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.


A Look at the Range of Forecasts Markets Are Anticipating

On Tuesday, the IMF released its latest World Economic Outlook, which forecasts global growth shrinking -3.0% in 2020, its worst downturn since the Great Depression and a major flip from January’s forecast of 3.3% growth.[i] While stark, this shouldn’t shock. As commentators have documented thoroughly, the sudden halt to economic activity from business closures and social distancing is unprecedented—and likely severe. With data from March rolling in, we are getting a look at just how severe. US retail sales’ -8.7% month-over-month drop was the biggest on record, and industrial production’s -5.4% slide was the worst since 1946.[ii] But these numbers are an incomplete look, considering they encompass only about two weeks of the present lockdowns. Plus, they—and most other figures coming out—are likely imperfect. As some have noted, business closures and outages are complicating economic data collection. However, while the actual data we have are very spotty, there is a huge array of forecasts—which markets see and adjust to. That is partly how they anticipate future conditions. Here is a look at the numbers economists expect—and why whatever end of this spectrum reality lines up with likely matters less than the duration.

For the US, there is a wide range of economic forecasts. Exhibit 1 shows major financial institutions’ forecasts in the order they released them. For the most part, their Q1 and Q2 GDP estimates go from bad to astonishingly ugly. They also generally worsened toward month end, as COVID-19 caseloads increased and state lockdowns spread.

Exhibit 1: Forecasters’ Q1 and Q2 GDP Estimates

Source: “Economists See U.S. Facing Worst-Ever Quarterly Contraction,” Reade Pickert, Bloomberg, 3/31/2020. Forecasts are for seasonally adjusted annualized GDP growth rates.

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Non-Traditional Data Show What Stocks Reacted To

As most major cities close in on the one-month anniversary of business closures and other social distancing measures to slow the spread of COVID-19, we are still some ways away from having official economic data to measure the precise negative impact. Even Wednesday’s retail sales release likely only hints at the damage. Yet neither we—nor markets—are flying blind. An array of narrow-but-speedy indicators hints at how the closures have impacted major metropolises—and how the situation here compares to China, which started reopening a few weeks ago. None of the results are wildly surprising, and all are widely known—not predictive for stocks. But in addition to showing what markets are already digesting, we think they help illustrate why the duration of this shock is likely more important to stocks than the magnitude.

First up, the scourge of every commuter: car traffic congestion. As shown in Exhibit 1, the cities with the worst COVID-19 outbreaks are still far below average. But Wuhan—the virus’s epicenter—is starting to improve a tad, and other major Chinese cities (represented by Shenzhen) have jumped back above average. That augurs well for activity in America and Europe returning to normal once shelter-in-place orders end.

Exhibit 1: Relative Peak Traffic Congestion

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Breaking Down the New OPEC+ Deal

While COVID-19 has dominated headlines this year, oil has also grabbed eyeballs. Brent crude prices plunged nearly -80% in Q1 2020 thanks partly to COVID-19—but also to a price war between Saudi Arabia and Russia.[i] On Sunday, though, a détente emerged: The Organization of the Petroleum Exporting Countries (OPEC) and other big producers including Russia—a group known as OPEC+—agreed to a record-high oil output cut. The US even helped broker the deal, which nearly collapsed after Mexico pulled out of talks last Friday. However, doubts remain about the production cuts’ effectiveness—understandable given the factors affecting oil supply and demand today. In our view, this also highlights a broader point for investors: Despite receiving lots of attention, oil price changes won’t have much impact on the present macroeconomic situation, for better or worse.

The 23 OPEC+ nations agreed to cut output by 9.7 million barrels per day (bpd), just shy of its 10 million bpd goal. Saudi Arabia is leading the way, cutting production from its April output of 12.3 million bpd to about 8.5 million bpd. G-20 countries not part of OPEC+—including the US, Brazil and Canada—are also reducing output, though market forces are driving those cuts. Mexico, which nearly torpedoed the agreement, will cut 100,000 bpd of output, less than one-third of what OPEC+ wanted. The US saved the deal by pledging reductions in Mexico’s stead. Not that America is turning into a command-and-control economy, mind you—last week, the EIA projected domestic oil output would fall about 500,000 bpd from 2019 due to weaker prices. Price signals, not politicians and regulators, primarily govern US output. 

Yet the deal isn’t as expansive as it first appears. Saudi Arabia’s new production is just 1.2 million bpd lower than its average production before the price war began. G-20 countries’ reductions are estimates based on current lower oil prices—should prices rise significantly, output may not fall. The planned reductions also taper off over time. The 9.7 million bpd cut lasts only through June. From July through yearend, the cut decreases to 7.6 million bpd—and then to 5.6 million bpd through 2021 until April 2022. Considering the deal doesn’t take effect until May 1, many producers will probably continue pumping at higher levels over the next several weeks—adding to supply. OPEC members’ compliance with production targets has historically been an issue, too. Oil supports many of their economies, and despite public pledges of solidarity, not all participants stay within their quotas. Considering the struggle to get 23 parties on board with an agreement, it seems fair to say there is a chance some don’t follow through.

