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.


What to Make of Flagging Consumption

With lockdowns starting to ease, many pundits are shifting their thoughts to possible paths forward. Since consumer spending is almost 70% of US GDP, many questions hinge on consumer behavior. The dominant theme: Fear that plunging consumption in March and April is a prelude to persistent weakness past economies’ reopening as virus worries, high unemployment and rising savings rates flatline spending and quash growth. But in our view, this overrates consumer spending’s variability—even given the current, very unusual economic circumstances.

Retail sales have tanked since shelter-in-place orders spread nationwide, falling -8.3% m/m in March and -16.4% in April.[i] To see the full effect of these twin monthly drops on retail sales—and its major underlying industry groups—Exhibit 1 shows the cumulative percentage change in retail sales from February – April 2020.

Exhibit 1: Percentage Change in Retail Sales Components, February – April 2020

Source: FactSet, as of 5/18/2020. Percentage change in components of US retail sales and food services, February 2020 – April 2020.

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What China’s April Data May Show Global Investors

China released several widely watched economic reports last Friday, providing more insight about the country’s performance since lifting its most severe COVID-containment policies in early March. Some doubt China’s numbers will shed much light about post-COVID life elsewhere—mostly citing unique features of the country’s lockdown and rebound. There is some sense in that. China’s experience won’t look exactly like Continental Europe’s, which won’t look perfectly like America’s (etc., etc. and so forth). Still, in our view, China’s nascent economic recovery offers an instructive preview of life following a virus-driven shutdown—and should help set investors’ expectations.  

In China’s first full month without national COVID restrictions, April industrial production rose 3.9% y/y, returning to positive territory after March’s -1.1% slip and January – February -13.5% decline (China typically consolidates January and February economic data to account for the monthly skew from the shifting Lunar New Year holiday). Retail sales fell -7.5% y/y—the second straight month showing slower declines. Both these measures have improved markedly from the start of the year, when authorities extended the Lunar New Year holiday as part of China’s COVID-19 containment effort. 

Exhibit 1: China Retail Sales and Industrial Production, April 2019 – April 2020

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Reopening in Europe and Australia

With more and more economic data coming in, the sheer scope of the hit to the global economy from well-intended lockdowns is becoming clear. With it, so is the importance of reopening the economy—both to growth itself and markets. Four weeks ago, we outlined the earliest European nations’ reopening plans—from Denmark and Austria. But now, many other nations have joined them in beginning to reopen. For investors, we think a quick look at some major developed nations’ plans can help further form expectations about the economic contraction’s duration—and global stocks’ likely path forward.

The following is a roundup of major nations’ plans. Of course, their leaders have repeatedly warned these are subject to change (read: delay or reversal) if COVID-19 case counts resurge. These gradual plans—plus governments’ caveats—should help keep investors’ expectations of the path to reopening low. In our view, those low expectations are a plus for stocks, likely helping reduce negative surprise power.

Germany:

Source: BBC and Reuters, as of 5/18/2020. Individual states’ roadmaps may differ.

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Rounding Up Major Global GDP Figures for Q1

Japan reported Q1 GDP this morning, rounding out the preliminary results of COVID-19’s impact on major developed economies, and as most everyone expected, the Land of the Rising Sun joined Germany, France and Italy in recession. As we warned readers a few weeks ago when the US reported GDP, national statistics agencies’ various reporting preferences may make comparing countries’ growth rates difficult. Hence, we have done the math to bring everything in line and show what the results do—and don’t—mean for stocks.

Under more typical circumstances, the variance among countries’ GDP growth rates wouldn’t get a ton of scrutiny—just a quick “A is growing faster than B,” and then everyone moves on. But in the COVID-19 era, investors are desperate for any hint of how the virus and the related stay-at-home orders are affecting the global economy, particularly with countries’ lockdowns (and reopenings) on differing timetables. Just looking at news coverage or national statistics bulletins probably won’t give you everything you need to know, however, because countries use different reporting methods. The eurozone and most of its member-states focus on year-over-year or quarter-over-quarter results. The former is the percentage change between GDP in Quarter X versus the same quarter in the prior year. The latter is the percentage between GDP in Quarter X and the preceding, usually with seasonal adjustments. The US and Japan report GDP growth at seasonally adjusted annualized rates, which is what you get if you compound the quarterly growth rate over a full year. So to make life easier for you and us, we made Exhibit 1, which displays seven major nations’ (plus the eurozone’s) annualized GDP growth rates over the past three quarters.

