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.


Counting Down to Gridlock

Editors’ Note: MarketMinder is intentionally non-partisan, favoring neither any party nor any politician. We solely assess political developments for their potential impact on stocks.

Seven hours after the last polls closed, there are a few things we know. But, as anticipated, there are many things we don’t: including who will win the presidency and which party will eke out a Senate majority. Even the House, which seems likely to stay under Democratic Party control, remains too close for Associated Press election watchers (the media's referee on this stuff) to call. Yet one thing is clear: However the next few days go, not a lot has changed. There was no landslide either way, and it looks like gridlock will ultimately win the day. However you hoped or feared this election would go, stocks don’t think in partisan terms and never inherently prefer one candidate over another. But they do like gridlock, which reduces the likelihood of big legislation creating winners and losers—and that seems like what we are going to get, in one flavor or another. The US is just one country and politics only one driver, but fundamentals on this front are shaping up nicely, in our view.

We will spare you a lengthy dissection of who won what, other than to say that for all the talk from both sides as the polls opened, nothing crazy happened. The one Senate seat that has flipped so far, in Colorado, went to a hugely popular former Democratic governor—no shock there. Senate Majority Leader Mitch McConnell and South Carolina’s Lindsey Graham, both supposedly vulnerable Republicans, held on easily. So did Republican Senator John Cornyn in Texas. As we write, Alaska, Maine, Michigan, North Carolina and both Georgia seats remain too close to call. Given the margins in some of those states, recounts look virtually assured. In Georgia, multiple candidates vied for the seat opened by Sen. Johnny Isakson’s retirement. This race is headed for a January runoff election between Isakson’s replacement, Sen. Kelly Loeffler and Pastor Raphael Warnock, as no candidate is poised to take over 50% of the vote. In the other Georgia Senate race, Republican incumbent David Perdue has a slim lead as we write, but a runoff could be required if no one wins more than 50% of the vote. Whichever party winds up with control of the Senate, their edge looks set to be tiny. In our view, even if the Senate, House and White House are controlled by one party, that would mean swing-vote senators would likely pull legislation towards the middle. Note: That is if one party controls the presidency and legislature. If not, we would get structural gridlock reducing the likelihood any sweeping legislation passes.

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The UK’s New National Lockdown

As if the world weren’t already on course for the saddest Halloween in recent memory, UK Prime Minister Boris Johnson announced on Saturday that England will enter a four-week lockdown on November 5. It is presently scheduled to end on December 2, but Johnson warned Monday it could extend well into 2021 if conditions warrant. The aim is, of course, noble—slowing COVID’s spread. But from the standpoint of near-term UK economic growth, this is obviously not good news. It will likely lead many to fear for UK stocks. However, for markets, we see a few mitigating factors that are worth keeping in mind if and when more countries or US states adopt stricter restrictions.

The first important consideration: This full lockdown isn’t quite as stringent as measures adopted in March. Yes, non-essential businesses (e.g., stores, hair salons and other personal services) must close, restaurants can serve takeout only, households can’t mix and people must limit travel to essential activities. But schools remain open—unlike in the spring. Factories remain open as well—another difference. Fiscal assistance is already in place. We aren’t going to call this “lockdown lite” or argue it is some whopping positive. But it is a mite better than the widely feared worst-case scenario where everything closes and the government has no help in place.

Second, and crucially for stocks, Saturday’s announcement wasn’t a surprise. We guess the fact UK stocks rose on Monday is one piece of anecdotal evidence supporting this, although we are loath to read into one day’s market movement. More compelling, in our view, is the timeline of UK COVID chatter over the past three months. As Exhibit 1 shows, the discussion flipped from reopening to potential new closures back in early September, and rumors of full lockdown have floated for about a month. France and Germany’s decisions to adopt nationwide measures last Wednesday further heightened UK lockdown fears. With the timeline laid over the MSCI UK Investible Market Index since the end of August, we think the extent to which stocks have been grappling with a potential new lockdown becomes clear.

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A Reason for Optimism in Today’s Trying Times

2020’s laundry list of challenges and tragedies runs long. The COVID-19 pandemic. Natural disasters, including catastrophic wildfires and hurricanes. Social unrest. Beyond this year, many say the longer-term outlook is in shambles, too, from Social Security’s uncertain future to skyrocketing federal debt. Some go so far as to argue it reveals a chasm in our economic system. We don’t dismiss either the short-term or long-term challenges, but it is premature to write off humanity’s ability to address them, courtesy of the free market’s boundless opportunities. Recent Census data highlight the resiliency of the American entrepreneurial spirit—a reason to be optimistic about the future, in our view.

