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.


US Q1 GDP Great, but Watch Expectations

GDP is within spitting distance of its pre-pandemic level after the Bureau of Economic Analysis reported initial Q1 growth estimates yesterday. With economic activity now a hair’s breadth from its high, what should investors expect going forward? In our view, a likely return to more normal growth rates.

With GDP’s 6.4% annualized Q1 surge, it is now just -0.9% below its Q4 2019 peak.[i] Since Q2 2020’s lockdown-driven depths, when GDP stood -10.1% below that peak after two successive declines, consumer spending has unsurprisingly led growth as America reopens. This remained true in Q1, with overall personal consumption expenditures (PCE) up 10.7% annualized, leading all major categories.[ii]

But growth in PCE—the lion’s share of GDP—hasn’t been uniform. Services PCE growth, notably, continues to lag. It grew only 4.6% annualized in Q1 versus goods PCE’s 23.6%.[iii] This is because demand for services is generally more “inelastic” than demand for goods, which is econo-jargon for less sensitive to economic trends. While some services—say travel and entertainment—are discretionary, most aren’t. Think: many healthcare expenditures, insurance payments, monthly utilities and rent. As Exhibit 1 shows, whereas goods PCE is now 12.5% above its pre-pandemic high, services PCE remains -5.7% below.

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What the Pop in PMIs Says About Sentiment Today

Some widely watched business surveys hit record highs in April, generating plenty of headlines. However, we think the more interesting takeaway was the overall optimistic reaction to the readings—rational, though a sign the bull market is a step closer to euphoria. That makes tracking sentiment’s evolution critical going forward—and one way investors can do that is through monitoring what pundits and analysts say (and don’t say) about economic data.

Purchasing managers’ indexes (PMIs) are monthly surveys measuring the percentage of businesses reporting increased activity, with readings above 50 implying expansion. Preliminary (or “flash”) readings represent about 80% - 90% of total responses and are the timeliest economic reading out there. IHS Markit’s April flash PMIs for several major developed economies broadly improved on March. (Exhibit 1)

Exhibit 1: Developed Economies’ Recent PMIs

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The Surprising Truth About This Year’s ‘Volatility’

In just four short months, big headlines have barraged investors. The year began with the Georgia runoffs and Capitol insurrection, stirring political fears galore. Then came COVID waves, variants and Europe’s vaccine hiccups. The GameStop trading frenzy. Last month’s Archegos hedge fund collapse. Interest rates’ surge. Tax hike fears. The jam-packed news cycle may give you the impression markets have been unusually rocky these last few months. But no. Rather than outsized volatility, stocks have kept their cool—a timely reminder for investors to tune down attention-grabbing events, in our view.

In terms of daily stock swings, 2021 has been relatively calm. Since 1928, when daily data begin, the S&P 500 has moved up or down by 1% or more on 34% of trading days.[i] In 2021 so far? Just 30%, or 24, with only 3 daily moves bigger than 2% (up or down), far lower than the historical average of 11%. No daily percentage swing has exceeded 3% up or down this year. Globally, a similar story holds. For the MSCI World Index, daily moves of 1% or greater in either direction occur 23% of the time since daily data start in 1980. That is a right around this year’s 22% (17 days), but this year has seen far fewer days swinging more than 2%.[ii] There have been just two.

Perhaps even more tellingly, most of those bigger daily moves have been up. Big down days—more than -1% declines—have been notably absent. Only 9 daily S&P 500 declines have exceeded -1% this year—11% of trading days, below the 17% historical average.[iii] For MSCI World, there have just been 6 to date in 2021, or 8% of trading days.[iv] The average is 11%.

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Redistricting Congress: Gridlock’s Underappreciated Boost

Editors’ Note: Our political commentary is intentionally non-partisan. We favor no politician nor any political party and assess political developments solely for their potential market and economic impact.