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Our Guidance for Q1 2020's Earnings Season

For the past several weeks, stocks have been pricing in the near certainty that COVID-19 containment measures will drive recession and hammer corporate earnings. Yet the precise extent of the damage remains a mystery, even with consensus expectations for Q1 earnings tumbling from 2.1% year-over-year growth two months ago to a -10% year-over-year decline at last week’s end.[i] This week we will finally begin getting more clarity, with Q1 earnings season kicking off in earnest. Brace yourself now for some truly awful numbers, and keep two things in mind. One, stocks have been laser-focused on this and are highly unlikely to be surprised by bad news. Two, just getting the numbers will reduce uncertainty a bit and help investors and analysts form more educated expectations for Q2 and beyond.

Considering how much life has changed since the lockdowns began in America and Europe, a -10% slide from Q1 2019’s earnings might seem rather mild. But most of the business closures and shelter-in-place orders didn’t take effect in America until about halfway through March. It wasn’t quite business as usual before then, considering China’s lockdowns disrupted supply chains in January and February, hurting American businesses reliant on those imports. But the worst came late in the quarter. That is why expectations for Q2 earnings are even worse, presently at -20% y/y.[ii]

Expect that number to shift quite a bit as Q1 results come in. Never before have we endured such a widespread shutdown of the private economy. The unprecedented nature makes analysts’ models mostly guesswork at this point. But getting Q1 results gives them a baseline to recalibrate. They will have actual numbers to weigh. That helps them assess not just the extent of the damage thus far, but how the numbers might evolve from here depending on how long closures last. Not that any of these models will be perfectly accurate—all forecasts are opinions—but the more flow charts we get showing how earnings might differ if normal life resumes in May, June, July or what have you, the more markets can adjust expectations.

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We Have Presumptive Nominees

Editors’ Note: Our political coverage is intentionally non-partisan. We favor no party nor any candidate and assess politics solely for their potential impact on capital markets.

Today, we will take a break from covering the bear market and associated developments to highlight something more … normal: election-year politics. Yesterday, Senator Bernie Sanders suspended his presidential campaign, making former Vice President Joe Biden the presumptive Democratic nominee. This means we now have a two-man race for the White House, well before the party conventions. While markets are fixated on COVID-19 now, the presidential election should get more attention as it approaches. In our view, the early resolution to the Democratic primary should help election uncertainty fall. While we aren’t arguing this is hugely bullish in the near term, that reduced uncertainty is a positive factor we think is worth considering.

With over two dozen candidates vying for the Democratic nod, a contested convention was a possibility. All it would have taken was the same three or four candidates splitting the vote. But then Biden dominated Super Tuesday and continued racking up delegates over Sanders afterward. Now, with Sanders’ departure and President Donald Trump waiting in the wings, we know the presumptive nominees seven months before the general election. This gives stocks a bit of political clarity—earlier than most expected this year.

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Why the Next Bull Market Doesn't Hinge on Buybacks

With the economy ground to a halt and earnings season just around the corner, companies are battening down the hatches. Several have canceled dividends and planned stock buybacks in recent weeks, leaving headlines globally asking: Where will a recovery come from if companies aren’t buying their own stock? Conventional wisdom correlates rising stock buybacks with markets’ rise during the bull market that ran from March 2009 to late February, flagging them as stocks’ main source of demand. Without them, many fear there won’t be enough buyers to cement a recovery and eventually return stocks to new highs. In our view, this misreads buybacks’ market impact. They weren’t the last bull’s driving force, and the next bull can get underway with or without them.

One extreme analysis, based on the Fed’s quarterly Flow of Funds reports, argues buybacks were the sole source of net positive demand during the last bull. As a Wall Street Journal summary explained: “Since the beginning of 2009, [the analyst] estimates, buybacks have added a net $4 trillion to the stock market. Contributions from all other sources—including exchange-traded funds, foreign buyers, insurers, mutual funds, broker dealers, pensions, hedge funds and households—netted out to roughly zero, he concluded, based on the Federal Reserve’s quarterly flow of funds reports.”[i] In our view, some simple math is all it takes to poke holes into this line of reasoning. At the end of 2008, the S&P 500’s market cap was about $7.85 trillion.[ii] When 2019 ended, it was $26.76 trillion.[iii] If the index’s market value rose by nearly $20 trillion, but corporations contributed only $4 trillion, then clearly other forces must be pushing up prices.

