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.


Turning Down the Volume on Some Noisy US Data

Several widely watched US economic data reports—including September retail sales and industrial production and a couple of October regional manufacturing surveys—have given experts plenty to discuss in recent days. Yes, consumers have been spending—but is it sustainable? Sure, manufacturing has been resilient—but are the latest readings a setback? As pundits and economists debate their meaning, we suggest investors think like markets instead. Stocks are highly likely looking well past these noisy readings and digesting the far future—the long end of the 3 – 30 month range we think they anticipate.

First, the numbers. September retail sales rose 1.9% m/m, the fifth straight positive month. However, September industrial production (IP) dipped -0.6% m/m—missing expectations for 0.6% growth and breaking a four-month positive streak—with the manufacturing subcomponent down -0.3% m/m. Elsewhere, two Federal Reserve regional manufacturing surveys’ divergent October readings muddled analysis further. The Philadelphia Fed’s Manufacturing Business Outlook Survey surged to 32.3 from September’s 15.0 while the New York Fed’s Empire State Index slowed to 10.5 from September’s 17.0 (readings above zero indicate monthly activity rose). The data spurred the usual interpretations: Ongoing retail sales growth continues to surprise, though many think weakness looms; others see IP’s September contraction signaling a slowing economic recovery—which recent surveys may or may not corroborate.

While it is grand to have a snapshot of the latest economic developments, we recommend not drawing sweeping conclusions. There is just too much noise, too many one-off variables and too many conflicting signals. Consider these seemingly contradictory tidbits from the retail sales and industrial production reports. Automobile and other motor vehicles sales were up 4.0% m/m, its second-straight positive month—yet production of automotive products fell -4.1% m/m, its second-straight negative month.[i] Were factories pulling back as retailers slashed prices on the last model year to clear old inventory that piled up in the pandemic? Maybe. Does this really mean much on a forward-looking basis? Probably not.

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Election Clarity: Possibly a Bit Delayed, but Still Coming Soon

Editors’ Note: MarketMinder is intentionally nonpartisan. We favor no political party or politician and assess political developments solely for their potential economic and market impact.

T-minus 14 days to Election Day, when we will finally know … well, perhaps not much. With several states slated to take days (or weeks) to receive and count mail-in ballots and both parties already lawyered up, unless there is a massive landslide in the initial tally, we are almost certain to face several days of extended uncertainty over whether President Donald Trump or former Vice President Joe Biden will be inaugurated next January. Pundits have warned for weeks of chaos and a host of outlandish possibilities, arguing sharp market volatility (or worse) is a virtual certainty. We always encourage investors to brace for wobbles—not because we expect them, but because volatility can arise at any time, for any or no reason. Regardless, we think investors would benefit from approaching the election with clear-eyed expectations of how election clarity will likely unfold.

COVID has had a huge impact on each party’s voter turnout strategy, making this election like none we have ever seen. The Republican Party claims to have built the biggest ground game in its history, reportedly with 1.5 million trained field workers knocking on doors, registering voters and helping people get to the polls on November 3. But the Democratic Party can’t go this traditional route, as it would conflict with the way its leaders have responded politically to the pandemic. You can’t make social distancing a key issue and then knock on doors and volunteer to drive people to the polls. So instead of the traditional ground game, they have deployed their considerable war chest on an “air game”—TV ads and other channels to encourage mail-in voting. The result will largely hinge on which effort is more successful. Will Republican turnout offset Trump’s relatively weak personal polling in toss-up states? Or will Democratic turnout tilt the playing field toward Biden?

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SPACs Aren’t 2000 IPO Mania’s Second Coming

Editors’ note: MarketMinder doesn’t make individual security recommendations. Those mentioned herein simply represent a broader theme we wish to highlight.

What do a space travel company, orbital tugboat builder, electric truck maker, next-generation battery developer, self-driving bus startup, fantasy sports operator, “aspirational lifestyle” retailer and a century-old snack maker have in common? All recently went or plan to go public, but in an unconventional way: as buyout targets of special-purpose acquisition companies, aka SPACs or “blank check” companies. As initial public offering (IPO) booms—particularly niche ones—usually do, SPACs’ sudden proliferation has prompted many pundits to draw parallels with 2000, citing froth and fervor. We think this is a bridge too far, although it is wise to be aware of the risks you may be taking on if you choose to dive into this space.

