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.

Inside June’s CPI Jump

Inflation unexpectedly accelerated in June, leaving economists and pundits from coast to coast scrambling to explain the year-over-year CPI inflation rate’s bump from 5.0% in May to 5.4%.[i] After all, consensus expectations were for a deceleration to 4.9% y/y, and CPI’s rise in June 2020 meant the base effect was less of a factor.[ii] Some coverage found the right culprit: a third consecutive jump in used car prices. Other outlets hit on false scapegoats and, in doing so, showed the perils of not looking deep enough at economic data. But from our vantage point, few if any pundits rightly noted that outside of the narrow categories affected by supply shortages and resurgent post-lockdown demand, we actually saw a fair amount of disinflation for the third straight month. In our view, despite the headline jump, this report strikes us as more evidence accelerating inflation is temporary and investors won’t have to reckon with a 1970s repeat.

Last year’s lockdowns are still upwardly skewing the year-over-year calculation and will for a few more months. Later this year, as the denominator in the year-over-year comp rises more—reflecting the demand bump from last year’s reopenings—it will probably push the annual inflation rate lower. So here, to strip that out, we will focus on the seasonally adjusted month-over-month inflation rate.

That accelerated to 0.9% m/m, defying expectations of 0.5%, which would have been the second straight monthly slowdown.[iii] The biggest single contributor, for the third straight month, was used car and truck prices. Those rose 10.5% m/m, compounding May’s 7.3% and April’s 10.0%.[iv] Transportation services, which includes airfares and car rentals, drove headline prices higher for the third straight month. Hotel accommodations, which shot up 8.8% m/m in April but rose negligibly in May, jumped another 7.9% to contribute almost one-tenth of the headline increase. None of those are terribly surprising, considering all relate to the reopening economy—a combination of tight supply and burgeoning demand. About the only major swing in June was Energy: After detracting from headline inflation slightly in April and May, it made a big contribution in June as gas prices jumped just in time for office workers to rejoin the daily commute and summer travelers to hit the highways. You can see all of this in Exhibit 1.

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The ECB’s ‘Strategy Review’ Yields Little New

Hailed as a big shift last Thursday, the ECB concluded its 18-month strategy review seeking more effective monetary policy. Emerging from the shift? A “new” twist on inflation targeting and a loose plan to help fight climate change. But if you tune down the noise to look at reality, we think you will see the new strategy is pretty hard to distinguish from the old.

The chief change to the ECB’s target inflation rate appears almost imperceptible. Instead of “close to, but below” 2% y/y, now it is a “symmetric” 2% target.[i] According to the ECB’s announcement, this means deviations above and below 2% are “equally undesirable.” That may be, but markets are more interested in what the central bank would do about them. Many pundits assumed the ECB would tolerate above-target inflation for a while if it was below before, like the Fed’s new inflation targeting approach. Not so. As German Bundesbank head Jens Weidmann—1 of 25 members on the ECB’s Governing Council—noted, the new strategy doesn’t try to make up for past misses. The lauded “new strategy” simply gives policymakers theoretical cover for trying to lift inflation toward the 2% y/y target, should it fall below that mark. The differences between this and the “extraordinary monetary policy” of the last seven-ish years when inflation ran sub-target seems pretty semantic to us.

In our view, that verbal cover underscores the ECB’s inability to hit its target. This isn’t a knock on the ECB specifically—there is no evidence any central bank can reliably hit inflation goals. On this score, the ECB is in the same boat as the Fed, Bank of England and Bank of Japan. Despite their extraordinary efforts and proclamations, all have mostly undershot their inflation targets after installing them.

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Chart of the Day: Growth and Value Trends Are Global

Friday morning, a widely syndicated Bloomberg article caught our eye. As we summarized in our coverage in MarketMinder’s “What We’re Reading” section, it theorized that since European value stocks have lagged US value stocks this year—while US value stocks have beaten their growth counterparts—European value must be due for some catch-up and major outperformance. As qualitative evidence, it offered Europe’s relatively delayed COVID vaccine rollout and reopening, presuming those factors are value stock fairy dust. We see a few glaring problems with this thesis, and they are worth spending a bit of extra time on, lest our readers be fooled into basing hasty portfolio decisions on flawed logic.