Exhibit 1 pokes even more holes, overlaying annual executed S&P 500 buybacks and annual S&P 500 returns. As you will see, 2018 had the second-highest dollar volume of buybacks. Stocks fell that year. In 2009 and 2010, when buybacks were at their lowest, the S&P 500 jumped 26.5% and 15.1%, respectively (including 2009’s 62.1% jump from the bear’s March 9 low through yearend).[iv] In the index’s best year of the last decade, 2013, buybacks were middling.

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A Ray of Light From Austria and Denmark?

Between UK Prime Minister Boris Johnson’s admission to an intensive care unit and grim forecasts for a sharp acceleration in US COVID-19 deaths this week, good news was in short supply on Monday. Yet stocks jumped globally, seemingly seeing through the bad news and zeroing in on reports that some European nations may begin easing lockdowns in the coming weeks. As always, it is important not to read hugely into any one day’s market movement, and short-term moves are unpredictable. So is government policy. But we think taking note of somewhat positive developments is important for investors—if not everyone—right now. If nothing else, maybe talk of plans to loosen restrictions is a reminder that there is an eventual endgame to the current crisis. It may even be starting to take shape.

The “good” news was minor by most standards. A few days after Denmark announced loose plans to begin easing the restrictions on movement and commerce aimed at slowing COVID-19’s infection rate and easing the strain on hospitals, Austria did the same. Over the past week, infection rates have slowed, even in hard-hit Spain and Italy. That seems to have helped policymakers see some light at the end of the tunnel and start rethinking their approach to containment.

In Austria, if all goes as hoped, small shops, home improvement stores and garden centers will be free to begin reopening on April 14, provided patrons wear masks and adhere to social distancing guidelines. Hair salons and other businesses necessitating closer personal contact will get the green light on May 1, and public gatherings may return in July. Yet travel may remain restricted, with international travel potentially banned until a vaccine for the novel coronavirus is available.

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What to Make of the March Jobs Report

The US Bureau of Labor Statistics announced March jobs numbers today, and as expected, they were bad. Yet after two weeks in which about 10 million Americans filed for unemployment assistance, many were likely also shocked nonfarm payrolls fell by just 701,000 jobs in March, pushing the unemployment rate up to 4.4%. There are some technical reasons for this, and those reasons are why many pundits expect the worst data are yet to come—and that general sentiment is almost certainly correct. In our view, though, the March jobs figures also highlight how late-lagging unemployment data are and why they shouldn’t guide your views about forward-looking stocks—especially now.

Wherever you want to start, the numbers were bad. Payrolls’ 701,000 drop was the biggest monthly decline since March 2009, ending the US’s record-long streak of 113 straight months of job growth.

Exhibit 1: Total Nonfarm Employees, Month-Over-Month Change

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How Bleak March Data Help Markets Anticipate the Future

Back on March 24, we pointed out the steep drops in March preliminary purchasing managers’ indexes (PMIs, surveys tallying the breadth of growth) as early signs of the economic fallout from society’s COVID-19 response. Friday, the more detailed, final figures emerged—and they were even uglier. When we covered the preliminary gauges, we noted the importance of remembering stocks tend to move before the economy—and this, of course, remains a crucial point now. But the broad reaction to the final figures also illustrates how stocks pre-price data, a point we think is worth considering.

Final PMIs are just a more complete look at the data that underpin Markit Economics’ preliminary version, including more granular looks at individual countries. Hence, we can now see the stark influence of Italy’s lockdown—and how hard-hit Spain has been affected. But we also now have the Institute for Supply Management’s (ISM) US PMI, offering a second look at America. Exhibit 1 shows the final PMIs across a range of major Western nations over the past three months. In all these cases, readings below 50 mean more firms reported contracting activity than expanding (and vice versa).

Exhibit 1: Major Manufacturing and Services PMIs

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Here Come the Downgrades

Now that major developed nations have signed off on trillions of dollars’ worth of COVID-19 economic response packages, they are starting to ratchet up bond issuance in order to pay for all of it. We have started seeing concerns about massive government debt increases trickle through the financial news arena, and over the weekend, one associated milestone occurred: Fitch downgraded the UK’s sovereign credit rating to AA-, citing the pending bond blitz. If recent history is a reliable guide, this will be only the beginning—not the end—of downgrade chatter. Hence, we thought it would help to highlight how markets have responded to sovereign credit downgrades over the past decade.

The standard fear when debt issuers get downgraded is that investors’ perceptions of their creditworthiness will also degrade, causing interest rates to rise and making debt more difficult to issue and service—a self-fulfilling prophecy. Yet as Exhibit 1 shows, this hasn’t historically been the case. Several nations, including the US, have lost their top credit ratings over the years. Some received multiple downgrades. Yet none of their interest rates soared. In many cases, long-term yields fell.

Exhibit 1: A Brief History of Sovereign Downgrades

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