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.


What Markets Are Eyeing Beyond Q3 GDP

US GDP slowed sharply last quarter, from Q2’s 6.7% annualized growth to 2.0% in Q3.[i] Major news outlets blamed logistics problems and the Delta variant, which has been a scapegoat for virtually every disappointing economic reading in recent months. We think the universal reaction is half right. Supply chain issues demonstrably knocked growth, but we don’t see much evidence that Delta took a toll—a bullish misperception, in our view.

As most coverage noted, Q3 GDP “missed” loose expectations for about 3% growth, but we see little in the data to support rising COVID infection rates as the cause. The biggest decline came from consumer spending on motor vehicles and parts, which lopped a whopping -2.4 percentage points off of headline GDP growth.[ii] Declines elsewhere in spending on goods were miniscule. Furniture and RVs each subtracted -0.2 points while clothing and footwear (-0.01) barely registered. All other goods categories were flat (e.g., food at home) or up (like gas). It is worth remembering, too, that these spending categories are inflation-adjusted.

The line items in services spending you would think would be most affected if COVID were crimping growth—recreation and dining out—added 0.3 and 0.5 points, respectively.[iii] More broadly, while total services spending decelerated from Q2’s 11.5%, its 7.9% annualized growth rate is still robust by any reasonable standard.[iv] Besides, deceleration from the initial springtime pop was always likely, in our view. Seeing it shouldn’t shock.

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UK Budget 2021: Schrödinger’s Tax Hikes

Editors’ Note: MarketMinder is politically agnostic. We favor no politician nor any political party and assess policies’ potential impact on the economy, markets and personal finance only.

Are UK taxes going up or down? When Chancellor of the Exchequer Rishi Sunak unveiled the 2021 budget today, he said, “My goal is to reduce taxes. By the end of this Parliament, I want taxes to be going down, not up.” That mission statement capped a speech in which he presented a smattering of targeted tax cuts, including reduced beer and air travel duties, commercial real estate tax relief for brick and mortar businesses, a small reduction in bank taxes, expanded research & development corporate tax credits, and more relief for low-income workers who receive the country’s universal tax credit. He did not announce broad new tax increases—rather, he froze fuel duties and canceled a previously announced increase on some alcoholic beverages. Yet the nonpartisan Office for Budget Responsibility (OBR) estimates the UK’s tax burden will hit 33.5% of GDP by fiscal 2026 – 2027, the highest since 1951.[i] (It sees public spending reaching 41.6% of GDP by then, the highest over a sustained period since the late 1970s.[ii]) So … who is right? We would argue the correct answer is “both and neither of them,” which we also think illustrates why UK stocks have dealt fine with the prospect of a higher tax burden.

Yes, the ideas in Sunak’s speech technically cut taxes, scoring some political points—which is what this exercise has always been about, in our view. But these small measures follow personal and corporate tax increases passed over the summer and a previously announced hike of the national insurance contribution, which funds the National Health Service and other social care programs. The OBR estimates these increases will add £49.7 billion to the UK’s total annual tax burden by 2026, while the cuts announced today total a paltry £1.6 billion.[iii] So, score a fact-check point for the OBR’s bean counters.[iv]

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Inflation Is Up, Gold Hasn’t Glittered

A long-held investment tenet claims gold is a great hedge against inflation. But before you nod along, consider: Despite the US consumer price index (CPI) ticking up 5.4% y/y—a rate last seen just over a decade ago—gold is down -5.4% on the year.[i] In our view, this is a clue to a broader truth: History shows gold’s inflation-hedging reputation rings hollow.

Exhibit 1 illustrates this year’s sharp divergence. Despite CPI’s accelerating from 1.3% y/y in December, gold has floundered.

Exhibit 1: No Hedge Year to Date

Source: FactSet and Federal Reserve Bank of St. Louis, as of 10/27/2021. Gold price per ounce, 12/31/2020 – 10/26/2021, and CPI, December 2021 – September 2021.

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Stocks Complete the Quick Round Trip to All-Time Highs

The S&P 500 and global stocks have fully erased September’s pullback as of Tuesday’s close, returning to all-time highs.[i] By recovering so quickly, stocks have once again taught two timeless lessons. Let us discuss.

1. Volatility goes both ways.

People often use volatility and negativity synonymously, and we will cop to falling into that trap now and then. But volatility really means movement, up and down. High volatility means the market’s movements are bigger—bigger up and bigger down. Usually, the bigger up and bigger down come hand in hand, which is why stocks often recover swiftly from pullbacks and their big brothers, corrections (sharp, sentiment-fueled drops of -10% to -20%).

