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.

Life After Brexit, Day 7

What a difference a week makes! After closing out 2020 as the MSCI World Index’s worst-performing constituent country, UK stocks jumped out of the gate in 2021, leaving the global market in the dust after the first calendar week. Now, far be it from us to read into a few days’ market movement, but we think it is noteworthy that this rally arrived just as widely expected post-Brexit chaos failed to materialize. Yes, there were a few speedbumps, but things seem to be going fine overall, and forward-looking stocks appear to be getting on with it.

One big problem Brexit was supposedly going to cause was chaos at UK ports as truck drivers got used to new paperwork requirements and—as all humans would—made some errors here and there. The massive truck backlogs that amassed when France closed the border over COVID concerns last month, allegedly, foreshadowed Brexit mayhem. So far, though, things have gone much better than most expected. In one anecdotal example, Eurotunnel tweeted that all trucks crossing from Britain to France via the Channel tunnel’s shuttle train in Brexit’s first 8 hours—about 200 trucks—had their paperwork in order. Now, the Welsh port of Holyhead has reported a reduction in EU-based trucks using the UK as a stopover between Ireland and the Continent, while there is an uptick in trucks taking ferries directly from Rosslare in Ireland to Cherbourg in Northern France—a longer trip. But ports operators are skeptical that this is permanent. For one, rumors of chaos in Britain may have inspired truckers to make the longer drive. Once it becomes clear things are running overall smoothly, activity could easily return to normal. Two, Brexit dread pulled a lot of demand forward, so this could be a natural hangover. Either way, the massive delays and disruptions so many expected didn’t arrive.

The other big, widely expected Brexit consequence basically did come true: A big chunk of euro-denominated stock trading left London stock exchanges as businesses shifted gears to comply with EU rules. On 2021’s first trading day, according to Refinitiv, roughly €6 billion of stock trades shifted out of London—about half the activity normally seen. That is a hit, but only a small one, as stock trading is not exactly a big revenue-generator these days. Here, too, markets seem largely unfazed, as UK Financials are performing in line with their global counterparts year to date. Banks have also expected—and prepared for—this for years. A small negative with no surprise power just isn’t likely to prove a major market mover.

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A Look at Recent Oil Market Rumblings

Saudi Arabia made headlines earlier this week after announcing a surprise oil production cut—right after OPEC+ (OPEC plus 10 partner countries including Russia) agreed to keep output flat. As oil prices rallied, analysts debated whether a shift was underway in global oil markets. However, we think the drivers for oil prices remain little changed: Supply remains plentiful given weak demand tied to COVID restrictions. In our view, this balance doesn’t look likely to change materially for the foreseeable future—important to keep in mind for those seeking opportunities in the Energy sector.

To understand why, start by considering what OPEC and friends have been up to over the past year. At 2020’s start, OPEC+ produced about 42 million barrels of oil per day (bpd).[i] After a price war between Saudi Arabia and Russia erupted in March, OPEC+ reached a US-brokered détente in April. Per the agreement, the group would decrease output by 9.7 million bpd—approximately 13% of global production—in May and June, then gradually taper those cuts. After June, the 9.7 million barrel cut would drop to 7.7 million through the rest of 2020—and then fall to 5.8 million through 2021 until April 2022, when the deal ended.[ii] In other words, they would cut a lot at first, then gradually ramp up production a tad—but nowhere close to the starting point.

However, not all has gone according to plan, and the group has struggled to hit their original targets. Though OPEC+ allowed 2 million bpd to return to the market in August, they have refrained from further easing, citing concerns of a still-fragile oil market. As of January 2021, OPEC+ output is still 7.2 million bpd below year-ago levels—nearly 2 million bpd more than the agreement’s initial aim.[iii]

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The Dangers of Partisan Bias Now

Editors’ Note: MarketMinder’s commentary is intentionally nonpartisan. We favor no politician nor any political party and assess political developments exclusively for their potential impact on investments and markets.

Ever since America’s historically close election on November 3, emotions have run high over the outcome. Those emotions hit a crescendo Wednesday, after Georgia’s Senate runoff elections seemingly concluded and rioters interrupted Congressional proceedings to certify Joe Biden as President-elect in the Capitol. There is a lot to say about all these developments themselves, of course, but little that hasn’t been said in virtually every media outlet nationally. Instead, we think developments since the election—and especially yesterday—highlight a key point: It is critical to set your political views aside when assessing investments. Despite widespread fears the election’s outcome and/or related instability would hurt markets, stocks are echoing that very message now.

