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 Earnings Slump Seems Over

So much for contraction. With 410 S&P 500 companies reporting Q4 results as of today, profits grew for the first time since 2019. That is a huge turnabout from the continued decline analysts expected. That earnings beat expectations, in and of itself, isn’t anything earth shattering. It happens much more often than not. But in this environment, it is more noteworthy. Sentiment has improved markedly in recent months, and as it did, analysts revised their Q4 earnings expectations higher. That reality still beat those higher benchmarks is, in our view, a good sign sentiment isn’t yet irrationally high.

The S&P 500’s Q4 blended earnings—combining reported results with remaining consensus expectations—are now up 3.0% y/y.[i] If this holds through the rest of reporting, it will snap a three-quarter string of year-over-year contractions and blow away analysts’ -9.3% y/y consensus estimate at last year’s end. About 80% of companies reporting beat analysts’ earnings and revenue growth estimates—both well above average historically.[ii] That is even more remarkable considering analysts ratcheted up their expectations as sentiment improved last autumn. In September, they anticipated a -13% y/y drop in Q4 earnings.[iii] With vaccinations rolling out in the new year and sentiment riding high, analyst consensus had cut this in half. By mid-January, with only 26 companies reporting, the consensus saw a much milder -7% y/y earnings contraction. Instead, profits are up, illustrating the unexpected speed with which Corporate America has climbed out of its deep lockdown-induced hole.

In a typical expansion, it isn’t unusual for earnings to return to growth less than a year after a bear market ends. But a big chunk of that early growth usually comes from cost cuts. Firms get lean and mean during a recession and keep trimming the fat early in a recovery, hoping to drive growth through productivity gains. Favorable year-over-year comparisons also help if the recession drags on for a while. For example, after the global financial crisis, S&P 500 earnings returned to growth in Q4 2009. Their growth rate, thanks to a depressed comparison, topped 100%.[iv] But revenues grew just 5.8% y/y off their own depressed comparison.[v]

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Japan’s GDP and the Nikkei’s Milestone: Don’t Call It a Comeback

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

Japan got a double dose of good news on Monday. First came Q4 2020 GDP, which grew the fastest among developed-world nations reporting thus far—but not enough to recoup all of the earlier decline. Then the Nikkei 225 index hit 30,000 for the first time since its bubble imploded in 1990—a nice milestone, yet also not quite enough to recoup all of the earlier decline. We wouldn’t read much into either development, although we do think there are a few interesting nuggets for investors.

Take GDP. Q4 growth did indeed hit 12.5% annualized, beating the US, UK and all eurozone nations reporting thus far.[i] As much of the coverage has noted, Japan’s COVID experience deserves some of the credit here. The second wave didn’t hit Japan as hard as it did America and Europe, helping the country avoid a second round of lockdowns last year. While westerners stayed hunkered down, Japanese folks were largely able to travel and enjoy some winter revelry.

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Good News! More Pundits Are Worried About Inflation

Lately, politicians aren’t the only ones fighting over whether the Biden administration’s proposed go-big $1.9 trillion COVID fiscal response plan is too big. Economists are increasingly weighing in and, this week, inflation fear seems to be dominating the zeitgeist—hinging on the notion the plan will “overstimulate” America’s economy, especially after the $900 billion bill that passed Congress in December. In our view, while it makes sense to monitor inflation now, the argument currently circulating seems a little hollow. Positively, though, the more it makes the rounds, the less of a threat inflation seems to be to stocks.

At its root, the overstimulation case rests on estimates of potential GDP. Potential GDP, for the uninitiated, is an estimate of where growth should be, were it not for shocks like the COVID lockdowns. Many also see it as a ceiling of sorts—the level at which GDP can grow without sparking hot inflation.

The overstimulation argument holds that growth is nowhere near $1.9 trillion below potential GDP. Most prominently, former Clinton administration Treasury Secretary and Obama advisor Lawrence Summers argued in a recent Washington Post op-ed that the gap is actually only about a third of that, or a bit over $600 billion—a figure likely to shrink as 2021 progresses, with or without Biden’s plan passing.[i] His view isn’t the only one. Many now say pumping $1.9 trillion into America’s economy would overshoot potential GDP and stoke hot inflation—particularly given the degree of money supply growth the Fed has engineered over the last year.

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Commodity Supercycles, Conjecture and Speculation

Stocks aren’t the only asset that surged after last winter’s lockdown panic. Metal prices (e.g., copper and iron ore) also boomed, helping Materials stocks—particularly Metals and Mining firms—outperform over the full year.[i] For a while it was one of the year’s more underappreciated success stories, but now it is gaining notice, with talk of a new, years-long commodities “supercycle” growing by the day. Now, we expect metals prices to be strong in 2021 as developed world economies rebound from the pandemic, benefiting growth-oriented Materials stocks. But we caution against looking much beyond that.

