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.


No Shortage of Souring Sentiment

Hear the one about supply chain bottlenecks knocking global growth, threatening the economic recovery from lockdowns? The IMF did—and ratcheted down its projection for developed-world growth this year from 5.6% to 5.2%. So did the people surveyed by Germany’s ZEW Institute, whose measure of German investor confidence slipped to its lowest level since COVID panic set in last year. And the US small business owners surveyed by the National Federation of Independent Business, whose sentiment measure fell again in September. And US CEOs surveyed by The Conference Board—their confidence level slipped almost -20% in Q3 on, you guessed it, supply issues. This all comes on the heels of The Conference Board’s broad US consumer confidence measure sinking to a seven-month low in August. Many pundits are treating these increasingly dour sentiment readings as portending to weak economic activity ahead in a self-fulfilling economic prophecy. We think that is a stretch. To us, these surveys and projections show the state of sentiment—and what markets have priced in—likely extending this bull market’s wall of worry in the process.

We do think it is fair to say everyone citing supply shortages as an economic headwind is on to something. While strong demand and overflowing order books are great, at the end of the day, output and spending are what show up in economic statistics. If businesses can’t get the supplies they need, they can’t make their widgets, and output drops. If they can’t get finished widgets to customers in a timely fashion, then sales likely drop. Both can weigh on industrial production, retail sales, GDP and other hard data.

Thing is, stocks don’t have a one-to-one relationship with any economic statistic. They don’t need growth to be fast or even particularly good. Just ok and not so bad are quite fine outcomes if expectations are low enough. This is because stocks move not on absolute reality, but the gap between reality and expectations. The lower expectations become, the easier it is for reality to beat them, even if reality is not so wonderful.

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This Week in Debt and Taxes

Editors’ note: MarketMinder is nonpartisan, preferring no party nor any politician. Our analysis serves solely to ascertain government actions’ potential market impact—or lack thereof.

On Thursday, two widely watched political measures took steps forward: In the US, Congress advanced a measure to raise the debt limit, while Ireland signed on to the US-backed global minimum corporate tax deal. Here we will bring you up to speed on these matters—and put them in broader perspective.

Congress’s itty-bitty debt-ceiling can kick: Wednesday, Republican Senate Minority Leader Mitch McConnell cleared the way for Democrats to pass a standalone debt limit extension. As his statement noted, he would “allow Democrats to use normal procedures to pass an emergency debt limit extension at a fixed dollar amount to cover current spending levels into December.”[i] In other words, he wouldn’t filibuster a bill to raise the debt ceiling a smidge, so Democrats could pass it with a simple majority. 11 GOP Senators joined him, enough to allow a vote to advance—although not without intraparty rancor. Democratic Senate Majority Leader Chuck Schumer took him up on the offer the next day.

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Who Keeps Snapping Up US Debt?

Among the many talking points surrounding the ongoing debt ceiling debate is a simple question: If the US keeps adding debt, won’t we run out of buyers? Where is all the demand going to come from? While no one can know what the future holds precisely, recent history can be instructive—and perhaps put one of investors’ debt fears to bed for the time being.

The recent history we refer to is the approximately $5.1 trillion added to net public debt since the end of 2019—all the bonds issued to fund COVID relief and other spending.[i] This is the largest, fastest increase outside of wartime, and during the middle of a global economic crisis to boot. Yet that didn’t deter Treasury demand. Buyers abounded, and that robust demand is a big reason why 10-year US Treasury yields are lower today than they were at 2019’s end.

Exhibit 1 details this demand, showing the increase in major owners’ holdings of US debt between December 2019 and July 2021—the latest month for which the Treasury has published information on international owners. As it shows, demand was broad-based.

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Why Rising Interest Rates Needn’t Stall Big Tech

Are Treasury markets hinting at trouble ahead for the Tech and Tech-like giants that have led this bull market higher? Some pundits say so, based on the observation that rising interest rates have coincided with short-term pullbacks in Tech stocks at various points this year, including the present. With the Fed signaling that quantitative easing (QE) will wind down soon, many think a continued rise in long rates means tough times for Tech and Tech-like firms from here. But history shows rising rates aren’t automatically negative for Tech stocks. While we don’t expect rising rates to persist, we still think that is worth keeping in mind.

According to those worried rising interest rates will weigh on Tech and Tech-like firms’ returns, when yields are low, investors are more willing to buy growth-oriented companies on the expectation of big future profits. But rising yields suggest investors feel more optimistic about the economy, so they supposedly prefer companies poised to benefit most from stronger economic activity in the present—ordinarily, value stocks. To back this claim, we have seen analysts cite a mix of recent data as interest rates have ticked higher. For example The Wall Street Journal reported on a $1.2 billion outflow from Tech mutual and exchange-traded funds in the week ending September 22—the first net withdrawal in three months.[i] Others noted that Tech stocks fell when interest rates rose this year, using a Tech-heavy ETF as a proxy for the sector.[ii]

