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.
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
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.
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.
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.
Editors’ note: MarketMinder doesn’t make individual security recommendations. Those mentioned herein simply represent a broader theme we wish to highlight.
Investor optimism is widespread today—rationally so, in our view. But rising optimism often spurs greed, which can invite big mistakes. Opportunities to act on that emotion abound today, especially as headlines trumpet the excitement—and hot returns—surrounding SPACs (special-purpose acquisition companies) and thematic exchange-traded funds (ETFs). (And, um, meme stocks chased by users of a certain freewheeling Internet forum, but this article isn’t about that.) We caution investors against getting carried away with these stories. (And, we guess, against chasing heat generated by users of a certain freewheeling Internet forum, but again, this article isn’t about that.) If you are investing to fund retirement (or some similar long-term goal), buying today’s narrow highflyers isn’t necessary to achieve your investment goals.
As we wrote in detail last November, SPACs are known popularly as “blank-check” companies. They raise money through an initial public offering (IPO) with the goal of finding a private firm and taking it public through a reverse merger. So if you buy fictional SPAC ABC and it buys fictional startup HydroGenZCarStop, you become the proud owner of stock in HydroGenZCarStop—now a public company after circumventing the traditional IPO route and associated paperwork. Thematic ETFs are narrow funds that invest in companies ostensibly related to a certain idea or trend—e.g., going “green,” technological innovation, veganism, etc.
Editors’ Note: Our political commentary and analysis aims to be nonpartisan. We favor no party nor any politician and assess developments solely for their potential market and economic impacts.
In what now seems to be standard procedure for new Oval Office occupants, President Joe Biden has gotten off to a quick start with a flurry of Executive Orders. As usual with these, most are in the realm of sociology, which is generally outside markets’ purview. But those relating to the Energy sector have received a lot of investor attention, with most presuming they are a large negative. That includes the cancellation of the Keystone XL pipeline and, in orders issued last week and Wednesday, new rules making it harder to drill on federal lands. In our view, however, these developments don’t alter Energy sector fundamentals.
First, a little perspective is in order, starting with Keystone XL. To call this an American political football is an insult to, uh, political footballs.[i] The two parties have fought over its construction for a decade, with Biden’s order overturning former President Donald Trump’s order permitting it, which, in turn, overruled former President Barack Obama’s orders on the subject. All this hullaballoo overrates the macroeconomic effect of a single pipeline. Yes, it would have created jobs to construct a pipeline to move Canadian oil from Alberta to refineries in the Gulf Coast. But assuming this means canceling it is a huge hit is out of step with the scope. Ditto for the environmental impact. The choice isn’t between oil and other forms of energy here. It is, more realistically, between oil shipped by pipeline or train. Sufficient demand at the right price will likely get the oil moving regardless.
If you have even merely peeked at financial news over the past seven weeks or so, you have likely noticed how much more cheerful press coverage has become. Where once pundits were pessimistic, seeing reason after reason stocks had come too far, too fast, they are now pretty optimistic. Not euphoric, as expectations for the economy seem overall reasonable currently, but we are starting to see small pockets where things are looking juuuuust a bit frothy, which makes sentiment’s evolution a key factor to watch this year. One example: sentiment toward stock buybacks.
In years past, most coverage of buybacks has been skeptical. If pundits weren’t parroting politicians’ complaints that buybacks were a poor use of capital that robbed Worker Petra to pay Shareholder Paulette, they were arguing buybacks were falsely inflating earnings per share and making investors think companies were more valuable than they really were. Or they groused that buybacks were the only source of investor demand and that once CFOs turned off the buyback machine, stocks would stop rallying. Those were all false fears, in our view, but they helped extend the proverbial wall of worry.
Now, with buybacks recovering from last year’s COVID-related drought, the tenor has changed. One outlet called them a positive sign of corporations’ confidence in their own long-term prospects—an overall bullish signal—and a sign investors shouldn’t read too much into corporate insiders’ simultaneously lower pace of buying.[i] (Not that we agree with that thrust, as insiders’ transactions generally don’t indicate anything, but the tone is noteworthy.) Another cheered the buyback rebound not only as a sign of healthy corporate balance sheets, but as an additional source of demand for already-booming markets.[ii] Not the only source, not the one thing keeping markets afloat, but an added plus. That is … new.
