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.

Record Speed to Record Highs

On Monday, the S&P 500 Total Return Index closed at 6895. For those scoring at home, that is a new all-time high for the S&P 500 when including reinvested dividends—officially rendering the rise since March 23 a new bull market. It is a notable milestone with much for market historians to mull over, but for investors, it likely means little for stocks going forward. 

Official back-to-breakeven dating will use the S&P 500 price index, whose daily dataset stretches back more than 60 years before daily total return data begin. Since that index doesn’t include dividends, we don’t think it represents investors’ full experience—hence why we are focusing on the total return index. But the price index isn’t far from breakeven. As of Tuesday’s close, it was just -1.5% below its prior bull market high.[i] Looking globally, the MSCI World is about -2.1% off its February 19 high.[ii]

Now, we aren’t predicting when the S&P 500 price index will hit its prior peak, although it is flirting with it on an intraday basis as we finalize this Wednesday morning. For all we know, a correction (sharp, sentiment-driven drop of -10% to -20% or so) could start tomorrow. Those start at any time, for any or no reason, and if one started this week, it would be the sort of quirky timing stocks enjoy—the Great Humiliator at work. But that is unknowable, in our view. Even then, with only four and a half(ish) months elapsed since the low, there is plenty of room for this to be the fastest return to breakeven ever—fitting for the fastest, shortest bear market ever.

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What Saturday’s Executive Actions Likely Will—and Won’t—Do

Editors’ note: As always, our political commentary is non-partisan by design. We favor no political party nor any politician and believe markets have no preference, either. We assess political developments solely for their potential economic and market impact.

The tussle over extending expired CARES Act assistance continues, with President Trump issuing four executive actions aimed at restoring some of the programs on Saturday, prompting some lawmakers (from both parties) to argue the president was acting unconstitutionally by usurping Congress’s power of the purse. That debate continued into Monday, when the orders spurred both sides to return to the negotiating table, which many claim was their actual aim. This is an epic round of political theater in an election year, and we won’t hazard a guess as to how it will go. That said, nothing in these orders strikes us as make or break for stocks’ young bull market. Further, we don’t think the much-discussed deferral of payroll tax collection is all that likely to do significant damage to Social Security, either.

In a nutshell, the four executive actions do the following:

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A Two-Pronged Note on Today’s Jobs Report

Friday, the US Bureau of Labor Statistics (BLS) unveiled its widely watched Employment Situation Report for July. After May’s private-sector employment shocked pundits by rising 3.2 million—and June’s topped it with 4.7 million hires—private hiring slowed to 1.5 million (1.8 million if you include government).[i] The common reaction to this seems cautious—skeptical. Many pin the slower hiring on the virus’s resurgence this summer and, even though data suggest this renewed outbreak has slowed lately, they project hiring to continue weakening later this year. In our view, this calls for a two-pronged note. One, the job market is unlikely to see a completely straight line to recovery. Two, stocks are very unlikely to fixate on these monthly reports, for good or ill, for long.

First, let’s dig into what July’s report showed. Nonfarm payrolls rose 1.8 million in the month, although this is likely inflated somewhat by a statistical phenomenon tied to seasonal adjustment. July is normally a month in which government employment declines tied to school being out all month in most of the nation. Yet this year, most schools were shuttered way, way earlier. The impact of this, according to the BLS, is that of the 301,000 jobs the data show government adding in the month, up to 245,000 of them are education-related quirks.[ii]

On the private-sector side, gains were quite broad-based. Leisure and hospitality again led, adding 592,000 jobs. 502,000 of those were in the restaurant industry—bringing the total in the last three months to 2.9 million hires.[iii] Employment remains down significantly in this industry, but this rebound has been good enough to cut the losses in half—and that seems noteworthy to us. Retailers were the next biggest source of hiring, adding 258,000 people to payrolls.[iv] Neither of these factors should shock, considering businesses continued to gradually reopen in some parts of the country while those suffering big virus outbreaks mostly just put existing plans on pause versus rolling them back.

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Top-Down Lessons From Energy

Editors’ Note: MarketMinder doesn’t make individual security recommendations; references to individual firms in the commentary that follows are simply made to illustrate a broader point.

Most financial media focuses on individual companies: Stories about executive leadership shifts, last quarter’s earnings, product issues or lawsuits often dominate. This is all fine, and individual security factors are no doubt important to weigh. But it downplays a key point, in our view: Drivers at the sector, country, industry or style levels often matter much more than stock-specific factors. We think investors would be well served to take note that similar stocks usually—and should—behave similarly.