Per the Census Bureau’s latest “Business Formation Statistics” report, Employer Identification Number applications—which new businesses submit with the IRS—hit 1.5 million nationwide in Q3, a 77.4% quarter-over-quarter rise and the most since records began in mid-2004.[i] Applications boomed throughout the country—particularly in the South—and the Census Bureau found 34% of all submissions were for “high-propensity” businesses (i.e., those likely to hire people).[ii]

Exhibit 1: A Surge in New Business Applications

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The Small Hint Embedded in Q3 GDP’s Huge Rise

The results are in: US GDP jumped 33.1% annualized in Q3, retracing about two-thirds of the winter and early spring’s COVID lockdown-related decline.[i] But stocks look forward, and many now argue the future they are looking to is dim: That COVID’s resurgence means lockdowns will return, slowing or even reversing GDP growth—especially if Congress doesn’t pass further assistance measures. We aren’t arguing the road from here will be obstacle-free, and simple math and common sense dictate GDP growth is overwhelmingly likely to slow. But in our view, the largely dour reaction to today’s GDP figures likely helps sap surprise power if things do weaken from here—a plus for markets.

There are plenty of highlights in the report, including imports’ near-doubling—a sign of a solid recovery in business and consumer demand—and business investment clawing its way back with 20.3% annualized growth.[ii] But in our view, a look at consumer spending, disposable income and the savings rate sheds the most light on today’s big fear. Consumer spending leapt 40.7% annualized, landing just -2.5% below Q4 2019’s peak.[iii] But services—consumer spending’s largest segment—didn’t rebound as much. Durable goods spending skyrocketed 82.2% annualized, propelling goods expenditures to new highs.[iv]

This is all the more interesting when you consider people splashed out on big-ticket items even as disposable personal income fell -13.2% annualized, which the BEA’s press release stated “... was more than accounted for by a decrease in personal current transfer receipts (notably, government social benefits related to pandemic relief programs).”[v] Now, ever since the CARES Act’s supplemental unemployment assistance expired on July 31—which August’s executive order only partially replaced—pundits have warned people would burn through their savings and consumer spending would plunge unless Congress ponied up again. A surge in big-ticket spending alongside lower benefits cuts against that, particularly with the quarter’s savings rate clocking in at 15.8%—down from 25.7% in Q2, but still more than double the pre-pandemic rate.[vi] Household finances seem to be in far better shape than most headlines allege.

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Three Halloween Ghost Stories

With trick-or-treating canceled in much of the country and It’s the Great Pumpkin, Charlie Brown not airing on broadcast television[i], this is shaping up to be perhaps the most miserable Halloween in recent memory. Adding to the gloom for investors is a litany of ghost stories that have many fearing the bull market is destined for an early grave. We won’t sit here and dismiss everything spooking investors today, as some—like a second, massive global lockdown—could prove problematic if they were to happen in a manner worse than everyone expects. But the vast majority of today’s fears are no more real than your typical frightful Halloween tale. Or zombies.

The Second Fiscal Response Deal Remains Dead

As Congress and the White House continue bickering over a second economic rescue package—with conflicting reports over how close they are—one fear seems to dominate both sides of the aisle: the fear the economy can’t continue recovering without more help from Uncle Sam. Undoubtedly, more assistance would be a welcome help for businesses still forced to deal with capacity limitations and people still out of work. However, that doesn’t mean the broader economy depends on another round of federal spending. Actually, we already have evidence it doesn’t. Several CARES Act provisions expired at the end of July, including the supplemental unemployment assistance, which an August executive action only partially replaced. Yet consumer spending and retail sales have continued growing since, with the latter hitting new highs.

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The Best Asset in a Fearful Time: An Even Keel

This terrible year’s twists and turns continued Wednesday, as COVID’s spread continued accelerating in Europe, leading the eurozone’s two largest economies—Germany and France—to install month-long restrictions on select businesses and activities. Politicians also announced new restrictions in a few American cities, most notably Chicago and Newark. Like those in recent weeks, these moves rekindle fears of a renewed lockdown on par with the spring, stoking the MSCI World’s -3.1% drop on the day.[i] As hard as it is, we think this is a time when keeping an even keel and not reacting to every headline is critical. In our view, it would take very restrictive measures to wallop this young bull market, given an autumn resurgence was so widely expected. Nothing to date is on par with that. Developments are worth watching, no doubt, but beware extrapolating current headlines into a much more locked-down future.

The day began with Germany and France planning to unveil new measures in response to swift increases in cases and hospitalizations. Mid-morning Pacific time, German Chancellor Angela Merkel followed through, announcing she had reached agreement with Germany’s 16 states to shutter bars, restaurants, gyms and other leisure establishments from Monday through November’s end. Social gatherings are capped at 10 people from no more than 2 households. Hotels may admit only business travelers. Merkel, who faces no shortage of criticism for this move, noted that contact-tracing efforts have failed, and with no way to identify how transmission is occurring and isolate that, she argues more extreme steps were necessary.