For one, markets deal efficiently with widely known information. It has been readily apparent for months that European trends, overall and average, would probably trail the US by a couple of months. When events are that widely anticipated, stocks don’t just sit around and wait for them to happen—they reflect them well in advance. So, in our view, to say European value stocks don’t yet reflect vaccines and reopening there is to say markets aren’t efficient, which we think is dangerous territory to base any theory on.

Beyond that, the European value catch-up thesis misses a key point about growth and value leadership trends: They are global. If value isn’t leading in the US, it probably won’t lead in Europe. In our view, the reasons for this are twofold. One, market cycles are generally global, not local, and growth/value leadership ties into the broader bull/bear cycle. (See this for more.) Two, growth/value trends also stem from global economic trends, and you rarely get wide divergence among developed-world countries on that front. We are slowly moving out of the reopening mini-boom and into what looks likely a post-pandemic trend of slower growth. Yes, even in Europe, considering GDP there is quite close to its pre-pandemic peak. In slower-growth environments, investors usually flock to big companies with recognizable brand names and a proven ability to crank out earnings through thick and thin. In other words, growth stocks.

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2021’s Astoundingly Average Volatility

Dearest readers, we have an apology to make. You see, yesterday afternoon we were hard at work pulling data on the S&P 500’s volatility this year, and we were quite eager to show you that, despite what headlines have implied, stocks’ volatility this year has been amazingly … average. So, of course stocks had to tumble at today’s open, hitting about -1.5% intraday before clawing a good chunk of it back to finish down just -0.9%.[i] What we are trying to say is, if you believe in jinxes, then we must begrudgingly accept that there is a chance our not-so-high volatility research triggered the market, which Fisher Investments founder and Executive Chairman Ken Fisher often calls, “The Great Humiliator” to throw some egg in our faces. Then again, we also think today’s market movement proves our initial point: If headlines resort to hyping a -0.9% day as impressively volatile, then that seems to us a good indication of just how placid this year has been—and how myopic the world is right now. Let us show you.

To put this year’s wiggles in perspective, we downloaded historical data from FactSet—93 and a half years of it, to be precise. First we gathered the S&P 500’s daily price return for every day since January 4, 1928 through June 30 this year—cutting it off there so we could easily equalize a half-year with 93 other full years. Then we used some Excel, umm, wizardry to calculate the average magnitude of the index’s daily price movement for each year.[ii] In other words, the average amount the index moved up or down on a given day in each year from 1928 to the present. We were after magnitude, not direction, because volatility is technically about how much the market moves over a given period, not whether that movement is up or down. Never forget volatility cuts both ways—0.9% up is just as volatile as Thursday’s dip.

The wildest year, on the basis of average daily return, was 1932. Then, the average daily price movement up or down was a whopping 2.59%. The calmest year was 1964, with an average daily wiggle of just 0.26% in either direction. The average for all years? 0.76%. The median, if you are into that sort of thing, is 0.65%. And through June 30, this year’s average daily movement up or down was … wait for it … 0.64%. That is about as typical as you can get.

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Why Jobs Don’t Sway Stocks

Jobs! According to many pundits, the Bureau of Labor Statistics’ (BLS) Employment Situation Report (aka, the unemployment report) is the biggest economic data announcement all month. For those who are unemployed and looking, that emphasis is understandable. But it also has many reading a lot into last Friday’s June release, like what it means for the economy, monetary policy—and stocks. For investors, we suggest tuning it out. Jobs data are backward looking, with little significance for markets.

There were several interesting tidbits,[i] including the headline figures many cited. Nonfarm payrolls added 850,000 workers in June. Leisure and hospitality accounted for over 40% of the total, leading the way and continuing a string of strong gains since February.[ii] That still leaves some ways to go before employment regains pre-pandemic levels. For perspective, nonfarm payrolls remain -4.4% below February 2020’s peak. Leisure and hospitality is -12.9% below then.

Meanwhile, June’s unemployment rate ticked up to 5.9% from May’s 5.8%, which may seem like it is heading in the wrong direction.[iii] But that uptick stemmed from more people without jobs saying they sought work in the month. This increased the number of people the BLS deems unemployed versus “discouraged” and out of the labor force, boosting the unemployment rate. But it doesn’t mean a bunch of people lost their jobs.