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The Many Problems With Taxing Unrealized Capital Gains

Editors’ Note: MarketMinder is politically agnostic. We favor no politician nor any political party and assess policies’ potential impact on the economy, markets and personal finance only.

As part of its push to raise taxes on affluent Americans, the White House released a report late in September that purported to show the real estimate of the “average federal income tax rate on the wealthiest Americans.” Now, the last I checked, the income tax rate was, you know, the tax rate paid on income—like the salary I make writing articles for Fisher Investments. This is the gist of the entirety of the US tax code. But economists from the Office for Management and Budget (OMB) see it differently, apparently. Their report redefined income as the increase in wealth from one year to the next—a bizarre methodology that introduces a lot of oddities, in my view. This would be a mere academic curiosity if Congressional Democrats weren’t jawboning about taxing wealthy individuals’ unrealized capital gains as they scramble to rewrite the reconciliation budget bill. While it is far from certain that this becomes law—and probably isn’t inherently bearish for stocks if it does—it is worth exploring the problems such an effort could create.

Much of the current push stems from the notion that wealthy people aren’t paying their “fair share,” which the OMB’s analysis aimed to demonstrate. It estimated “the average Federal individual income tax rate paid by America’s 400 wealthiest families, using a relatively comprehensive measure of their income that includes income from unsold stock.” (Italics mine.) Lest you think that means dividends, they go on: “An important feature of our analysis that is less common in existing estimates of tax rates is that we include untaxed (‘unrealized’) capital gains income in our more comprehensive income measure as they accrue.” As they explain it, “The wealthy pay low income tax rates, year after year, for two primary reasons. First, much of their income is taxed at preferred rates. In particular, income from dividends and from stock sales is taxed at a maximum of 20 percent (23.8 percent including the net investment income tax), which is much lower than the maximum 37 percent (40.8 percent) ordinary rate that applies to other income.” Hence, the OMB’s staffers claim the wealthy paid, “an average Federal individual income tax rate of 8.2 percent for the period 2010-2018.” Getting to that figure, though, requires redefining income altogether—and changing how they approach capital gains, too. Taxing unrealized gains as they accrue—which Congressional Democrats have said is on the table for America’s billionaires—or removing the tax code provision allowing heirs to inherit investments without inheriting the original cost basis (known as the cost basis step-up at death), are the purported solutions to this alleged conundrum.

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Our Thoughts on Coal Stocks’ Return From the Abyss

Energy stocks have been the hottest game in town since the electricity shortage erupted in mid-September, and one category is especially catching eyeballs: coal. One discussion that caught our interest today—and is well worth a read if you have the time and access—was a New York Times piece by Jeff Sommer that investigated the disconnect between near-term returns and long-term climate initiatives. In our view, it is a prime example of a simple point: Stocks look only about 3 – 30 months ahead.

For the better part of the last decade, pundits have presumed coal stocks were consigned to permanent weakness because emissions targets and international climate accords were killing off everyone’s least-favorite Christmas present. Some pointed to climate policy as the culprit (for better or worse) for coal stocks’ long-running lag and cited each coal plant closure as another nail in the coffin. But now coal use and coal stocks are soaring amid the global natural gas shortage, and it is drawing many investors’ attention. Some are confused, seeing this as contradicting the long-term direction of energy markets. Others see opportunity. We see neither.

When you own stocks, you own a share in future earnings. But stock prices today don’t reflect earnings 10 or 20 years from now, for the simple reason that the far future is impossible to predict. Hence, markets tend to looker closer to the present, weighing economic drivers and trends affecting earnings. So even if governments (particularly in developing nations) do phase out coal over the next few decades, that isn’t terribly meaningful to earnings today.

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Bull Market Bounciness Isn’t a Call to Action

The past several weeks have seen some volatility return, with global stocks falling -5.5% from September 6 to October 4’s low, then rebounding to close less than 1% from where they started today.[i] Still, we see pundits suggesting now is the time to raise cash, arguing the likelihood of more negativity is high. Holding more cash in anticipation of rocky stretches may sound sensible, but doing so could cost you dearly. Let us review.

There are myriad reasons for holding cash, some more beneficial than others. For example, cash is a near-necessity in a right-sized emergency fund or for a known or planned expenditure—two scenarios where any volatility is likely a huge problem. Cash also can make sense as part of a defensive strategy during a bear market, perhaps alongside bonds and other securities, depending on market conditions. However, we think it makes sense to go this route only if you see a bear market forming and have based your assessment on careful fundamental analysis, not merely recent returns. In our view, pundits’ reason for raising cash now is less beneficial. Some see recent volatility as a call to pare back stock holdings to “protect” capital while also building up some “dry powder” to put to work after a decline.

