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.

Assessing Economic Data During COVID-19

With America closing its borders and many local governments shutting down non-essential business, the fight to slow the COVID-19 pandemic will undeniably have a stark economic impact. How exactly that looks is an open question, though, with much hinging on how long the interruptions to business last. Soon we will start seeing data reflect the impact—and a flood of associated headlines. Here is what we can say now—and how we will be approaching releases as they come.

China provides a preview. The coronavirus’s spread escalated exponentially during mid-January’s Lunar New Year holiday. The ensuing public health emergency and containment—quarantines, city-wide lockdowns and travel restrictions—severely curtailed economic activity through February and early March. Data are now starting to reflect the damage. February’s manufacturing purchasing managers’ index (PMI) fell to a record low 35.7 from January’s 50.0—the dividing line between expansion and contraction.[i] February’s non-manufacturing PMI suffered a steeper decline from January’s 54.1 to 29.6—also a record low.[ii] China combines most of the rest of its official data for January and February to even out skew from the Lunar New Year’s shifting timing. As shown in Exhibit 1, they were awful across the board.

Exhibit 1: Chinese Economic Data Has Tanked

Source: National Bureau of Statistics of China, FactSet and CNN, as of 3/20/2020.

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Market Update Podcast: Michael Hanson on Market Volatility and Our Outlook

This podcast features an audio excerpt from a Fisher Investments Market Update Webinar. In this podcast, Fisher Investments’ Senior Vice President of Research and Investment Policy Committee Member, Michael Hanson discusses recent market volatility and our current outlook.

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This Bear's Evolving Fears Parallel the Past

In the past few days, investors’ fear has mushroomed beyond COVID-19 containment efforts and their immediate fallout. As the dollar has strengthened—normal during a recession and bear market—so have fears of companies and governments abroad struggling to service dollar-denominated debt. The gyrating corporate bond market is fanning fears of an allegedly long-overdue reckoning in junk bonds. Rising sovereign yields brought Italian debt crisis fears back. So are worries of imminent collapse in a smattering of industries, including travel, autos and retail—a lot of which carry a tinge of “this time is different.” We won’t try debunking any of these for now—there will be a time for that later. Rather, we will simply note that spiraling, spreading fear—a hunt for “the next shoe to drop”—is normal as a bear market worsens and not a roadblock to its eventual end.

You can see this in a number of past bear markets. Last time around, fears morphed from banks and subprime mortgages to the auto industry, the north-south economic divide in the eurozone, hyperinflation due to aggressive monetary policy and a years-long recession on par with the early 1930s. TARP and fiscal stimulus efforts drove fears of spiraling debt and deficits. The surging dollar in late 2008 had many fearing a reckoning; when this reversed and weakened later, many feared a dollar crisis. Toward the bear’s end, people were even speculating that stocks could go to zero. Morphing panic is part of a bear market’s evolution.

The 2000 – 2002 bear market had a similar fear morph as the dot-com implosion rippled throughout the broader economy. The tragedy of 9/11, which occurred a year and a half into the bear and six months into the recession, added airline industry woes and related pension dread. It also added fears over prolonged armed conflict in the Middle East. Enron and other accounting scandals drove worries that no company’s books were reliable.

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Here Comes the Stimulus

For the past couple weeks, stocks have dealt with the increasing likelihood of recession resulting from the societal efforts to contain or slow COVID-19 in Europe and North America. Now, the same governments are trying to ride to the rescue. Just one week after announcing £50 billion worth of help, the British government announced an additional £350 billion in business lifelines, loan guarantees and tax relief Tuesday. Several European nations, including France and Germany, have also unleashed billions of euros in fiscal stimulus and effectively suspended the EU’s debt rules. Not to be outdone, US Treasury Secretary Steven Mnuchin and members of Congress have spent this week batting around somewhere between $850 billion and $1.2 trillion worth of tax credits, direct payments and provisions for businesses impacted by containment measures. Without having any specifics or actual legislation to assess, a deep dive on winners and losers is premature. For now, we think it is important to simply acknowledge the massive wave of liquidity lurking and help investors set reasonable expectations on what it can—and can’t—do.

First and foremost, fiscal stimulus can’t stop the economic consequences of closures, outages and interruptions to business. Like monetary policy, it can’t reopen the stores and restaurants that have closed either voluntarily or due to local emergency restrictions. It can’t end the shelter-in-place order affecting the San Francisco Bay Area. It can’t heal the sick, reopen schools or return people to the workforce. Most importantly, it can’t force COVID-19 to fade with flu season a month or so from now. Only when COVID-19 fades is life likely to start returning to normal. That will happen when it happens regardless of how much stimulus governments load into their metaphorical bazookas.