SPACs are a way for private companies to go public without the traditional (and costly) rigmarole of an IPO. Essentially, they are shell companies with one purpose: to acquire existing, privately owned firms using funds raised on the public markets. If we were into analogies, we would probably call them “midwives for startups” or something similarly reductive, but then all analogies are bad analogies. To set that aside, here is how it works: First, a SPAC registers with the SEC to go public through an IPO. A SPAC usually starts with a few high-profile backers to give it gravitas and attract would-be investors, and it quickly IPOs the traditional way to raise more capital on the open market. Its initial “business model” is only to merge with one or more private companies that don’t want to go through the hassle themselves, and investors are buying the potential of that merger. But it is frequently a grab-bag, as SPACs generally don’t have a target in mind. Instead, the SPAC’s capital usually sits in a trust while the principals hunt for a company to buy within a predetermined window. If all goes according to plan, the SPAC finds a target, buys it and, essentially, becomes that company.

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Chinese GDP Regains Pre-Pandemic High

Chinese Q3 GDP took headlines by storm today as the quarter’s 4.9% y/y growth put GDP above pre-pandemic levels. This triggered a bunch of commentary comparing recoveries in China and the West, with the takeaway being that China is winning and the US and Europe would do well to take a few lessons. We think it is worth turning a critical eye on that thesis, particularly because stocks—the ultimate leading indicator—don’t appear to be drawing a similar distinction between China and the US. While pundits focus on COVID-related developments in the here and now, we think markets are looking much further ahead.

As for China itself, the results were overall encouraging. Monthly data showed retail sales and imports back in positive territory year-over-year in September, suggesting domestic consumption is recovering nicely—undercutting widespread fears that the broader recovery is a mirage of infrastructure spending. Even if you don’t own any mainland Chinese stocks, broad growth in the world’s second-largest economy is a plus for global GDP and demand for goods produced elsewhere.

Some commentators took things a little too far, however, in arguing China’s apparently faster rebound is a product of unique success in staving off COVID-19. We think this is a stretch on a couple of fronts. One, we saw numerous pieces arguing the country has avoided a second wave. That may be true as far as the official numbers are concerned, but we think this strains credulity. For instance, last week officials mandated—and reportedly completed—testing for every last person in Qingdao after discovering 13 cases of local transmission. That is 11 million people. They turned up … zero new cases.[i] That seems like just a bit of a stretch in light of those 13 cases and what researchers have discovered about how the virus spreads over the past 9 months. We aren’t saying it is impossible, just highly improbable. Particularly when the international medical community has warned for months that virus data from China are suspect given the regime’s well-documented lack of transparency.

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Interest Rates Influence, but Don’t Dictate, Stock Market Trends

Ten months into 2020, global high dividend yielding stocks are trailing their non-high-yielding brethren by a significant margin. Including reinvested dividends, the MSCI World High Dividend Yield Index is down -8.0% thus far this year—while the MSCI World itself is up 5.5%.[i] Some might see this as a reminder that there is no automatic superiority to high dividend stocks—which is a valid point. But there is another angle to this that we find more interesting: It undercuts the notion that low interest rates fuel a hunt for yield, driving stocks up and leading dividend payers to outperform. Interest rates are important, but they don’t dictate stocks’ direction alone.

For most of the last decade-plus, short- and long-term interest rates have been low by historical standards. In the last bull market, this led many pundits to presume investors were selling low-yielding bonds and buying dividend paying stocks—the much-ballyhooed “hunt for yield.” Many claimed these low rates fueled stocks’ rise from 2009 to early 2020.

Exhibit 1: Rates Have Been—and Most Certainly Are Now—Historically Low

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The Facts and Fiction of Fedcoin

Fedcoin! Ever since the rise of cryptocurrencies in the mid-2010s, some pundits have theorized that the Fed is secretly working on its own cryptocurrency to rival bitcoin and Facebook’s nonexistent Libra. Fed members themselves have occasionally fanned the flames, too, fueling mounting speculation a digital dollar (or thereabouts) awaits us. The chatter escalated once again in mid-August, when Fed Governor Lael Brainard said, “the Federal Reserve is active in conducting research and experimentation related to distributed ledger technologies and the potential use cases for digital currencies.”[i] Since then, we have seen a litany of newsletters warn this is the end of the dollar as we know it, with everyone’s savings eventually coming under government control (and subject to confiscation). Even on the less hyperbolic, more reputable side of the financial commentary world, pundits are ruminating over “Fedcoin” potentially disrupting digital payments and altering the currency landscape. A theoretical paper on central bank digital currencies released by seven central banks and the Bank for International Settlements this week added even more fuel to the fire. But whatever the Fed eventually does, we rather doubt any of these spectacular scenarios come to pass. It all actually seems pretty dull to us.