That sounds nice in theory, but in our view, it falls apart in practice. Volatility doesn’t announce its arrival or departure, and a short negative spell doesn’t beget more market bounciness. As we wrote throughout the year, markets had been relatively calm in 2021—until September. But last month’s dip doesn’t say anything about future market movement. Yes, more negative volatility is always possible, and if stocks fall anew, recent calls to hold cash for future buying opportunities will look prescient. But volatility goes both ways. If markets go through a stretch of positive volatility, that better buying opportunity you are waiting for may be in the rearview already.

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An Update on Chinese Property Developers

Editors’ note: MarketMinder doesn’t make any individual security recommendations. Companies mentioned here are only for illustrative purposes to highlight a broader theme.

Evergrande’s missed bond payment a few weeks ago struck fear into the financial world. Since then it has missed a couple more and given few indications it plans on paying international bondholders. A few other Chinese property developers—mostly small, distressed ones—have followed suit, to varying degrees. Yet the chaos most expected and worried could spill globally seems absent. This doesn’t shock us—as we wrote recently, China’s financial system is largely still isolated from the world’s. But also, there are signs China’s government is acting to mitigate the local effect, and the process is playing out in an orderly fashion. In our view, this underscores why we didn’t and don’t believe Evergrande is a financial crisis catalyst—neither locally in China nor globally.

Evergrande has now missed a combined $279 million in offshore coupon payments since late September, which will officially constitutes a default if they remain unpaid after a 30-day grace period expires on Saturday. Meanwhile, more credit events are popping up. To date, seven small, distressed developers including Fantasia Holdings, China Properties Group and Xinyuan Real Estate have either missed payments to offshore creditors or compromised with them, replacing existing debt with new bonds. Yet all these transactions are in the millions of dollars—far too small to cause fundamental troubles in China’s economy, much less the world’s.

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Lessons From Oil on the New Crypto Futures Fund

Editors’ Note: MarketMinder doesn’t make individual security recommendations. This piece aims to hit on a broader theme illustrated by the securities discussed.

If you so much as peeked at the financial news world Tuesday, you likely saw there is a new ETF in town. Some, playing fast and loose with terminology, call it a bitcoin ETF, the first of its kind, a landmark development for investors. Finally, people can invest in bitcoin without venturing into the Wild West of crypto wallets and zero investor protections! There is one teensy little problem with this claim: It isn’t a bitcoin ETF. The fund actually manages bitcoin futures, and it may not end up tracking bitcoin’s price well at all. That is just one reason we are issuing a friendly buyer beware to anyone considering this. We aren’t inherently against it or bitcoin, or securities tracking bitcoin futures. But understanding what you are reviewing to properly weigh risks is key to making any investment decision.

People have been trying to get bitcoin ETFs off the ground for years. The Winklevoss twins started the push in 2013, but the SEC rejected multiple applications, citing concerns about market manipulation, illiquidity and outsized volatility. Several asset managers also tried and hit that brick wall. But over the summer, the SEC changed its guidance to imply it would bless funds that packaged bitcoin futures, rather than actual bitcoins. Unlike cryptocurrencies, futures trade on regulated exchanges, where officials can monitor for unusual and suspicious activity. So ProShares, a fund provider, got to work on the Bitcoin Strategy ETF, which will hold only bitcoin futures contracts. The SEC gave the green light last week, and it debuted Tuesday with ProShares execs ringing the New York Stock Exchange’s opening bell.

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No Surprises in China’s Slowdown

Chinese GDP growth slowed to 4.9% y/y in Q3, with most pundits agreeing the problems at Evergrande and associated real estate woes, combined with September’s electricity shortage, took a big bite out of the economy. While we agree those issues did have some negative effects, most of today’s coverage overstated them and ignored a simple but important point: Q3’s growth rate is right in line with the long-running trend. In our view, that makes these results a return to pre-pandemic normal, not a sign of sudden big problems in the world’s second-largest economy—a fine backdrop for stocks.

Also lost in most coverage: Chinese GDP is so far on track to meet the government’s full-year target of at least 6%, as it is up 9.8% year to date from 2020’s first three quarters.[i] Obviously there is some COVID skew there, but according to China's National Bureau of Statistics’ (NBS) press release, the compound growth rate over the past two years is 5.2%.[ii] That is very much in line with pre-pandemic growth rates. So is Q3’s 4.9% growth, as Exhibit 1 shows—it largely extends the decade-long slowdown from the double-digit growth rates of old.

Exhibit 1: Slowing Growth Is the Norm in China

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