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.


Own Up to the Ownership Effect

Editors’ Note: This article mentions several individual securities in the course of discussing a broader subject. Please note that MarketMinder doesn’t make individual security recommendations. Any reference to them is solely incidental to the article’s discussion.

In my interactions with investors, I often find some who own a lot of a single stock—many even admit the holding is much more concentrated than they know is wise. Every now and then they think about selling it. Maybe some of it. Maybe all of it. But the decision very often runs aground when the investors consider when to diversify. Enter the endowment effect, or “ownership effect”—investors’ reluctance to part with a stock they already own. They find reasons to wait or defer for another day. But this is dangerous, and if you are doing this, owning up to how the ownership effect is skewing your thinking can help you refocus—and get better diversified.

In my experience, investors with concentrated positions tend to think in one of two ways, usually depending on how their large holding has done lately:

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Checking In on PMIs, US Durable Goods and UK Retail Sales

As we approach Q1’s close, discussions about the global economy’s health abound. Besides ongoing concerns about rising prices, supply bottlenecks and COVID outbreaks, Russia’s invasion of Ukraine added a new wildcard. While dour projections are myriad, it is important to focus on actual data—and we got a bunch last week. Here we break down both the numbers and the broad reaction to them.

March PMIs Flash Some Positive Signs

First up: S&P Global’s March flash purchasing managers’ indexes (PMIs)—the artists formerly known as IHS Markit PMIs.[i] Despite a few soft patches, they broadly showed continued growth across the developed world.

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Our Perspective on the Nascent Rebound

After another positive week, US and global stocks have pared about half of their peak-to-trough declines during this correction, give or take. Or, what we think is a correction—a sharp, sentiment-fueled drop of -10% to -20%. Some have a different opinion and warn the past few days could be a mere sucker’s rally—a temporary positive burst that fools people into buying during a bear market, which is typically a much longer, deeper decline of -20% or worse with a fundamental cause. In all fairness, this is possible. Yet investing isn’t about possibilities—in our view, it is about probabilities. To avoid getting faked out, we think it is helpful to bear in mind some of bear markets’ typical traits.

Corrections are usually short and steep from start to finish. They tend to start and end without warning, and they fall on feelings—sometimes tied to a big story, sometimes for no apparent reason. Sentiment usually deteriorates throughout, generating a barrage of this time is different arguments that the decline will get worse. But then they end, usually as suddenly as they began, and a steep recovery typically follows. In our view, the best thing for someone seeking long-term growth to do during corrections is grit their teeth and hang on, lest they sell after a decline and miss the rebound—and miss returns that could compound over time.

Bear markets, by contrast, tend to last several months or more, usually rolling over gradually, with the worst declines coming late. In 2020, this wasn’t the case, as the bear market lasted just five weeks for the S&P 500 and six for the MSCI World Index—as we have written, it was more like a correction than a bear market, despite the fact it technically was a bear market (the magnitude exceeded -20% and, in the lockdowns, it had a fundamental cause). But that instance aside, bear markets are usually long grinds, and we think their slow start is what makes it possible to carve out a chunk of them.

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Keep Cool and Don’t Chase Energy’s Heat

While global and US markets have endured a correction this year, one sector hasn’t participated: Energy. Global Energy stocks are up just over 30% year to date, and US Energy is up even more.[i] As you might expect, this is generating a host of chatter about a long-lasting leadership rotation, along with a hefty dose of fear of missing out—FOMO—among investors whose portfolios followed the broader market’s swings. Dear readers, let us issue a friendly reminder: You can’t buy past returns. Moreover, what just led isn’t guaranteed to keep leading. So if Energy’s run is tempting you to chuck a diversified portfolio for a concentrated position, take a deep breath, stay cool, and remember discipline is key to successful investing.

Whenever past performance makes you want to trade, we think it helps to pause and go back to basics. Remember one of the first principles of investing: Past performance doesn’t predict future returns. What happened one month doesn’t determine what happens the next. Just because something ran up bigtime doesn’t mean it will stay atop the leaderboard. Leadership shifts often. Sometimes those shifts are lasting, resulting in cumulative outperformance over a few years. Sometimes they are quick deviations—countertrends that burn out fast. If you chase them, you run the risk of missing returns if the hot sector turns cold.

For a recent example, consider Energy stocks last year. Then, as now, they were the hottest sector early on. When Q1 2021 ended, global Energy stocks were up 21.8% on the year, and US Energy stocks were at 30.9%.[ii] The MSCI World and S&P 500, by contrast, were up just 4.9% and 6.2%, respectively.[iii] According to headlines at the time, Tech stocks—and growth stocks in general—were out, and Energy and value were in. But the party didn’t last. Energy stocks were basically flat over the next several months and underperformed for much of the rest of that year.