Throughout 2020’s election cycle, we heard pundits of both political persuasions warn of a market rout if their side didn’t win. But Election Day was 72 days ago—10 full weeks plus two days. There are only 13 days until Inauguration Day, when this election’s news cycle should conclude. In those 72 days, America’s S&P 500 Index is up 13.6%.[i] Sure, that is behind the MSCI World’s 16.5% over this span.[ii] Maybe political angst explains some of that lag. (Although we would note it likely has more to do with November’s value countertrend rally.) Even Wednesday, as the news was breaking in the Capitol, stocks rose—and S&P 500 futures climbed after trading concluded.[iii] Markets opened up sharply Thursday morning, too. While we would never draw big conclusions from one day and definitely not from one after-hours session, they merely add to the preceding 10 weeks’ evidence.

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Lessons From PMIs and Other Goodies

Investors got 2021’s first US economic data release Tuesday, when the Institute for Supply Management (ISM) announced its manufacturing purchasing managers’ index (PMI) for December jumped to 60.7 from November’s 57.5, beating expectations for a mild slowdown.[i] (As with all PMIs, readings over 50 indicate expansion.) Forward-looking new orders hit an astounding 67.9, and output rose to 64.8.[ii] Surprising many, this expansion happened even as several states and metro areas were tightening lockdowns. Meanwhile, ISM’s services PMI doesn’t hit until tomorrow, but IHS Markit’s version ticked lower, signaling a slowdown. This divergence is unusual for a recession, and it isn’t the only thing making 2020’s economic contraction unique—a factor that holds a few takeaways for investors, in our view.

History will remember last year’s economic decline as a recession. The official arbiters, the National Bureau of Economic Research, already declared it one. But from a qualitative standpoint, we think the decline’s nature matters, too. Last year’s downturn had a well-known, unique cause: In hopes of slowing COVID-19’s spread, governments nationwide (and worldwide) ordered the closure of most face-to-face businesses. When the first wave of lockdowns happened in March, that included a lot of manufacturing facilities as well as shops, restaurants and personal services. But by the time the late-year virus surge triggered a new wave of lockdowns, officials seemed to realize factories could stay online provided employees maintained social distance and had adequate personal protective equipment. They were allowed to remain open—unlike restaurants, hair salons and a host of others. Online shopping also supported demand for physical goods as people adapted to stay-at-home life. So we ended up with a forced decline in services activity, while manufacturing fared ok after an initial drop.

More traditional recessions don’t materialize as suddenly or sharply. The typical recipe: As an expansion rolls on and the world gets more optimistic, businesses tend to build up excess as their expectations get too high. They launch big new projects, ramp up output, add headcount and all the rest as they see only sunlit uplands and can’t fathom bad times arriving in the near future. Meanwhile, in an effort to contain that froth, central bankers often overshoot, jacking short rates above long rates and inverting the yield curve. That starts a reset in which funding dries up, forcing businesses to get lean and mean to make it through. They slash investment and production and work through big inventories, with the goal of being able to do more with less once everyone has worked off their collective bloat. You can see this in the steady decline in inventories and capacity utilization over the entirety of a recession. Both usually bottom out alongside GDP. This time, inventories and capacity utilization took an immediate hit before beginning a sharp recovery. Neither is back at breakeven yet, but both have rebounded far faster than if this were a traditional recession, as Exhibits 1 and 2 show.

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The Sentiment Overshoot That Spurred Stocks in 2020

As we reflect on 2020 in its waning hours, it is easy to think of many ways this year will be remembered as one of history’s worst: the pandemic’s vast public health impact and the related tragedies many families endured; the sudden, sharp hit to employment and small businesses; the dislocations from social distancing and school closures. As much as this is the undeniable reality of the year, though, there is another thing to consider: How much better than feared the economic reality has been since the lockdown-induced contraction in the spring. While we don’t diminish the year’s general awfulness, we think it is worth acknowledging that this better-than-feared reality likely contributed mightily to the swift bull market that began in March.