The way most commentary explains the situation, the rise of bitcoin and other cryptocurrencies revealed a huge global appetite for digital money, incentivizing central banks to create their own digital coins to ensure money creation stays under centralized control. At the same time, central banks throughout the developed world have adopted or flirted with negative interest rates, raising the question of how effective a negative rate can really be if people can avoid it simply by stashing paper bills under the mattress? Academics and newsletter writers theorized official digital coins could solve this dilemma, as they would replace cash and central banks would control their value. This, as best as we can tell, is the genesis of all the “Fedcoin will destroy savings” warnings we have seen.

As is typical of most fearful frenzies, however, there is little grounding in reality. Lost in 99.9% of coverage we have seen on the matter is the simple fact that the US already has a digital currency, and it is called the dollar.[ii] Chances are, you own it and transact with it regularly! Any money in your bank account isn’t stashed in a vault—it is a digital accounting entry. Whenever you shop online, you are paying with digital dollars. When you use your credit or debit card at brick-and-mortar stores, you are paying with digital dollars. The Fed doesn’t even need to create systems to enable these digital payments, because they already exist. Your bank and credit card companies administer them. So do PayPal, Square, Apple and Venmo—not to mention Starbucks’ smartphone app, which stores so many digital dollars in the form of gift cards that we have occasionally wondered if it should be regulated as a bank. All of these were born in the free market, without central banks guiding them, as many innovations are.

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What If the BoE Goes Negative?

For months, one question has preoccupied Bank of England watchers and British savers: Is the BoE about to take short-term interest rates negative in the UK? Monetary policymakers have admitted it is under discussion. Futures markets show it happening by early 2021. While BoE Governor Andrew Bailey recently said it wasn’t on the docket, his institution sent UK banks a letter on Monday asking them to explain their “current readiness to deal with” zero percent or negative rates. This, predictably, sent banks and commentators into a tizzy, with many warning about looming trouble for banks’ earnings and savers’ deposits if rates drop below zero. In our view, there is some merit to this criticism, however overstated it might be, and considering these risks can help folks set expectations. On the bright side, though, negative rates haven’t caused recession or bear markets in other countries using them in recent years.

In theory, negative rates’ purpose is to discourage banks from hoarding reserves at the central bank. If banks must pay the central bank to store their excess reserves instead of earning a tiny return on them, the theory goes, banks will find lending more attractive—stimulating the economy as banks dole out more funding to households and businesses.

It is a nice seeming theory, but reality hasn’t totally vetted this out. In the eurozone, the ECB adopted negative rates in June 2014. At the time, loan growth was negative—tied to the eurozone’s sovereign debt crisis-driven regional recession. It did improve from there, returning to positive year-over-year growth in February 2015 and accelerating in the months and years ahead. But relative to the eurozone’s history, loan growth in the negative rates era wasn’t robust, as Exhibit 1 shows—it was in line with the recovery from the financial crisis, before the debt crisis, but far below the prior bull market.

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Our Perspective on the UK’s August Slowdown

The UK released monthly GDP for August today, and with growth slowing from July’s 6.4% m/m to 2.1%, most headlines focused on the seemingly fizzling recovery dashing hopes for a V-shaped rebound.[i] With growth stalling and new restrictions in local hotspots already starting to bite—and GDP still -9.2% below its pre-pandemic peak in February—many fear the road ahead will be long and arduous.[ii] We won’t argue everything from here will be smooth sailing, especially with pubs and restaurants throughout England now facing new limits on operating hours. But digging into the data, we found some interesting tidbits indicating the UK’s economic foundation is a lot stronger than it gets credit for and—for better or worse—reopenings and restrictions remain the swing factor. That doesn’t necessarily make life easier for investors, since these are inherently unpredictable political decisions, but it does suggest “weak economic fundamentals” aren’t reason to shun UK stocks.