With Tuesday’s headlines obsessing over the flurry of activity in President Joe Biden’s first 100 days in office, Washington, DC might not feel gridlocked right now. But that perception should change looking forward as the administration’s honeymoon period ends and infighting escalates. One process likely to contribute to this: House redistricting, which officially kicked off Monday when the Census Bureau announced the final tally of which states will gain and lose seats. In our view, the uncertainty this causes for politicians—redrawing district maps may mean a new electorate to court—creates a big incentive to avoid rocking the boat. That probably contributes to most legislation getting watered down (if not scrapped outright). In other words, higher uncertainty for politicians means less uncertainty for stocks, which we think is an underappreciated tailwind.

The official reapportionment results flip a handful of seats from traditionally Democratic states to traditionally Republican, but not by as much as preliminary projections suggested. Texas gains two seats instead of the three predicted by the American Redistricting Project, Florida picks up just one, and Arizona—initially projected to gain one—stands pat. Meanwhile, Rhode Island won’t lose a seat after all. Exhibit 1 shows the full national landscape as it stands now.

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Capital Pains? On the Latest Rumored Biden Hike

Editors’ Note: Our political commentary is intentionally non-partisan. We favor no political party nor any politician and assess political developments solely for their potential economic or market impact.

Investors have dealt with a lot of tax chatter over the past year and a half. This week added another, albeit widely expected, round: the Biden administration’s rumored plan to nearly double capital gains taxes for people earning over $1 million. We have seen a lot of hyperbolic talk about this sucking money out of the private economy, hurting growth and productivity—not to mention reducing demand for stocks following a wave of selling as the affected people race to lock in gains before the increase takes effect. We have also seen long defenses of the preferential long-term capital gains rate, which we sympathize with. But America has a long history of capital gains tax changes and, spoiler alert, they aren’t automatically bearish. We think President Joe Biden’s proposal is quite unlikely to differ, even if it passes exactly as advertised. One reason why? Next to no one would pay it.

If the rumors are accurate, Biden’s plan would jack up capital gains rates to 39.6% on these high earners. That rate would be up from 20% currently and slightly exceed the current 37% top marginal income tax rate. Actually, these folks’ gains would face a 43.4% rate when you add the Affordable Care Act surtax. Plus many states levy capital gains taxes, meaning taxpayers in higher tax states like New York or California would pay capital gains rates topping 50%. Hence, the uproar.

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Stimulus Checks Aren’t Consumer Spending (or Inflation) Rocket Fuel

For weeks now, several prominent economists have argued the recently passed $1.9 trillion American Rescue Plan portends hot inflation, stirring some investors’ fears. Unlike prior COVID relief packages, they argue, this package splashes out too much cash, which will inevitably slosh around the economy and pump prices higher. We disagree with this for a host of reasons, not least because there isn’t much evidence money is changing hands quickly. Some recent survey and data results illustrate this, showing why investors needn’t fear runaway inflation hurting stocks.

Exhibit 1 shows results from a recent New York Fed survey, which asked stimulus check recipients how they allocated proceeds among spending, saving and paying down debt. Perhaps surprising many, recipients reported spending only 26% of funds (on average across the three rounds of stimulus checks), saving or paying down debt with 73%.

Exhibit 1: Distribution of Stimulus Check Usage

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A Busy Couple of Days in Politics Beyond America’s Borders

Editors’ Note: MarketMinder’s political commentary is intentionally nonpartisan. We favor no party nor any politician and assess developments solely for their potential market impact.

While Congress continues haggling over new spending and tax changes, politics globally are in a similar simmering lull—a welcome quiet for markets after a raucous 2020. But that doesn’t mean nothing is happening. Uncertainty is ticking higher in some places and lower in others, but all support the global gridlock we think should continue benefiting stocks worldwide this year. Let us have a look.

German Players Move Into Position

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Takeaways From China’s Historic Q1 GDP

Editors’ Note: MarketMinder doesn’t make individual security recommendations. Any reference to an individual publicly traded firm herein is merely included to illustrate a broader point.