In the early, hugely uncertain days after Western nations began locking down in an effort to slow COVID’s spread, pundits pretty much everywhere agreed the hit would be severe. Comparisons to the Great Depression were front-page news in many major outlets worldwide. Yet expectations from the crisis’s pessimistic depths for everything from annual GDP growth to earnings and unemployment have proven overly negative.

Consider GDP. In the lockdowns’ immediate wake, everyone was sure the damage would be severe—and it was. In Q1 and Q2 2020, US GDP fell -5.0% and -33.1% annualized, respectively.[i] Now, that doesn’t mean output actually fell that much in each quarter. As we took pains to explain at the time, annualized rates are the full-year rate that would result from the quarter-over-quarter growth rate repeating all four quarters. Using the actual quarter-over-quarter rates, GDP fell by -10.1% from Q4 2019’s high through Q2 2020. That is the worst two-quarter contraction in terms of magnitude since quarterly data begin in 1947. But it isn’t on the Depression’s level. Across that three-plus-year downturn, economists estimate GDP fell by roughly a third—nearly three times 2020’s decline, including one year (1932) in which GDP fell -12.9%.[ii]

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Some Dos and Don’ts for a 2020 Portfolio Review

With 2020 about to wrap up, annual reflections and reviews are common[i]—including of investment portfolios. There is nothing special about a calendar year, and reviewing such things in 12-month chunks has always struck us as rather arbitrary. But if you choose to conduct a year-end portfolio performance review, we think these dos and don’ts should be front of mind.

Do: Assess returns against a comparable market index (or mix of indexes).

Global equities are up 15.7% for the year.[ii] Depending on your asset allocation—your portfolio’s mix of stocks, bonds and other securities—that may not be the best reference point for your entire portfolio. If you have a good chunk of your assets in bonds, comparing the totality of your portfolio to stocks alone would be inaccurate. Instead, measure each portion against the most relevant benchmark. For example, you might measure your bonds against a broad bond index, like the ICE BofA 7-10 Year Corporate-Government Bond Index. For stocks, if you are invested globally, measure that portion of your portfolio against the MSCI World Index, not the US-focused S&P 500 index. For instructions on how to access these indexes on publicly available sites, here you go.

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The Major Lesson From a Wild, Tumultuous Year in Markets

With two trading days left in the year, the S&P 500 is up 17.5% year to date.[i] The MSCI World Index is right on its heels at 15.5%.[ii] If you were locked in a sound-proof chamber devoid of any interaction, online or otherwise, with the outside world all year and got only this information, you might think 2020 was just a nice, ordinary, modestly above-average year. Obviously, it wasn’t. February and March saw history’s fastest bear market, turning the year into a wild rollercoaster most would rather forget (not to mention the pandemic, natural disasters, social upheaval, a contentious election and all the other events this year threw at us). To those who hung on through the tumult to capture the rebound and subsequent gains, whether intentionally or because terror froze you into inactivity, never forget how your patience paid off—that lesson will serve you well the next time stocks encounter such sharp volatility. To those who missed some of this year’s returns, take heart: One year won’t make or break anyone’s long-term returns. For everyone out there, success doesn’t depend on how you did in 2020 alone. But what you have learned this year could be vital to future success.

There are plenty of lessons to learn from this year—and plenty of other articles listing them out. So here we will just offer a simple one: If you are investing in stocks for long-term growth, there are generally only two valid reasons to exit the market. First, if sentiment is so rollickingly euphoric that investors’ expectations have become almost comically high and impossible for reality to beat in any realistic universe. Second, if you see something big, bad and unnoticed—something no one else thinks could wipe a few trillion dollars or more off of global GDP. Those are the two things that generally cause bear markets, and identifying them early on can help you see a bear market just after it begins, giving you plenty of time to get out before the worst hits.

When stocks peaked in mid-to-late February, euphoria was absent. The COVID lockdown fell into the second category, which we call a wallop, and stocks started pricing those lockdowns’ economic fallout in weeks before they became official. Markets bottomed on March 23, the very day the UK became the last major nation to enter lockdown—and the day before IHS Markit’s flash purchasing managers’ indexes for March offered the first look at how much lockdowns were harming global economic output.