On paper, we are 10 months into a new bull market—a time when value stocks traditionally outperform. But, a few short bursts aside, that hasn’t been the case this time around. Since the low on March 23, 2020, growth stocks—those that plow profits back into the business and strive for long-term expansion—have beaten value, which tends to rely on the economic cycle to boost earnings and returns more profits to shareholders. This is a well-known discrepancy, and many pundits have identified a potential reason: Value-heavy sectors were most affected by lockdowns, while the Tech and Tech-like companies that were most resilient (and benefited from the big switch to working from home and shopping online) are growth-heavy. Once the world is vaccinated and businesses reopen, the popular narrative holds that it will be value’s time to shine.
We see a glaring problem here. Yes, value usually does best early in a bull market. But that is generally because after it gets pounded during a long, brutal bear market, no one wants to own it—that is where the, well, value comes from. It is also the great irony surrounding value investing: Value’s nice long-term returns (prior to the last decade or so) cluster in big bursts that happen when value is also least loved.
Today value is hardly unloved. With precious few exceptions, it is getting heaps of attention and affection today. You can see it in press coverage salivating over the prospect of outsized returns in Financials, Energy and other value-heavy sectors as normalcy returns later this year. You can also see it in Wall Street forecasts, which heavily favor value stocks and non-US markets (which are generally more value-heavy). Following are several snippets we rounded up—not to cast aspersions or quibble, but to illustrate just how common expectations of value leadership are this year in the investment community.
With COVID caseloads spiking in the US and UK, authorities have tightened lockdowns, and the impact is starting to show in economic data. But similar to the widespread reaction to stumbling US employment data earlier this month, observers are largely taking a longer-term, rosier view than they likely would have earlier. Instead of seeing a looming second shoe to drop, they envision vaccinations and a nearby return to normalcy. To us, this is another indication sentiment has warmed considerably in recent months, which should boost stocks as the year unfolds.
The latest US and UK economic data show lockdowns affecting activity, with service-related industries (predictably) taking a harder hit than manufacturing. UK monthly GDP fell -2.6% m/m in November as the country re-entered lockdown.[i] Services output fell -3.4% m/m, but industrial production dipped only -0.1% and construction rose 1.9%. Factories’ remaining open helped cushion GDP’s decline relative to both consensus expectations for a -5.8% m/m drop and last spring’s sharp plunge, as manufacturing output rose 0.7%.[ii] While America doesn’t report monthly GDP, a similar disconnect is evident in other US data. Led lower by food services, December retail sales fell -0.7% m/m, missing expectations for a 0.1% rise.[iii] But industrial production rose 1.6% m/m in December.[iv] It has now risen in seven of the last eight months.
While the specific numbers above may have topped or missed expectations somewhat, none of them provide anything really surprising, in our view. For one, purchasing managers’ index surveys have hinted at these numbers for weeks. Two, perhaps the most common fear after lockdowns began lifting last spring was a wintertime second wave. Virtually every expert in the field said one was likely, requiring a return to lockdowns. Markets are efficient, discounting common views, opinions and forecasts about how the next 3 – 30 months may look. They price those views in advance—and in this case, that included renewed lockdowns.
Editors’ Note: MarketMinder favors no politician nor any political party. We analyze political developments and news solely to weigh the potential impact on markets.
Just before noon Eastern Standard Time Wednesday, Joe Biden took the oath of office on the Capitol steps and became America’s 46th president. The backdrop was certainly unusual, with security extra-high and thousands of flags standing in for the throngs of people that ordinarily attend inaugurations. But nevertheless, power transferred amid some, if diminished, pomp and circumstance. To us, it is also a time to remember: Though the American president may be the world’s single most powerful person, they rarely impact stocks as much as some believe. This is a point we think is worth recalling as President Biden begins his term.
Around any election, talk of this-or-that candidate being “good” or “bad” for stocks is common. This time, many pundits cast Biden as the anti-market candidate while Donald Trump was supposedly bullish—a near total reversal of how he was cast in 2016, when most analysts presumed a Trump victory would doom markets. The doom failed to materialize in both cases.