Exhibit 1: Annualized GDP Growth Rates

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Much Ado About Negative Rates

Last Thursday, fed-funds rate futures dipped negative—seemingly hinting that some traders anticipate the Fed enacting a negative interest rate policy by mid-2021. Accordingly, chatter—and fear—about the prospect is up. President Trump tweeted his support for it. Yet several Fed members, including Chairman Jerome Powell on Wednesday, have stated they have no plans to cut rates below zero. That seems sensible to us. We find little evidence of negative interest rates stimulating growth anywhere they have been tried, mostly amounting to a mild negative. Here is why.

To be clear, we aren’t talking about market-determined Treasury rates, which can (and have) dipped below zero at times.[i] We are referring to Fed-set overnight rates—like those that influence rates banks charge one another for overnight funds and/or earn by depositing funds at the Fed itself. Presently, these are barely positive.[ii] Negative rate proponents argue flipping them below zero would boost growth and inflation by spurring banks to lend. But in countries deploying negative rates in recent years—Sweden, Denmark, Switzerland, Japan and the eurozone—lending didn’t get an apparent turbo-boost. 

Sweden’s Riksbank was the first to implement negative rates in July 2009. This first foray lasted until September 2010, and it may seem to have “worked.” An eight-month deflationary stretch ended in December 2009, after which Swedish inflation gradually accelerated to 3.4% y/y in August 2011.[iii] But this was part of a global trend of higher inflation as the world emerged from the global financial crisis, so it looks less like a policy success and more like a byproduct of the global recovery. Sweden reinstated negative rates in February 2015 and ended them this February. During this span, the policy looks less “successful”: Inflation was at or above the bank’s 2% y/y target less than a quarter of the time.[iv]

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Teachings From a Maturing 1990 Treasury Bond

Friday, $10 billion worth of 30-Year US Treasury bonds originally sold at auction on May 15, 1990 will mature. Partly to refinance this, the government sold new 30-year bonds on Wednesday—$22 billion worth. The results of this swap highlight a key point about US debt: While the amount of debt outstanding is up a lot, so is debt affordability.

Let there be no doubt: US federal government debt has grown dramatically these last 30 years—and seems set to rise substantially this year, too, given the fiscal response to coronavirus lockdowns. On May 12, the Treasury put overall (gross) federal government debt at $25,188,757,825,113.86.[i] Call it $25.2 trillion for simplicity’s sake. Of that, the government itself (not including the Fed) owns $5.9 trillion. As this is both a federal government asset and liability, it effectively cancels. Hence, most economists and analysts look at net public debt, which removes intragovernmental holdings. It stands at $19.3 trillion presently.

When the government issued the 1990 bonds that mature Friday, America had about $2.4 trillion in net public debt.[ii] Looking at this metric, to say that the aggregate amount of federal government debt has grown some is an understatement.

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Into Perspective: Renewed Fears of an EM Currency and Debt Crisis

The global bear market beginning in February left few asset classes unscathed. But the heightened risk aversion hit many Emerging Markets (EMs) particularly hard, with a surge in capital outflows and material currency weakness reigniting debt fears. This is a common narrative during times of stress—EMs have been plagued by multiple crises over the past 30 years, and memories of the late-1990s currency crisis loom large. But too often, pundits focus on fragile positions in a few countries, then extrapolate those fears to the broader category. A similar phenomenon is occurring today, with headlines dwelling on IMF bailouts and defaults. Yet most EMs are in relatively healthy shape, and the probability of a new currency and debt crisis remains low.

Fears surrounding debt tend to focus on absolute levels—think of the US national debt clock, currently over $25 trillion at the time of this writing. EMs as a whole owe even more—a massive $71 trillion.[i] Big numbers scare people, and there isn’t a person on Earth who thinks trillions of anything is a small figure. Overall debt levels have indeed risen globally in the past decade—but so has the size of the global economy and countries’ institutional defenses against financial trouble. In our opinion, it is more instructive for investors to focus on debt sustainability, which means scaling borrowings and better understanding their composition.