China’s latest economic data dump received a lot of press, especially its eye-popping Q1 GDP growth rate. Many also noted China’s economic recovery would likely slow in the coming quarters—a return to its pre-COVID normal—which we think sounds about right and should be fine for stocks. In our view, Chinese economic figures remain a useful, albeit imperfect, preview of post-pandemic life in the US and other developed nations—a helpful way for investors to set their expectations for other major economies’ data.

Chinese Q1 GDP soared 18.3% y/y, a bit slower than some economists’ expectations, but still the fastest growth rate since the country began reporting quarterly GDP in 1992.[i] (Exhibit 1)

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Don’t Buy Big Banks’ Q1 Earnings Bounce

Big banks kicked off Q1 earnings season with a bang. Firms reporting this week in the S&P 500’s banks and capital markets categories announced Q1 earnings growth topped 200% y/y, trouncing expectations for more pedestrian double-digit growth rates.[i] This has headlines claiming more gangbusters growth is in store and set to deliver a big positive surprise to stocks. Apologies for raining on a parade, but we think they are in for some disappointment. Not the bull-market-ending kind, but the kind that doesn’t fuel lasting outperformance in more cyclical stocks.

Banks’ blowout growth is wonderful news, but it is backward looking—and has questionable staying power. Simply, markets pre-priced all the economic activity that drove these earnings. Thinking they are predictive is backward. After last year’s March 23 low, the S&P 500 hit new highs in August, preceding economic recovery well in advance. The latest Q4 GDP figure still stands -2.4% below its Q4 2019 pre-pandemic high.[ii] While economists expect expansion this year, that—and its impact on bank earnings along the way—is old news to stocks.

The drivers behind Q1’s bank earnings are well known at this point—and they don’t look sustainable to us. For one, base effects from last year dominated. During Q1 2020, as lockdowns took effect, Financials’ earnings fell -40.6% y/y.[iii] That set up a low base, which alone virtually assured triple-digit growth rates as earnings return toward—and exceed—pre-pandemic levels. With 15 of 65 S&P 500 Financials reporting so far, their blended aggregate Q1 2021 earnings per share (EPS)—combining actual results with remaining consensus expectations—stand at $11.92, which would be 116% y/y over last year’s $5.53.[iv] But pre-pandemic, Financials’ quarterly EPS averaged $9.16 in 2019.[v] In this light, Q1 EPS more than doubling year over year seems much less extraordinary. Growth now has more to do with 2020’s devastation than anything in 2021, besides normalcy resuming.

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UK GDP and a Lesson on How Markets Work

One of the central tenets of our investment philosophy, which we have mentioned here often[i], is that we think stock markets are forward-looking, discounting expected events over the next several months. Economic data, by contrast, are backward-looking. Data released now reflect activity that happened in a previous month, quarter or year. Therefore, if you are looking at economic data for clues into what stock markets will do, we think you are probably mistaken, as prices likely already reflect that earlier economic activity—and have for some time. To see this clearly, here is a shining, timely example: February’s UK GDP, released Tuesday.

Most countries release GDP quarterly, but the UK—like Canada—produces a monthly report, giving more insight into the economy’s short-term twists and turns. That has been particularly illuminating during the pandemic, as it gives a more detailed look at the lockdowns’ varying economic impacts. The third UK lockdown took effect in early January, and that month’s GDP fell -2.2% from December.[ii] But in February, there was a slight recovery. GDP grew 0.4% m/m, even as strict nationwide business restrictions remained.[iii] To us, that is a noteworthy sign of the country’s economic resilience, which we think probably benefits many people at a personal level.

But to stocks, it is very old news. That would be true of any month’s GDP, but something that happened the day before the release ties a bow on it: Businesses began reopening from that third lockdown. That reopening has been scheduled since February 22 , when Prime Minister Boris Johnson announced it. Also widely known: The government’s plans to have all remaining restrictions lifted by June 21, provided the virus doesn’t escalate again. For nearly two months, the government’s reopening timetable has been common knowledge—a fact investors were likely well aware of as they bought or sold. This is what we refer to when we say markets anticipate expected events.

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