Many see last year’s run as a down payment on years of rising commodity prices and impressive gains as fiscal stimulus boosts infrastructure spending and countries accelerate a shift to renewable energy. Both endeavors are quite metal-intensive, leading pundits to believe years of booming prices for copper, lithium and more lie ahead. But in our view, not only are long-term forecasts a fool’s errand, but citing what the world might look like in 15 years as reason to buy is generally a sign of creeping euphoria. Instead of putting these arguments in your reasons to be bullish file, we suggest taking note of the burgeoning optimism and staying alert for more arguments like this. The more you see, the closer we probably are to a market peak.

It generally is true that metals prices tend to move in long, grinding cycles. This is largely because supply is very slow moving. A typical cycle goes something like this: Demand rises, lifting prices. Those higher prices incent companies to invest in new mines—an endeavor with high up-front costs. But constructing a new mine can take years, keeping prices elevated for a long while if demand stays strong—spurring more investment in new mines. Eventually, mine development overshoots, and as the new mines start producing, a supply glut ensues. That, too, can last quite a while as companies keep production up in order to get the revenues needed to service debt—a similar phenomenon to what we have seen among US shale oil producers in the last couple of years. Eventually production does ease, and the cycle begins anew.

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Don’t Bank on Financials Leading

When value stocks led briefly last fall as good vaccine news shot sentiment higher, many presumed it was the start of a longer-lasting leadership rotation that would benefit banks—value stalwarts. While that rally has since faded, some suspect it previews what is to come once reopening really kicks in. Presumably, that would jumpstart loan demand, supercharging bank earnings. We think that thesis overlooks a lot of contrary evidence, though, and jumping headlong into banks probably isn’t a winning move.

Exhibit 1: Despite Several Countertrends, Financials Have Underperformed for Years

Source: FactSet, as of 2/9/2021. MSCI World Financials and MSCI World, both with net dividends, 12/31/2017 – 2/8/2021. Financials index divided by World index rebased to 100 on 12/31/2017.

As Exhibit 1 shows, Financials have underperformed for years, tied to value’s lag. Many pundits suggest that makes it “due,” particularly since, on paper, we are in a young bull market that began last March. Because economically sensitive value stocks tend to lead early and Financials constitute value stocks’ biggest sector—with banks its chief industry—some think November’s rally is a prelude to their leadership.[i] If vaccine news can be so bullish, imagine what an actual widespread rollout could do!

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Catching the Coin Craze?

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

Coins coins coins! That is how we would sum up Monday’s big financial headlines. If people weren’t marveling at the massive spike in a meme-based cryptocurrency designed as a joke, they were obsessing over a certain automaker’s announcement that, in addition to purchasing $1.5 billion worth of bitcoins, it would begin accepting payment in bitcoin. The first was allegedly a sign crypto markets have officially entered bubble territory, while the second, supposedly, signals bitcoin’s increasing legitimacy as a currency. In our view, that is an exercise in trying to have it both ways, and we think it is worth investigating what all of this says about investor sentiment today.

As with most entertaining things in financial news these days, both stories have one thing in common: Tesla impresario Elon Musk. In addition to Tesla’s bitcoin adventures, he has spent the past few days tweeting humorously about Dogecoin—a cryptocurrency based on an old Internet meme about shiba inus (a Japanese dog breed). It has always been mostly a joke, the comic relief of the cryptocurrency world, launched to great amusement and fanfare during the first bitcoin boom in 2013. There are now well over 100 billion Dogecoins in circulation, each is worth a few pennies on the dollar, and total future supply has no cap. People in its thriving online community use it primarily to tip folks who post content they like. They have also held fundraisers in Dogecoin, which sent the Jamaican bobsled to the 2014 Olympics and sponsored a Nascar racer at Talladega.[i] Aside from a boom and bust alongside bitcoin in 2017 and 2018, it has mostly traded flat versus the dollar. Until late January, that is, when the Reddit WallStreetBets crowd adopted it as a fun meme trade. Musk’s tweets added fuel to the fire, the price doubled in mere days, and now a Dogecoin that was worth less than a penny a year ago will fetch you nearly eight cents.[ii]

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What Investors Can Glean From Q4’s GDP Slowdowns

One month into 2021 and several major economies have released Q4 2020 GDP readings, which followed huge Q3 jumps to results ranging from slowing growth to an actual return to contraction. Though these data are old hat for forward-looking stocks, the numbers confirm several trends. Perhaps the biggest such trend: The broad reaction to the data is largely rational—a sign of rising optimism, in our view, and worth noting for investors. 

After the US released Q4 GDP—which slowed to 4.0% annualized growth—the eurozone followed suit. Prior to the release, expectations were low, as targeted lockdowns returned across the Continent in November and December. Those projections were rational, as eurozone GDP contracted, but the numbers also largely beat expectations—signaling some economic resiliency. Germany and Spain even eked out Q4 growth.

