If the current correction resolves as others have—and we see little reason to think this time is different—the recovery to new highs and beyond could come much sooner than many seem to anticipate today.

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Political Uncertainty Falls in France

Editors’ Note: MarketMinder favors no political party or politician, analyzing developments solely for their potential market and economic impact.

Well that was anticlimactic. French President Emmanuel Macron cruised to victory over challenger Marine Le Pen in Sunday’s runoff, becoming the first French incumbent president to win re-election in 20 years. Heading into the contest, polls put his lead in single digits, a hair’s breadth from the margin of error. Yet the latest projections put his margin at 58.5% to 41.5%.[i] Some headlines are breathing a sigh of relief that France won’t be ruled for five years by a nationalist who touted far-left economic policy on the campaign trail. Others warn that Macron’s decision to tack left on economic policy while campaigning could herald a shift away from his first term’s alleged pro-growth reform bent. We think both viewpoints largely miss the elephant in the room: French presidents can’t do much without Parliament, and Parliament holds elections in June. A break from the deep gridlock that marked most of Macron’s first term seems unlikely. While that probably prevents meaningful pro-growth reforms, it should also reduce legislative uncertainty. That likely extends the status quo that French stocks have been fine with for years.

From the start, we doubted the presidential contest was make or break for stocks. Given Le Pen’s National Rally has had difficulties organizing at the grassroots level, the likelihood it won a majority in June was exceedingly low. Her economic agenda likely would have gone nowhere. She might have been a thorn in other EU leaders’ sides, but that probably would have amounted to far less than feared. The European Council operates by consensus, and that process has always been messy, with holdouts holding plenty of influence. That the holdout would have come from the bloc’s second-largest economy wouldn’t have changed much beyond appearances.

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Digging Into March Retail Sales

Have high gas prices started taking a toll? Retail sales rose 0.5% m/m in March, but excluding gas stations, they fell -0.3%, sparking stagflation concerns.[i] Stagflation, or high inflation amid stagnant growth, connotes 1970s-style economic malaise, but we don’t think those comparisons—or the alleged ramifications for markets—are apt. Retail sales are only a subset of consumer spending, but the glimpse they give still shows demand holding relatively firm in the face of higher prices.

Exhibit 1 depicts the slight divergence between retail sales with and without gas spending. As pump prices hit a record-high national average of $4.33 in March, gas station sales soared 8.9% m/m, driving retail sales’ monthly gain.[ii] These figures aren’t adjusted for inflation, so it seems fair to say rising prices were responsible for much of the increase.

Exhibit 1: Retail Sales’ Latest Wiggles in Perspective

Source: Federal Reserve Bank of St. Louis, as of 4/14/2022.

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I Bond You Bond We All Bond Over I Bonds?

As inflation continues biting, folks from coast to coast are scrambling for tools to fight it—an understandable urge. Banks aren’t paying anywhere near enough interest to preserve savings’ purchasing power, and the erosion hurts. A lot. So it isn’t surprising that the US Treasury’s normally obscure inflation-adjusted savings bonds—better known as I Bonds—are suddenly among finance’s hottest topics. Starting next month, they will pay nearly 10%, with interest and principal guaranteed by Uncle Sam himself. Yet as with any investment, there is no free lunch, and reality may be a touch more complicated than the flashy talking points suggest. We aren’t against I Bonds, and we think they may play a small, beneficial role in a broader fixed income strategy. But it is important to know exactly what you are buying and what the tradeoffs are. So, here is a friendly primer.

What are I Bonds?

They are US savings bonds—like a supersized version of those $50 or $100 savings bonds kids sometimes receive as presents or prizes in school raffles. But unlike those bonds, they carry a floating interest rate that rises and falls with the Consumer Price Index (CPI), resetting every May and November. In general, their interest rate will be a skosh higher than the CPI inflation rate. Right now, they pay 7.12%.[i] In May, that jumps to 9.6%.[ii]

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A Global Roundup of Political Developments (Outside France)

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

When it comes to politics, pretty much all eyes in the financial world are on Sunday’s French election. We will have more to say about that after the fact, but in the meantime, here is a cocktail of other political snippets (and their stock market implications) to wet your whistle.

Boris Johnson Pays Fine, Says Sorry, Remains Employed

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Another Source of Potential Falling Uncertainty: China’s Lockdowns

If we were allowed just two words to sum up the financial world’s reaction to China’s Q1 GDP release, they would be “yah” and “but.” As in, yah, that 4.8% y/y growth beat expectations and is mostly in line with the government’s target, but that was before half the country went back into lockdown.[i] A fair point, and the risk of a contraction in Q2—which some outlets now project—is also worth considering. In our view, China’s economic and COVID setbacks likely add to this year’s early uncertainty—yet they also create opportunities for uncertainty to fall later this year as early headwinds fade. High and falling uncertainty is often positive for stocks, and we think it should be a tailwind as 2022 rolls through its back half.

While it is true that China’s Q1 data don’t give much insight into the latest lockdowns’ impact, the accompanying March monthly data offer some clues. Unsurprisingly, they show the restrictions hitting consumer activity hardest. Retail sales fell -3.5% y/y and -1.9% m/m, with the latter (and month-over-month data in general) featuring rather prominently in the National Bureau of Statistics’ (NBS) release.[ii] As always, we would take that with a grain of salt, as China’s seasonal adjustment methodologies are young and unproven, but it seems rather telling that officials seem increasingly ok with shedding light on negative data. It will also give us a chance to more clearly assess the damage as lockdowns spread from Shenzhen to Shanghai in late March, reaching dozens of other major cities in April.

Developments in industrial production will also be worth watching, as it held up fairly well thus far. Heavy industry grew 6.5% y/y in Q1 overall, with industrial production up 5.0% y/y in March.[iii] It also eked out 0.4% m/m growth, but that coincides with the early parts of Shenzhen’s and Shanghai’s lockdowns, when factories were still managing to operate as bubbles and keep output flowing.[iv] More recent reports indicate supply chain troubles have prevented factories from getting components, so industrial production could very well take a hit in April. Same goes for exports, which jumped 10.7% y/y in Q1, including a 12.9% y/y rise in March (China doesn’t publish month-over-month trade data yet).[v] If factories can’t assemble final goods for shipment overseas, then exports will probably weaken. Imports, however, we wouldn’t read much into. Ordinarily, we would interpret their -1.7% y/y drop as a potential sign of weakening domestic demand, but the global supply chain weirdness that has companies opting to ship empty containers back to China rather than wait to load them up continues.[vi] That is probably skewing the data to an extent.

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