Hours later, French President Emmanuel Macron—who previously downplayed the likelihood of nationwide measures—took more extreme action. In a televised address, Macron announced that, effective Monday, bars, restaurants and non-essential retailers will close. Domestic travel and public gatherings are banned, and he encouraged companies to use remote work rather than have folks come into the office. Macron said these measures will last through December 1, but that he will re-evaluate in two weeks with an eye toward easing restrictions if there is improvement.

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Tech Isn’t Too Big

Editors note: MarketMinder doesn’t make individual security recommendations. Any company mentioned below serves only to illustrate a broader investment theme we wish to highlight.

Is Tech getting too big for its britches? Many note the Tech sector and Tech-like industries’ swelling share of S&P 500 market capitalization and see 1999’s dot-com bubble inflating all over again. At first blush, maybe this seems sensible. Tech has led the bull market that began in March. It led in the downturn and in the preceding bull market. Big returns plus big market cap share may hint at froth. But this surface-level look doesn’t hold water, in our view. A look at fundamental drivers reveals faults in the comparison, suggesting to us Tech’s big share doesn’t reflect an unsustainable bubble.

Tech and Tech-like behemoths do comprise a record-high share of US markets—in a sense. The Tech sector currently amounts to 28% of S&P 500 market cap.[i] While that isn’t quite the 35% share at 2000’s tech-bubble zenith, comparing Tech now and then isn’t quite an apples-to-apples exercise.[ii] The way the S&P 500 classifies stocks is a bit different today than two decades ago. For example, index providers place bookseller-turned-everything-store Amazon in the Internet & Direct Marketing Retail industry within the Consumer Discretionary sector. Several other giants moved recently from Tech to the newish Communication Services—lumped together with the sector formerly known as Telecommunications Services. Tech and these two groups account for nearly 40% of S&P 500’s market cap, exceeding Tech’s 2000 heyday—and spurring many claims the sector is overinflated.[iii] Some even argue a single sector’s exceeding 20% of the S&P 500’s market cap, like Financials in 2006 or Energy in 1980, spells its downfall. The fact Tech (in its broad sense) is now twice that, the thinking goes, means double trouble.

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Election Questions From the Mailbag

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

With Election Day now a week away and mail-in voting in full swing, investors’ nerves seem to be on edge, to put it mildly. To help keep both your fears and hopes in check, here is our take on some of the most common questions we have encountered.

What will the results mean for COVID restrictions and reopening? President Donald Trump winning re-election means everything opens, and former Vice President Joe Biden winning means a big “closed” sign, right?

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Rounding Up Europe’s New Response Measures

Volatility flared up again Monday, with the S&P 500 and most other major indexes globally down nearly -2%.[i] Most observers blamed news of COVID spikes and new restrictions in Italy and Spain, raising the specter of a second global lockdown. Germany’s IFO business sentiment survey, also out Monday, showed folks fear restrictions will soon bite there, too, and across the Continent, expectations are now for any GDP growth from Q3 to prove temporary and recession to resurge in Q4 as lockdowns tighten. That is one possible outcome, and a second sweeping worldwide lockdown could drive weakness. Yet in our view, it is worth noting how far we are from that outcome at the moment. There is another key difference between now and February, too: Then, a global lockdown was unthinkable, but now, with everyone expecting it, we suspect a lot of the surprise power is gone. That is key to consider as you weigh the potential market impact of COVID this autumn and winter.

With the heightened rhetoric surrounding the latest restrictions on activity, it may be tough to get a handle on how draconian they are. Statements like Italy implements harshest restrictions since national lockdown ended are abundant and … not helpful, in our view. So to put everything in perspective, we have catalogued the latest restrictions from Continental Europe and the UK.

Exhibit 1: New Restrictions at a Glance

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Some Reminders as Tax Year 2020 Winds Down

Presently, November 3 is the date that seems to dominate most investors’ minds. But not so far behind it lies another date of some importance to investors: December 31. Yes, 2020 is coming to a close[i], and with it the books on the tax year. With that in mind, here is a quick roundup of some pre-yearend considerations for investors.

Tax Loss Harvesting

While you may have already addressed this, if you realized capital gains (meaning, you sold a security at a profit) this year, it may behoove you to review your portfolio and find positions you currently hold that are at a loss. If this is you, you may wish to consider selling the security to realize the loss. Realized losses can offset gains dollar for dollar, limiting your potential capital gains exposure. Alternatively, you can deduct up to $3,000 in losses from your income (reducing tax exposure there). If by chance your realized losses exceed your gains, you can carry them into future years and use them to offset realized gains.

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