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A Closer Look at Rate Hike Cycles and Stocks

After the Fed’s first step up from zero last week, its dot plot of Federal Open Market Committee (FOMC) members’ fed-funds target rate projections implied more rate hikes at every meeting this year. If so, this would mean six more quarter-point increases, potentially putting the benchmark rate’s range at 1.75 – 2% by yearend. Fed-funds futures also reflect this, suggesting it is widely expected—and likely baked in to prices, to a large degree. There is a lot of chatter about what the Fed’s running the table would do to the stock market, but stocks are often resilient as rate hike cycles get going.

Historically, stocks have done better than you might think through rate hike cycles. As Exhibit 1 shows, cumulative S&P 500 returns were positive in 8 of the last 9, with an average annualized total return of 11.8% and a median of 7.5%. Past performance isn’t predictive, of course. But as a guide, history suggests stocks can hold up for sizable chunks of Fed “tightening” stretches.

Exhibit 1: Stocks Mostly Rise During Rate Hike Cycles

Source: Federal Reserve Bank of St. Louis, Global Financial Data, Inc., and FactSet, as of 3/21/2022. Federal-funds rate target, July 1971 – December 2008, federal-funds rate target upper limit, December 2008 – February 2022, and S&P 500 total returns, July 1971 – December 2018. Note: The Fed hiked in December 1986, but the cycle was brief. The S&P 500’s forward 12-month total return was 5.2%. *Percentage Point.

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The Spring Statement’s Overlooked Message About UK Politics Today

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

Hours after the release of February’s inflation report Wednesday—which showed CPI accelerating to 6.2% y/y—UK Chancellor of the Exchequer Rishi Sunak engaged in the semiannual rite of presenting a budget statement to Parliament.[i] While the formal Budget comes out in the autumn, governments have increasingly used the so-called “Spring Statement” as a chance to tweak provisions that attracted criticism months earlier. So when Sunak stepped up to the dispatch box, many expected timely tax cuts and other measures to help people through a tough stretch of rising living costs. Yet the new measures were mostly muted, generating criticism from pundits and fellow politicians in both parties. In our view, the significance for markets is more political than economic—counterintuitively, the disappointing statement may be a sign political uncertainty is falling, which should contribute to global political tailwinds as the year rolls on.

For months, pundits have warned the UK is facing a “Cost of Living Crisis.” Not just from consumer price inflation, but also from the forthcoming increase to household energy prices in April, as well as tax hikes that will take effect then. The Office for Budget Responsibility estimates these factors will drop real disposable household income by -2.2% this year, which would be the biggest hit to living standards since the 1950s.[ii] After a fuel relief package introduced in February largely landed with a thud, pressure for Sunak to do more to ease households’ pain was high.

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The Dollar’s Reserve Currency Status Means a Lot Less Than Many Think

When Western leaders effectively cut off Russia’s access to its foreign exchange reserves as part of the economic response to Vladimir Putin’s invasion of Ukraine, it was only a matter of time until people started speculating that this could trigger the dollar’s demise as the world’s preferred reserve currency. After all, if holding dollars overseas turned out not to be a financial fortress for Putin, it might logically inspire China and other nations to move away from the greenback. We don’t think this outcome is terribly likely, although only time will tell. Regardless, this seems like a good time to issue a friendly reminder: The US gets very, very little from the dollar being the world’s preferred reserve currency, and losing that status won’t be the end of the dollar as we know it.

Conventional wisdom says the dollar’s in-demand status gives the Treasury an “exorbitant privilege” that, among other things, keeps US Treasury yields low. Allegedly, reserve currency status is the only thing standing between Uncle Sam and a debt crisis. If foreign governments were to diversify away from the dollar, the logic goes, demand for Treasurys would plunge and borrowing costs would soar.

If this were actually true, then one would logically expect US Treasury yields to be much lower than sovereign yields in nations that don’t play a large role in forex reserves. So put it to the test. The IMF publishes quarterly data on global foreign exchange reserve composition, telling us the amounts of dollars, euros, British pounds, Japanese yen, Swiss francs, Canadian and Australian dollars, and Chinese renminbi in governments’ official reserves. (Amusingly, they convert all of these figures to US dollars.) So, we grabbed the last few quarters’ worth of data, then pulled all of these countries’ total outstanding government debt levels in local currency, converted those figures to dollars at today’s exchange rates, and calculated the percentage of outstanding bonds that are held as forex reserves. We couldn’t do this for euroland, unfortunately, since the IMF doesn’t report the issuer of these securities (i.e., there is no way to know which portion of euro-denominated reserves are German bunds versus French OATs or what have you). We also omitted China, as its bond markets have major accessibility issues. But for everything else, see Exhibit 1.

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Dividends Are Nice, but They Aren’t Safety Blankets

Editors’ Note: MarketMinder doesn’t make individual security recommendations. Those mentioned below merely represent a broader theme we wish to highlight.

Global stocks enjoyed a nice rally last week, but it hasn’t much calmed investors’ nerves. Headlines continue warning of worse to come, and there is a cottage industry in articles featuring investment tactics for uncertain times. One supposed tactic getting a lot of ink: dividends. This isn’t unusual. In our experience, interest in high dividends tends to spike whenever markets get rocky—largely because the dividend payments offer perceived stability. In our view, this is a short-sighted and flawed viewpoint. We like dividend stocks just fine, but they aren’t safe havens.