Take, for example, the Energy sector. Most of the firms in this sector are heavily exposed to oil prices. Some directly, given they explore for oil. Others are more indirectly exposed: Perhaps they are natural gas producers, but since gas is often a byproduct of oil exploration, oil production trends exert plenty of influence on gas prices. Globally, the sector has only a few firms with no direct or indirect exposure to crude.

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A Word on China's Gangbusters July Exports

Chinese exports soared 7.2% y/y in July, shattering expectations for a -0.6% drop and beating June’s 0.5% rise.[i] We would love nothing more than to write about how this is a stellar sign of rebounding demand in post-lockdown America and Europe, and that is true to some extent, but a gut check is also in order. Not because we are pessimistic, but because we think investors benefit from taking a measured view of any and all available data.

As we write, China’s customs administration hasn’t updated its English language website with July data, and our trusty data software tools have only the headline results—not a detailed product breakdown. So much of what we say here relies on professional China-watchers. Universally, they point to strong global demand for tech-related goods and components, which probably stems at least partly from people continuing to beef up their work-from-home setups. Shipments of personal protective equipment (masks and gowns) were also strong, though analysts noted demand in this category has tapered off lately. So yes, the West’s virus-related misfortunes did boost Chinese exports to an extent, but they probably don’t deserve credit for the surprise.

More telling, in our view, is the geographical breakdown, because Chinese exports weren’t strong worldwide. Shipments to the EU fell -3.4% y/y.[ii] Exports to Japan? Down -2.0% y/y. Shipments to India fell a whopping -21.2% y/y. Closer to home, exports to Hong Kong rose a respectable 6.6% y/y, and exports to Taiwan rose 3.9%. But exports to the US rose—wait for it—12.5% y/y. That seems like a weird outlier until you consider the geopolitical backdrop, which included tough talk from both of November’s presidential candidates, embassy closures and other sabre rattling. This strongly suggests businesses were trying to front-run their collective fears of new tariffs and sanctions, in essence pulling late-summer and early-autumn demand into July. As a result, whether or not the US or China backs their recent words with new policy, we would expect July’s surge to be a one-time (or close to it) event, with exports tapering off later on.

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Sorry, the Fed Isn’t That Powerful

In recent years, it has become ever-more popular to presume that the Fed can use its ability to create or destroy bank reserves and exert influence over short and long rates to exert quasi-magical influence over just about anything, leading to calls among politicians and pundits to widen its mandate. Many attribute the 2009 – 2020 bull market and the current one to its “stimulus” moves like quantitative easing. Many others attribute the labor markets’ pre-coronavirus health to it—one end of its “dual mandate” to balance labor market health and inflation. Still others blame the Fed for low wage growth over the past few decades, claiming it focused too much on the inflation end of that mandate. All the contradictory claims have now seemingly jumped the shark and veer off into presuming the all-powerful Fed should get additional responsibilities—some push it to act as lender of last resort for Main Street, municipalities and just about everything else. Many further presume the Fed should use monetary policy to target social outcomes or other political causes. But whatever you think of these ideas, the trouble is they presume clout, competence and efficacy the Fed hasn’t historically demonstrated. Those who want to widen the Fed’s mandate would do well to remember: Any time you want the Fed to do more, they have more to mess up.

The Fed’s current mandate, as summed up by its Chicago branch, is to “achieve both stable prices and maximum sustainable employment.” Since January 2012, the Fed has interpreted “stable prices” as a 2% year-over-year inflation rate (based on the Personal Consumption Expenditures Price Index, not the Consumer Price Index and not the “core” version of either gauge that excludes food and fuel). In this span of time, the actual PCE inflation rate has been within 0.2 percentage point above or below the target in 19 months … out of 102.[i] For the first several years, as inflation drifted further below the target, everyone feared deflation was setting in.

Exhibit 1: Missing the Target

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Coal’s Continued Decline Defies Political Narratives

Around a decade ago, the article you are presently reading online would likely have been delivered to you via the magic of coal-fired electricity. In the intervening years, however, that has become increasingly uncommon. Coal’s share of US electricity output has fallen tremendously—a trend the COVID lockdowns have compounded. Why this decline? For years, many have chalked it up to political policy—which some see as a positive and others a negative. But as we have written for years, while politics may play a fringe role, coal’s plight has a whole lot more to do with market economics and seismic shifts in America’s energy industry. The direct investing implications of this are limited, as pure-play publicly traded coal firms are a rarity these days. But the industry’s state—and its cause—is a reminder to get beyond common narratives and assess data even-handedly.