But looking beyond what just happened shows reality isn’t so simple. Recent history proves Tech can do just fine alongside rising rates. From July 25, 2012 to 2013’s end, the 10-year Treasury yield rose from 1.43% to 3.04%.[iii] Tech rose 36.9% over that stretch—a bit behind global markets’ 42.3%, but still up nicely.[iv] Or consider when the Treasury yield climbed from 1.37% to 3.24% between July 8, 2016 and November 8, 2018.[v] Tech’s 69.7% return over that timeframe more than doubled global stocks’ 30.8%.[vi]

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Inside the Global Energy Price Spike

In the energy crunch heard ’round the world, households and businesses reliant on oil and gas are scrambling, driving headline fear from the UK to China as oil hits a seven-year high. Pundits warn the shortages and price spikes will hurt households, raise businesses’ costs and compound global supply-chain dysfunction as factories slash output. We don’t doubt many will feel a pinch, yet we also think a little perspective is in order. While it may take time to iron out production wrinkles and shortages, in the 3 to 30 month timeframe we believe forward-looking markets evaluate, the winter fuel “chaos” pundits hype isn’t likely to tank global growth—or stocks.

What is behind the global energy crunch? Regional factors. As we wrote last Tuesday, China implicitly banned Australian coal imports over a geopolitical spat, while it has also been trying to cut its coal dependence generally. Last year, China became the world’s largest liquid natural gas (LNG) importer, and its appetite has only grown since. But switching to gas-fired electrical generation hasn’t been smooth. China’s government caps electricity prices, so utilities can’t pass their rising costs to consumers. Spiking wholesale power prices force them to operate at a loss, so many cut output, sparking blackouts.

In the UK and much of Europe, weak wind power generation has also driven up demand for gas, which smaller utilities struggled to manage, leading to outages. Adding to the crunch: low reserves, as Russian gas export curbs have depleted inventories to decade-low levels. Dutch near-term gas futures, the European benchmark, quintupled to a record-high €100 per megawatt hour last Thursday from €20 in April.[i] This is having knock-on effects globally. In the US, natural gas prices more than doubled from $2.43 per million British thermal units in April to $5.94.[ii] Except for intermittent spikes associated with brief supply disruptions, like this February’s winter cold snap that literally froze natural gas production amid surging demand, prices are at their highest in more than a decade.

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The Behavioral Quirk Recent Choppiness Reveals

The pullback that began in September isn’t over yet, as Monday’s -1.3% drop added to the S&P 500’s rough patch.[i] As with all short-term volatility, we think it is impossible to know when it will end. But we have already seen an age-old truth play out: When pundits call for the stock market to do X and it does Y, they pout. Yet when it complies, they don’t cheer, either. Understanding this behavioral quirk can help make headlines easier to navigate.

This is a regular occurrence in bull markets. If stocks rise as forecast, headlines will call them overvalued. If pundits say the market is overvalued and needs a pullback to let some froth out, they will inevitably treat an actual decline as a sign the bottom is about to fall out. This isn’t universal—there are always exceptions—but it happens often enough.

The latter is what we are seeing now. Over the summer, we saw oodles of articles observing that the S&P 500 hadn’t had a -5% pullback since last autumn and warning the market was too calm—ignoring the Delta variant, inflation, supply shortages and all the other ghost stories hogging headlines daily.[ii] The implication was that some volatility would be healthy, bringing prices more in line with reality.

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China’s PMI Dip: Another Brick in the Wall of Worry

Thursday brought the first look at how China’s electricity shortage is affecting the economy, and the results weren’t exactly pretty: The government’s official manufacturing purchasing managers’ index (PMI) sank to 49.6 in September, implying contraction. Caixin’s PMI, which includes a host of smaller private firms, technically broke even at 50.0, but its production subcomponent remained in contractionary territory, according to the press release from Caixin and IHS Markit. These survey results were all pundits needed to conclude that China’s energy crisis is adding to economic pressures, jeopardizing the global recovery from lockdowns. In our view, that is just a tad hasty, and the likelihood that global markets will have to reckon with a hard landing in the world’s second-biggest economy remains low.

Interpreting PMIs correctly requires a clear understanding of both their quirks and their history. They do not measure—or even attempt to measure—how much activity increases from month to month. That responsibility lies with output measures like industrial production. PMIs, by contrast, are surveys. Businesses report on whether output, new orders, employment, supplier delivery times and sentiment rose or fell versus the prior month. Then the agency producing the PMI compiles all the results and computes them into an index. The index’s reading, roughly, is the percentage of businesses reporting increased economic activity overall. If it exceeds 50, a majority of firms reported expansion, which implies the sector grew. If it is below 50, it implies contraction. So September’s 49.6 manufacturing PMI means a slight minority of firms reported expansion.

But because the PMI doesn’t measure how much businesses grew, the relationship between PMIs and output is fuzzy at best. If only 49.6% of businesses reported growth, but they grew by more than the others contracted, then output can still rise in a given month. So while we think PMIs are handy, as they are generally the first economic indicator released for a given month, we think it is best to take them with a grain of salt. Don’t get too excited by incremental moves down or up, especially when they are very close to 50, like China’s latest figures.