So governments and central banks aren’t saviors. But crucially, the global economy and markets don’t need a savior. Not because of anything unique about this bear market, but because cycles turn with or without stimulus. Stocks move in advance of economic data, and many bull markets have begun long before data improved. The last bull market began in March 2009, when data and corporate earnings were awful, unemployment was rising alongside bankruptcies and most of the world was contracting. The recession didn’t end until that July—and data revealing those green shoots didn’t come out until late summer and early autumn, nearly six months after stocks bottomed. Stocks don’t wait for improved data. All they need is sentiment becoming overly pessimistic, creating an easy benchmark for a not-as-bad-as-feared reality to beat.

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Timeless Optimism Will Conquer Panic. Again.

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks.

That is how Warren Buffett—perhaps the greatest living investor—began his October 2008 New York Times op-ed. World stock markets were selling off violently, similar to what we have all experienced lately. The specifics, of course, differ from today. But his basic wisdom holds: In a panic, those who can keep their heads generally prevail. Investing is a statement of hope and optimism in the power of human creativity to bring a brighter longer-term future. Twelve years ago, his words resonated with me. Many lambasted him as out of touch at the time. The succeeding decade proved otherwise. This is, no doubt, a fearful time. However, it will pass. Once it does, history argues the American and world markets will flourish—echoing their rebound then.

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The Fed's Mixed Bag of Measures

The Fed announced more “emergency” measures Sunday, just three days before its scheduled meeting and monetary policy announcement, and markets reacted fearfully. In addition to cutting the fed-funds target range by a full percentage point to 0 – 0.25%, the bank restarted its “quantitative easing” (QE) asset purchases: “Over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion.”[i] In hopes of boosting liquidity in financial markets, they also dropped the discount rate (at which banks borrow from the Fed directly) to 0.25%, dropped reserve requirements to 0 and encouraged banks to draw on their capital buffers, if necessary, to boost lending to households and businesses short on cash as COVID-19 containment policies escalate. While they likely intended to shore up confidence in the banking system and allay fears of a financial crisis, the move seems to have done the opposite, giving investors the perception the Fed knows something the rest of us don’t. To us, that is more panicky sentiment than reality, though to be clear, the Fed can’t do anything to stop the economic consequences of COVID-19 containment efforts. They can only help with the collateral damage and the eventual recovery, and on that front, these measures are a mixed bag.

Starting with the good, the measures to ensure liquidity are fine in theory, although the announcement’s timing and sentiment probably did more harm than good in the very short term. Oodles of small businesses have been forced to close, and no one wants to see restaurants, breweries, shops, daycare centers, dental offices and others have to fold just because revenues stopped rolling in and they couldn’t cover fixed costs. That would be astounding collateral damage. So to the extent that the Fed can grease the financial system to enable banks to get folks over the hump, good.

But only time will tell whether these policies work in the real world as well as in theory. Letting banks take capital below regulatory minimums sounds helpful, but banks were already holding capital well above the minimum, suggesting regulations alone don’t guide their capital decisions. Similarly, the Fed encouraged banks to use the discount window on Monday, in an effort to erase the stigma that has long accompanied it. Fair enough, but what practical reason do banks have to tap the discount window when the rate is higher than what they would find in the open market? The Fed historically encouraged discount window use by dropping the discount rate below fed-funds to boost liquidity. That enabled banks to borrow from the Fed and lend to each other at a small profit—a powerful incentive. They didn’t use that tool in 2008 and aren’t now, which is a bit head-scratching. We suspect it is all fine since banks actually have plenty of cash, but still.

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A Vital Asset Now: An Even Keel

Seventeen days ago, the S&P 500 was at record highs. Yesterday, it had its worst day since 1987, entering bear market territory. And today? Its 10th-best rise on record. If you find the huge downs and ups disorienting, you are not alone. Heck, we feel it too, and we do this for a living. It is tempting to read into the huge swings—up or down—and draw large conclusions. Some will declare the end must be nigh following a week with such steep climbs and dips, and maybe that will prove to be correct. But no market turning point is clear until you have several weeks’ or months’ hindsight. Additionally, no turning point is predictable.

In our view, these ups and downs are a call for calm on both ends of the emotional spectrum. We suspect getting too carried away by a steep jump is as dangerous as getting hung up on a drop. The movement in either direction just doesn’t predict what lies immediately ahead.

Until we get some distance on it, we won’t know where the low is. To us, the best course of action now is doing your best to keep an even keel. If you let today boost your expectations, and we end up getting another downdraft, it could be that much more difficult to swallow. That could put you at risk of making counterproductive moves. We are empathetic toward anyone who wants to breathe a sigh of relief. But always remember there is no such thing as an all-clear signal.

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Volatility by Any Other Name

Stocks’ seesaw week continues. After bouncing 4.9% on Tuesday, the S&P 500 sank -4.9% on Wednesday, hitting a new low.[i] The peak-to-trough decline breached -20% briefly late in the day before a last-minute climb pared it to -19.0%.[ii] Meanwhile, the Dow Jones Industrial Average—a broken index—now sits -20.3% below its peak, spurring “Bear Market!” headlines across the Internet.[iii] As we will discuss momentarily, magnitude alone doesn’t determine whether a downturn is a bear market. More importantly, whatever moniker this decline ultimately earns, what matters more is what stocks do from here. Look at the entire dataset of S&P 500 history, and you will see sharp declines from a high usually don’t mark the start of something long, grinding and ugly. Most often, they mean a rebound lurks nearby.