Wednesday, the US Energy Information Administration (EIA) estimated that, based on railcar loadings, US total coal production had dropped a stunning -27% year-to-date through May 2020 versus the same period in 2019.[i] The culprit, of course, is the economic lockdowns tied to the coronavirus, which have crushed demand worldwide. EIA data show coal exports fell -29% year-over-year in 2020’s first five months, while coal-fired utility production plummeted -34%.

While the lockdowns almost certainly exacerbated the huge declines—which will likely reverse to some extent as reopening shows up in the data—the trend isn’t new and it isn’t coal’s friend. As Exhibit 1 shows, US coal production fell to levels unseen since 1978 last year—in the pre-coronavirus era.

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Putting the Greenback’s Recent Slide in Proper Context

Does the dollar know something stocks don’t? That is the question on pundits’ minds as the dollar sinks versus the euro, hitting a two-year low. With much of continental Europe having less of a second COVID flare-up than parts of the US thus far, the popular viewpoint holds that currency markets reflect the likelihood that the eurozone economy is stronger than the US for the foreseeable future. Implicit in all of this is that if US stocks don’t outright fall as a result, they will trail badly. In our view, this thesis has a couple of flaws. In addition to wrongly presuming stocks are less efficient than currencies, it ignores the dollar’s longer-term history.

Exhibit 1 gives you a look at the euro/dollar exchange rate in 2020 through July 29. What has people talking now isn’t so much the dollar’s relative strength in early 2020—it is the more recent weakness.

Exhibit 1: Euro per Dollar Exchange Rate in 2020

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Q2 GDPs Were Historically Awful, but Not a Surprise

Q2 GDP results for the first two major developed nations to report emerged today, and in a word, they are … ugly. The US and Germany each notched record-fast declines, and they probably won’t be the last to do so. As these awful Q2 numbers hit the wires, we think it is worth remembering stocks spent February and March reckoning with the lost activity that is now registering in GDP—and markets are now looking far, far beyond what happened between April and June.

Perhaps the most surprising development is that US GDP didn’t fall quite as much as German. US output fell -32.9% annualized, which translates to -9.5% q/q.[i] German GDP fell -10.1% q/q, which simple math translates to -34.7% annualized.[ii] We did this math because the US’s Bureau of Economic Analysis’s headline figure is the annualized rate, which is the rate GDP would fall over an entire year if the quarter-over-quarter rate persisted for four quarters. But Germany, like the rest of Europe, uses the quarter-over-quarter figure. The math makes it easier to do a comparison.

Considering Germany began reopening from the COVID lockdowns before most of the US, it would be reasonable to expect German GDP to fall less than the US’s. Analysts certainly did. According to FactSet’s most recent surveys, consensus estimates were for German GDP to drop -9.0% q/q, beating the US, which analysts estimated at -10.1% q/q (based on consensus estimates of a -34.6% annualized drop).[iii] Germany’s initial release doesn’t include a detailed breakdown, though the presser noted a “massive slump” in trade and private demand, with only government spending increasing. The US breakdown showed much the same. But we won’t know for a few weeks whether the US’s edge over Germany stemmed from a slightly less bad private sector decline or relatively higher government spending—presuming that edge isn’t revised away in future releases.

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Will a Jobless Recovery Hinder Stocks?

As the latest business surveys showed improving economic output across the developed world, headlines trumpeted a new concern: a potential “jobless recovery.” Though businesses reported increased activity overall, they were also still cutting headcount, and recent US initial jobless claims reports showed layoffs are rising for the first time since March. Many worry budding economic green shoots will wither if millions remain out of work. But this development isn’t unique: Most recoveries are “jobless” early on. While the magnitude may be large, nothing in the latest reports is a unique or different risk to stocks than in most historical bull markets.

IHS Markit’s July flash purchasing managers’ indexes (PMIs) showed ongoing economic improvement in the US, UK and eurozone. All composite readings (services plus manufacturing) were at or above 50, indicating a broad return to expansion for the first time since COVID went global.

Exhibit 1: IHS Markit Composite PMI

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