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Sunset on Reform Hopes in Japan?

Editors’ Note: MarketMinder is politically agnostic. We favor no politician nor any party and assess political developments for their potential economic and market impact only.

Japan officially has a new prime minister (PM) in waiting, and it is … not the person observers expected. Heading into today’s Liberal Democratic Party (LDP) leadership vote, reform minister Taro Kono was the apparent favorite, but former LDP Research Council chair Fumio Kishida pulled off an upset with unexpectedly strong support from LDP lawmakers. Presuming he wins a confidence vote in Japan’s parliament (known as the Diet) on October 4—a foregone conclusion, considering the governing coalition’s supermajority—he will become the next PM and form the country’s 100th government. Japanese stocks fell sharply on Wednesday, dipping -1.9% on the day, perhaps partly due to this news.[i] We wouldn’t be surprised to see a bit of Japanese lag persist, either. To us, investors seemed to get too far out over their skis on economic reform hopes when Kono looked like the heir apparent. But now it is Kishida and reality is setting in.

When former PM Yoshihide Suga announced on September 3 that he wouldn’t seek re-election as LDP chief in today’s election, Kono swiftly emerged as the likely successor. While stocks in the rest of the world hit a speedbump, Japanese markets rallied on the prospects of change. In his short tenure as PM, investors mostly saw Suga as a classic safe pair of hands—a name well known in Japan and a PM who would focus on shepherding the country through COVID rather than rock the boat with contentious reforms. In most developed countries, that sort of gridlock and status quo is generally bullish, as “reforms” create winners and losers. But Japan remains plagued by a number of structural issues that stifle competition and domestic demand, including a byzantine labor code and complex web of cross-shareholdings among the major conglomerates. Throughout Japan’s post-War history, this system has kept bloated, hopeless companies afloat and stifled competition from new challengers. It is a big reason for the country’s infamous lost decades in the 1990s and 2000s.

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Energy Prices, Interest Rates and Volatility: Our Thoughts on a Rocky Tuesday

It’s baaaaaaaaaack. The volatility monster, that is. After months of calm, the S&P 500 has delivered more big daily moves of late, including more big negative ones. Last Monday brought a -1.7% drop as the world freaked over a Chinese property developer’s potential default.[i] Today, it was a -2.0% fall as a mooted oil supply crunch and an uptick in 10-year US Treasury yields spooked many.[ii] When markets were calmer, we reminded you that volatility would return and, when it did, we think the best thing to do is stay cool-headed, assess the situation carefully and think beyond the next week or month. That holds today, in our view.

With markets rocky again, we think this is a good time to reiterate some advice we gave at September’s outset: “While they are regular occurrences, substantial pullbacks draw reams of attention—and pundits’ explanations about why more trouble must lie in store. But letting this influence your portfolio decisions generally isn’t beneficial.” We are seeing this phenomenon everywhere now, making it critical to put your emotions to the side and assess their arguments carefully. If they are right and a lasting downturn lies ahead, there will likely be plenty of time to move strategically to avoid the worst of it. If they are wrong, then you will have saved yourself the financial setback (and heartache) of selling after a sharp drop, then missing the recovery.

So with that said, let us take on today’s central fears. The first: oil. Or more specifically, energy, as oil and natural gas prices are spiking in tandem. The central fear is not that high oil prices will hamper consumption, but that they represent severe shortages that will crunch global energy supply this winter—particularly if more countries start relying on oil-fired power plants to compensate for shortages at natural gas-fired plants and wind farms. Supposedly, we are already seeing the first signs of this with mile-long lines at gas stations in the UK and electricity rationing in China. Yet in our view, a closer look shows neither of these situations is representative or terribly forward-looking for global energy markets. In the UK, the shortage stems from panic-buying, akin to 2020’s great toilet paper freakout. But the root issue isn’t a shortage of gas itself, but a shortage of truck drivers to transport said gas to filling stations. When BP warned of temporary closures at some gas stations due to the lack of drivers, it triggered a classic run, making a nationwide shortage a self-fulfilling prophecy. While we won’t hazard a guess at when this acute problem will end, UK hauling companies—like their global counterparts—are already raising pay packages in an effort to entice new drivers, and there is some anecdotal evidence that this is starting to work. In time, like the world’s many other logistical bottlenecks, this should ease.

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Germany Gets Gridlock Again

Editors’ Note: MarketMinder is politically agnostic. We prefer no politician nor any party and assess political developments for their potential economic and market impact only.

The results are in, and German voters have elected—wait for it—gridlock. No party took a majority in Sunday’s federal election, and it is far from clear which party will head the next government and who will replace Angela Merkel as chancellor—as we (and most observers) expected. Coalition negotiations could very well take months. Yet for markets, this all amounts to political stability and the extension of the status quo, which has long been a fine backdrop for German stocks.

Heading into the vote, the center-left Social Democratic Party (SPD) was polling just ahead of Merkel’s center-right Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU). Those polls proved more or less right, with the SPD winning 25.7% of the vote and the CDU and CSU combining for 24.1%. The SPD took a small plurality of the Bundestag’s 735 seats.

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