Conventional wisdom says a stock market correction is a drop between -10% and -20%, while a bear market is a drop of -20% or worse. In our view, it is a little more complex than that. Corrections are usually fast and sharp. They start and end without warning and usually feature a freakout over a scary, seemingly plausible story. Sentiment is the driving force. Bear markets, on the other hand, usually start slowly as investors shrug off danger signs, with the gentle declines luring in optimistic buyers. They usually have identifiable fundamental causes that the world overlooks until it is too late. Those causes fall in two general categories: the “wall,” in which euphoric investors have climbed the proverbial wall of worry, creating lofty expectations that reality can’t possibly match; or the “wallop,” in which a stealthy negative capable of knocking a few trillion dollars off global GDP goes unnoticed. Regardless of which recipe forms a bear, though, they tend to develop gradually—not fast, like corrections.

As for magnitude, bear markets don’t just breach -20%. Usually, they take extended trips below it. The one seeming exception to this trend, 1990’s shallow and short S&P 500 bear, was part of a longer, deeper global bear. Then, the MSCI World Index fell -25.9% in price terms between January 4 and September 28 and had a classic rolling top.[iv]

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Our Perspective on Oil and Stocks' Continued Volatility

Ouch. That is the first word that leaps to mind after Monday’s big market volatility. By now you likely know stocks plunged globally after Saudi Arabia flipped from trying to agree to production cuts to slashing its oil price and ramping up output. That sent global crude oil prices down -30% this morning, before they recovered somewhat.[i] The S&P 500, meanwhile, fell -7% early in the day, triggering circuit breakers that paused trading for 15 minutes to give everyone a moment to breathe and try to think rationally. After trading reopened, stocks seesawed and ultimately closed down -7.6% on the day.[ii] That brings the S&P 500’s peak-to-trough decline to -18.9%, placing it inches from what many consider bear market territory on what would be (and we think will still prove to be) this bull market’s 11th birthday.[iii] It is ugly any way you slice it. However, this volatility still looks correction-like, not bear market-like, to us. While there is no way to know how much longer this volatility will continue, we still think investors seeking long-term growth will benefit most from staying cool and awaiting the recovery.

In our view, that remains true even if volatility continues and takes the total decline somewhat below -20%. Whatever you call such a move, quick, steep drops tend to reverse about as swiftly. Absent a major, lasting, fundamental negative—which we don’t think coronavirus fears or weak oil prices amount to—the rebound shouldn’t be far off.

The general sentiment among investors today seems to be that plunging oil prices add another blow on top of the coronavirus, all but assuring a global recession. In years past, investors would have cheered oil prices in the $30s as stimulus, arguing it gives consumers more flexibility to spend on discretionary items. But in 2014, the last time oil plunged, it didn’t have a material effect on consumer spending, and it forced oil firms to rein in investment. Their cutbacks rippled through oil-dependent economies as well as global manufacturing, causing a mid-cycle economic slowdown that lasted into early 2016. As a result, people are now penciling in another round of cutbacks—and worse. Many smaller Energy producers have weaker balance sheets now than the last time around and risk running out of cash if they can’t continue tapping borrowers, causing a twin fear of bankruptcies wreaking havoc in the sector, potentially triggering a chain reaction through broader credit markets and the economy.

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Coronavirus: Seeing Through the Fog of Fear

With nearly every news website, broadcast, blog, social media outlet and publication wallpapered with coronavirus coverage, information—and, sadly, misinformation—about it abounds. That slew of coverage is seemingly spawning fear, which makes focusing on facts currently known about the outbreak all the more urgent, in our view. Now, we aren’t epidemiologists or physicians. Neither of us studied medicine. We don’t even play doctors on TV. But part of what we do is analyze media—our team covers dozens of outlets daily from around the world. That means we have collectively read hundreds of articles on the subject—and found some significant overlap across various experts about what is true and what isn’t. While there are still some significant unknowns about the outbreak, we thought rounding up our findings may help readers. Now, of course, all this could change—and some statistics surely will—but we hope to provide you as good a basis for seeing this as possible now, given extant fear over the issue. Without further ado, here we go.

How Many People Have the Coronavirus?

Most outlets cite the total number of identified cases in response to that question. As of March 6, Johns Hopkins University’s dashboard (which you can view here) cites 101,781 coronavirus diagnoses—260 in America. However, there are a few caveats to this. One, that doesn’t deduct the number of patients who have recovered or, tragically, died. Hopkins counts 55,866 patients as having recovered from the virus. 3,460 have died. Hence, these data show 42,455 persons currently known to have coronavirus globally—238 in the US.

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