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Today in Brexit, Day 1,644

Editors’ Note: As always, our political commentary is intentionally non-partisan. We do not advocate for or against the UK leaving the EU and assess developments like these exclusively for their potential market impact.

Well how about that! In perhaps the least 2020 thing to happen all year, UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen agreed overnight on a post-Brexit trade deal. It reportedly took 24 hours of telephone haggling over fishing rights, which ended in an agreement whereby EU fishing boats can access UK waters for five-and-a-half years but the value of their catch must fall by 25%—a deal we are sure some on both sides will find delectable and others will find, well, fishy.[i] Oh, and trade between the UK and EU will remain tariff free and not subject to caps or other restrictions, a win for businesses on both sides. Now, we have long argued a deal isn’t necessary for both sides’ economies (or stock markets) to do fine once the post-Brexit transition period ends next week, so we don’t view this as some whopping positive or super-bullish catalyst for stocks. But it zaps most remaining Brexit-related uncertainty, giving businesses clarity on trade costs from here on out. More broadly, it probably helps boost sentiment, which adds to the blooming animal spirits as 2021 dawns.

Beyond the fishing bargain, the agreement offers little that wasn’t already expected. It puts the UK outside the EU’s customs union, giving it noteworthy freedom to diverge from EU regulatory standards—a key point for those who were pro-Brexit. As a result, there will be border checks on goods crossing the Channel and/or Irish Sea (the border between Ireland and Northern Ireland remains unfettered, consistent with 1998’s Good Friday Agreement that brought peace to the island). Those checks could cause some near-term backups and delays as freight firms adapt to new paperwork and procedures—not dissimilar from the interruption France closing its borders tied to COVID response caused in recent days. Moreover, the deal doesn’t apply to services—including financial services, meaning UK-based firms need to have a physical EU presence to ensure market access. That said, this was widely expected and led many firms (including our own) to establish footholds in EU jurisdictions to serve customers there over the past few years. It also remains possible that London-based banks gain access later if the sides reach an agreement on regulatory “equivalency” or thereabouts.

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An Early Christmas Gift From Congress?

Editors’ Note: As always, our political commentary is intentionally non-partisan. We favor no party nor any politician and assess political developments solely for their market and economic impact.

After months of talks, Congress agreed on a $900 billion COVID relief package on Monday, and its finalization seemed like a foregone conclusion until Tuesday evening, when President Trump blasted it and asked for some upward revisions in direct payments to Americans. But the legislation passed both chambers with veto-proof majorities, so it seems unlikely that this suddenly implodes. Meanwhile, the president isn’t the only one debating the pros and cons and whether more “fiscal stimulus” is necessary—headlines have been at it for days. In our view, this argument is wide of the mark. While the bill will likely help some struggling households and businesses, we don’t think it will meaningfully boost the economic recovery even if a few more billion dollars are added to it as the president requested—especially since the spending isn’t true stimulus, in our view.

Barring any forthcoming changes, here are some of the highlights in the bill Congress passed.[i]

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The Key Financial Lessons From an Awful Year

2020 has been terrible. But in its awfulness, it may also have revealed the importance of what we take for granted too often. This ranges from the everyday, like getting a haircut or catching a quick lunch, to the profound—the personal connections that enrich life. Being prepared financially is on the mundane end of the spectrum, but in our view, this year has made its value abundantly clear. So in the spirit of learning from hard knocks, here are some financial lessons brought to you by 2020 that we think bring timeless benefits.

It pays to stay cool and level-headed—especially when most aren’t. By their very nature, unprecedented events with big, negative consequences trigger fear and panic. But such crises aren’t the only risk. They can lead you to take the wrong actions at the worst possible moments, compounding disaster. In mid-February, after an exceptionally strong 2019 that looked likely to continue, stocks faced a wallop: a pandemic that led to blanket economic lockdowns attempting to contain it, crushing economic activity suddenly.

The bear market that ensued sent the S&P 500 down -33.8% in five weeks—a record-fast drop and extraordinary in the history of bear markets, which are usually long, grinding affairs.[i] It would obviously have been great to be able to foresee the bear market coming and take action in February or thereabouts, getting back in at lower levels later. But the next best option? Staying cool. Five months later, markets had erased the damage.

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