Historically, EM debt crises generally arise from currency crises. This is because EMs find it more difficult to raise funds domestically, so they lean heavily on financing abroad in foreign currency. The Asian Financial Crisis in 1997 – 1998—the last true debt crisis to ripple through EM—is a textbook case of what can go wrong. At that time, many countries pegged their currency to the US dollar to piggy back on its relative stability. They then heavily borrowed in dollar-denominated debt to finance booming economic growth, keeping few currency reserves to fend off speculators. When their currencies fell under pressure, they quickly ran out of firepower to defend the pegs and were forced to devalue. In doing so, their debt levels and service costs in local currency terms skyrocketed—and crisis ensued.

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Stocks and Unemployment’s Relationship Hasn’t Changed

Last week, we highlighted stocks’ strong tendency to move before unemployment data—falling before unemployment starts rising during a recession and rising before the unemployment rate peaks post-recession. This bear market and economic contraction, thus far, have been hyper-compressed. Stocks’ decline preceded data putting numbers on stay-at-home orders’ economic impact, including weekly jobless claims. The rally since March has been similarly fast and ahead of economic data, which is normal at the end of a bear market. Should it hold, the rise preceding the unemployment peak, though also hyper-compressed, would be quite typical.

One article that caught our eye on Monday presented the S&P 500 Index and unemployment rate in a visual way we hadn’t encountered before. It took the last 10 years of S&P 500 price index levels (the full history available for free public use at the St. Louis Fed’s FRED database) and unemployment rate and made a scatterplot—unemployment on the Y-axis (vertical) and stocks on the X-axis (horizontal). It then connected all the dots in chronological order. The result, which we have recreated, looked like this (although the data labels here are ours):

Exhibit 1: A Creative Look at Stocks and Unemployment

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What Recovery Pessimism Means for Stocks

With countries gradually reopening from COVID-19 lockdowns, investors’ focus seems to be shifting from the economic contraction’s depth to its duration. Where at first hopes seemed high that reopening would mean a swift return to normalcy, pessimism seems to be growing. A number of outlets now argue that even if lockdowns end swiftly, it won’t be a magic economic elixir—dooming the economic recovery to look more like an “L” than a “V.” In our view, the recovery’s eventual speed and trajectory aren’t knowable now, as they rest on a number of unpredictable variables. But from an investment standpoint, more pessimistic expectations widen the range of outcomes that could generate positive surprise.

As most states and countries are opening gradually, we have only a very limited look at how businesses and consumers will respond. In the US, about half the states have started phased reopening processes, with Georgia the first locked-down state to lift restrictions and Texas the largest so far. Overseas, the UK announced slightly eased restrictions, while Germany, Italy and Spain are a couple weeks into reopening.

Economists are creating models tracking activity to gauge states’ and countries’ progress. Georgia selectively opened gyms, salons and tattoo parlors on April 24. Dine-in restaurants and movie theaters followed a few days later, with stay-at-home orders expiring April 30. But some models now suggest the state’s reopening hasn’t meant much for consumer spending thus far.[i] This finding has many now extrapolating Georgia’s experience to other states—and America as a whole. They say people’s individual decisions trump government decrees. With uncertainty still running high—about viral contamination and personal finances—ending official lockdowns allegedly won’t buoy economic activity.

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How to Think About Health Care Stocks Now

Amid a global pandemic that has dominated world news, the Health Care sector is unsurprisingly front-of-mind for many equity investors. Many see it as an innovation hub offering profitable crisis solutions. Others see it as a stodgy, defensive haven. But in reality, Health Care is a diverse sector with a huge array of industries responding to different drivers. Here is a primer on how we think investors should approach the sector—both generally and in light of recent developments.

COVID-19 has put the Health Care sector under a spotlight, particularly as the race for treatments and vaccines heats up. Headlines frequently highlight individual Health Care firms’ apparent progress and speculate about winners. Health Care stocks also garner attention for their superior recent performance. Since global stocks peaked on February 12, the MSCI World Index is down -17.1%, while Health Care leads all sectors at -4.3%.[i] This leadership has burnished its reputation as a defensive sector. Many presume it is less economically sensitive and therefore likely to hold up better in a recession. Even in downturns, the logic goes, people will still consume healthcare products and services. While that has aspects of truth, we think it is an oversimplification. Digging deeper reveals more nuances.

First, here is a look at the various industries comprising Health Care.

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