Much of dividends’ allure during volatility stems from a fundamental misperception about what dividends are. You can hear it in sentiments like, stocks may be down, but at least these dividends get me a nice yield. Problem is, this statement presumes dividends are a return on your investment, which isn’t true. Dividends are a return of capital. Unless you reinvest them, they don’t add to returns.

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‘Narrative Confusion’ Is New Only If You Shun History

In recent days, we have seen a rather novel twist on the this time is different mentality that often surges during stock market corrections (sharp, sentiment-fueled drops of -10% to -20%): the claim that investors have to deal with a multitude of competing market-related narratives, and that this is somehow new. One Wall Street Journal piece positing this called it “narrative uncertainty.”[i] Supposedly until now, stocks have had only one big story at a time—making the conflux of Ukraine, oil prices, inflation, rate hikes and China’s latest regional lockdown a perplexing conundrum.[ii] Competing, colliding narratives, the story goes, mean heightened volatility and struggling stocks. And, well, we agree shifting headlines are probably contributing to stocks’ yo-yoing this week—that is par for the course during corrections, when emotions run hot. But take a trip with us down memory lane, and you will see this time isn’t different—there are rarely periods in which investors have only one narrative to grapple with.

For instance, consider 2013. The eurozone was still in recession when that year began, with headlines shrieking over possible defaults of sovereign nations like Italy leading to the euro currency’s splintering. That was also the year the US and UK briefly flirted with intervening in Syria’s civil war and the Fed signaled its plans to taper quantitative easing bond purchases (QE). Cyprus endured its banking crisis and bailout, terrorists bombed the Boston Marathon, and the US had a government shutdown and a pretty hyperbolic debt ceiling standoff. That is a heck of a lot of narrative uncertainty! Yet global stocks topped 25% that year, and the S&P 500 topped 30%.[iii]

Or, how about 2012? That was the year Greece defaulted twice, terrorists struck America’s Libyan embassy, MERS erupted and the Fed felt compelled to roll out a third round of quantitative easing—such was sentiment about the allegedly weak US economy still needing life support. There was also a contentious US presidential election, which came amid frequent handwringing over the expiration of Bush tax cuts and automated “sequester” spending cuts—a frightful combination none other than then-Fed head Ben Bernanke dubbed a “fiscal cliff.” The UK was flirting with a double-dip recession, the eurozone was still contracting, and Japan was struggling to find economic momentum. Pundits now portray this as a year when Fed bond purchases made stocks an easy, one-way decision, but we have receipts! We tracked developments on these very pages throughout! Sentiment was the polar opposite at the time, and stocks endured a correction that spring. Yet even with that volatility and a drumbeat of bad news on the economic and geopolitical fronts, global stocks delivered 15.8% and the S&P 500 rose 16.0%.[iv]

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The ECB’s Latest Words Are Nothing to Fear

For months, European Central Bank (ECB) President Christine Lagarde and other officials rebuffed speculation the bank would tighten monetary policy in response to elevated inflation rates. They pushed back on the possibility of interest rate hikes in 2022—though that stance seemed to shift somewhat last month. Then last Thursday, the ECB announced plans to accelerate the wind-down of its asset purchase program (quantitative easing, or QE), surprising many. The news spurred speculation about what the ECB sees going forward—and whether the bank will hike rates much sooner than most analysts anticipated. In our view, this is yet another reminder central bankers’ plans aren’t set in stone, so investors should refrain from treating their words and forecasts as roadmaps for future action.

The ECB’s QE efforts have topped headlines in recent years. The bank’s first program lasted from March 2015 – December 2018. Despite claims of QE’s purported stimulus power, eurozone GDP was already rebounding nicely from the 2011 – 2013 recession before the program’s implementation—and the slowing (i.e., tapering) and ending of bond purchases didn’t derail expansion. However, many (wrongly, in our view) see QE as critical economic support, so when eurozone GDP growth slowed in mid-2019, the ECB’s Governing Council voted in September to resume bond purchases at a clip of €20 billion a month beginning in November—to last as long as the bank deemed necessary. Several months later, in March 2020, the ECB launched the pandemic emergency purchase programme (PEPP) in response to COVID and its economic fallout, mirroring other central banks globally. This “emergency” QE combined with regular QE amounted to monthly bond purchases of around €120 billion.

As the eurozone economy recovered, Lagarde and Co. set the stage for slowing bond purchases—while vehemently denying it was a taper. At a September 2021 press conference, Lagarde declared, “The lady isn’t tapering,” after the ECB decided it would conduct emergency QE purchases at a “moderately lower pace” for the last three months of the year.[i] At its December 2021 meeting, the ECB said emergency QE would end in March 2022 and recalibrated the monthly pace of regular QE: €40 billion in Q2 2022, €30 billion the following quarter and €20 billion starting in October, which would continue “for as long as necessary.”

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