Exhibit 1: Q4 Eurozone GDP

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More on Biden’s COVID Relief Plan and Gridlock

Editors’ Note: As always, our political commentary is non-partisan by design. We favor no party or politician and assess developments solely for their economic or market impact.

Four weeks ago, with victories in both Georgia Senate runoffs, the Democratic Party clinched nominal control of Washington, DC. Even though it was flimsy control, hinging on Vice President Kamala Harris’s Senate tiebreaking vote and the smallest House majority since 1900, most commentators seem convinced the party had enough clout to make passing bills smooth sailing. If necessary, they could just use budget reconciliation to bypass Republican filibusters, negating the need to scrounge up 60 Senate votes. Now it seems this thesis is getting its first test after President Joe Biden reportedly rejected GOP Senators’ $600 billion counteroffer to his proposed $1.9 trillion COVID relief package as “way too small” in a meeting with party leaders. Later Tuesday, Senators voted to start the budget reconciliation process. Yet there is also some dissent simmering within the Democratic Party, suggesting even reconciliation won’t succeed without horse trading and a watered-down bill. If a measure with broad philosophical agreement behind it can’t pass easily, the likelihood anything remotely controversial skates through seems quite low. This gridlock should be a powerful tailwind for stocks as investors’ fears of sweeping change prove false.

Passing COVID relief through reconciliation isn’t quite as simple as some coverage suggests. For one, unless a Republican Senator or two breaks ranks, it would require Democratic unanimity. That appears much easier said than done. On Monday, Bloomberg reported two of Biden’s own economic advisors think the proposed personal “stimulus” checks are too large at $1,400 and have too high of an income cap.[i] Even deeper divisions emerged later that day when Harris took to the airwaves in West Virginia to sell Biden’s proposal directly to voters. That raised the ire of West Virginia Senator Joe Manchin—a centrist Democrat who holds a critical vote on any partisan legislation. In a follow-up interview, Manchin said Harris’s appearance wasn’t cleared with his office and noted Democrats aren’t even fully on board with Biden’s plan—and seemed generally miffed overall.[ii] While Manchin supported moving to reconciliation in Tuesday’s vote, we aren’t certain that seals the deal.

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Redditors, Shorts and Crazy Single-Stock Swings

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

“Hey are you guys gonna write about GameStop?” That, as you can imagine, is the question we have received about 84 million times this week, give or take. So, to quote that old Toyota commercial, you asked for it, you got it. But first, please let us reiterate that we really don’t make individual security recommendations. We make jokes, occasionally buried in the footnotes. We analyze broad trends. We review financial media and occasionally offer hot takes. But we don’t make individual security recommendations.

What follows is our broad exploration of this week’s chief media story—the battle between a select group of individual investors and hedge funds. Many seem to think this is huge news for markets broadly that investors everywhere must weigh. We see it differently. This story is mostly overdramatized infotainment—not anything the majority of long-term investors need to worry about. Let us take you on a tour of this to show you why.

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2020’s Historic GDP Downturn—and Recovery—in Perspective

Many headlines noted 2020’s US economic downturn was, in some ways, the worst since WWII. GDP’s upturn since, as many also note, hasn’t fully recouped the decline. Yet it has gone a long way toward doing so, with Q3’s rebound accounting for most of the recovery thus far. Thursday’s Q4 report showed it continued but slowed, which highlights two key points: One, most of the recovery seems over. Two, a look under the hood suggests more pedestrian growth likely lies ahead.

GDP staged a big recovery in 2020’s back half, but as economic activity returns to normal, growth likely slows. After Q2’s historic GDP plunge, Q3’s 33.4% annualized rebound erased much of the lockdown-driven decline.[i] Q4 GDP followed with a 4.0% annualized gain. That slowdown was partly because of new restrictions, but also because the vast majority of the reopening rebound is behind us. With full-year numbers in, headlines focused on 2020’s -3.5% annual contraction as the deepest since 1946’s post-war demobilization. But just as noteworthy, in our view, is where Q4 finished relative to Q4 2019, GDP’s peak. It was just -2.5% below the prior high, well above the -10.1% hole at Q2’s trough. After a devastating pandemic and unprecedented economic downturn to start the year, GDP recouped a significant amount of the drop.

You can see this in consumer spending—or, formally, personal consumption expenditures (PCE). Exhibit 1 shows PCE (green line) and its two main components, services (yellow) and goods (blue). Overall, PCE is down just -2.6% from pre-pandemic highs.[ii] But this glosses over interesting detail. Spending on goods not only held up better in Q2 as everyone stockpiled beans and toilet paper, but it boomed in Q3 as shops reopened, passing its peak. However, goods consumption flat-lined in Q4. Households have already unleashed pent-up demand for things they could buy.

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