The first interesting nugget comes from page three of the Office for National Statistics’ press release: “The accommodation and food services sub-sector contributed 1.25 percentage points to the 2.1% growth in GDP for August 2020, as the combined impact of easing lockdown restrictions, Eat Out to Help Out Scheme and ‘stay-cations’ boosted consumer demand.” Now, pessimists could read this and scoff that GDP was artificially inflated by government largesse, and if it can’t even grow well without the government picking up the tab when folks eat out, then things must be dire indeed. As people who generally believe most sustainable growth comes from the private sector, we won’t try to talk you out of that general viewpoint. But there is another way to view this without casting judgment for or against Eat Out to Help Out: People went out, period. As the UK and other nations started reopening in late spring and early summer, the big worry was that society’s fear of COVID-19 would keep people home and out of restaurants, sapping reopening’s power to generate an economic recovery. Indoor dining was supposedly the most vulnerable to this at all. But August’s results prove that decisively false. Setting aside quibbles over who picked up the tab, the simple fact people actually felt comfortable leaving the house and lingering at their local watering hole suggests that whole notion of psychological scarring causing economic scarring was off base.

The second set of fun facts comes from page five of the press release, which looks at Services’ 14 sub-sectors. Of those 14, 12 remain below pre-COVID levels, which isn’t surprising. But we were rather struck by which industries are struggling the worst. As Exhibit 1 shows, that includes all the items we wouldn’t rationally expect to recover until the virus is old news and no longer threatens the masses. Stuff like air travel. Rail transport. Entertainment. Elective health care. Paid domestic work. These are all largely still offline. Whatever your opinion of the merits of this, until life on these fronts returns to normal, these areas will likely continue to be sore spots. But when they do reopen, August’s hospitality boom suggests they can recover a lot faster than people might expect.

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The Big GDP Bang Analysts Project

Twenty days from now, in what is sure to be a heavily covered release, the US Bureau of Economic Analysis will unveil its advance estimate of US Q3 2020 GDP. After a historic decline in Q2, expect the reverse: a historically huge surge. How large? Estimates tracked by FactSet run the gamut from 17.0% annualized to 39.0%.[i] The Atlanta, New York and St. Louis Fed’s nowcasts—attempts to estimate GDP growth in real time using incoming data throughout the quarter—put Q3 at 35.3%, 14.0% and 20.3%, respectively.[ii] The median of these 30 total forecasts is 26.1%. Similarly huge jumps—if not huger—are expected in most of the developed world. The takeaways from this for investors are limited, but we do think putting these data in perspective can help manage expectations.

The third estimate of US Q2 2020 GDP put the springtime contraction at -31.4% annualized, the biggest drop since … ever. Now, as we told readers (probably too often), that doesn’t mean GDP fell by roughly a third. That is the rate of decline if contraction lasted a year at that quarterly clip. Similarly, if the median Wall Street estimate holds, the 26.2% annualized jump wouldn’t mean that GDP grew by more than a quarter.

As for those estimates, Exhibit 1 plots 30 forecasts of US Q3 GDP, as tracked by FactSet, and the three regional Feds. For some perspective, America’s highest-ever growth rate since quarterly GDP data began in 1947 was Q1 1950’s 16.7% annualized.[iii] All of Wall Street’s current estimates exceed this. Only the bears over at the New York Fed estimate a weaker-than-record growth rate.[iv]

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Our Notes on the Vice Presidential Debate

Editors’ Note: MarketMinder is intentionally nonpartisan. We favor no political party or politician and assess political developments solely for their potential economic and market impact.

Last night, Vice President Mike Pence and Senator Kamala Harris engaged in a tour de force of lying with statistics, ducking questions and rambling off-topic—otherwise known as your typical vice presidential debate. Ordinarily, our only mention of a vice presidential debate would amount to jokes about that old Saturday Night Live skit where the great Dana Carvey and Phil Hartman spoofed Ross Perot and Admiral James Stockdale, respectively, debriefing after the 1992 veep debate while joyriding. “Ping pong match! It was a.” But we digress.

Many pundits claim this year’s vice presidential debate is far more consequential than normal, given President Donald Trump’s being 74 and having a recent brush with COVID-19, as well as former Vice President Joe Biden’s 78 years of age. Speculation that one of the people on stage may be president before the next four years are out is relatively common, more common than usual, we suspect. That allegedly makes voters extra keen on hearing what they had to say and, potentially, makes it more influential on the race than usual. We don’t buy it, and we offer this word of advice: Don’t look to this debate for hints of who will win, much less what will happen to stocks.

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