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A Brief Q&A on the Latest Global Tax ‘Breakthrough’

In a rather odd intro to Independence Day, the US and 129 other countries reached a broad agreement on a global minimum tax rate last Thursday, supposedly a big step toward a huge overhaul of the world’s tax system. We have seen a lot of chatter in the days since, and if our inbox is any indication, this is a hot topic among you, dear readers. So here is your handy dandy guide to where things stand and what is really at stake for global Tech companies.

130 countries sounds like critical mass. Is this debate over now?

Probably not. Excluded from those 130 countries in the OECD’s agreement are Ireland, Estonia, Hungary, Nigeria, Kenya, Sri Lanka and Peru. The latter four all have corporate rates over 20%, making their absence less of a wild card. But Ireland, Estonia and Hungary boast rates under that 15% global minimum, making it less meaningful than the press release indicates. Essentially, what happened last Thursday was that a bunch of nations who charge 15% or more agreed to … keep charging 15% or more, while shifting some revenue collection among one another.

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2021 Halftime Report

2021 is officially half over, and if you are at a loss for how to describe it, you probably aren’t alone. In one sense, a lot has happened. The events of January 6, Brexit, the Suez blockage, meme stocks, Archegos’ collapse, cryptocurrencies’ wild ride, all things dogecoin, COVID’s delta variant, the Indian tragedy, new lockdowns in Australia, sabre-rattling in the Taiwan Strait and South China Sea, Middle Eastern conflict, you name it. But markets have told a different story, extending one of the longest quiet periods in recent memory. Day-to-day volatility is low. As many outlets have noted, stocks have now gone without a -5% drop since last autumn. That might be why headlines have hyped every little wiggle along the way to global stocks’ 13.1% first-half return, which illustrates the myopia plaguing the investment world right now.[i]

As June closed, most outlets focused on the S&P 500 and other big indexes finishing the month at new record highs. That is a nice enough milestone, if not a dime a dozen in maturing bull markets. A more interesting development, in our view, didn’t receive anywhere near as much ink: Growth stocks trounced value, 10.9% to 4.7%.[ii] Heck, since the value countertrend’s zenith on May 13, growth is up 9.3% while value just barely rounded to 0.1%.[iii] Yet, strangely, most commentators act like value remains on some huge tear while growth is stuck at the starting line with a sprained ankle. Consider this as Exhibit 22,567,938 in the wealth of evidence that letting headlines drive your investment decisions isn’t a winning move. Sometimes they are myopic and sensationalized. Other times, they are dead wrong.

With growth leading in Q2, growth-heavy sectors did a lot of the heavy lifting. Tech was the best performer at 11.5%, bringing it in line with the world year to date.[iv] Communication Services, home to many Tech-like firms, also outperformed at 9.2%.[v] But Energy defied the trend, as oil market fundamentals outweighed stylistic factors. It kept outperforming and remains the market’s top sector year to date. We still think this is likely to prove fleeting, as the reopening demand pop will probably run out of steam sooner rather than later and producers worldwide still have plenty of spare capacity. Supply and demand will likely balance out before long, putting a lid on oil prices and cooling earnings growth for that sector. Markets will probably start pricing that soon, if they haven’t already, considering Energy’s margin of leadership was much, much narrower in Q2 than in Q1.

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The Lay of the Land Up North

Happy Canada Day! Between the holiday and a Canadian team being in the Stanley Cup finals for the first time since 2011,[i] what better time to celebrate our friends in the Great White North with a check in on Canadian stocks? Especially after they were again among the developed world’s best-performing nations in Q2, finishing June up over 20% year to date.[ii] What is behind the party? Will it last? Read on!

If you have been following Canada’s battle against COVID, you might wonder how Canadian stocks are rockin’ and rollin’ while the country’s lockdowns are among the Western world’s longest lasting. The answer, in our view, is simple: Markets are looking a lot further out than lockdowns and reopenings, allowing sector trends to enjoy greater influence over returns. Year to date, that has been a mighty tailwind for Canada. Its market cap is about half Energy and Financials, which happened to be the first half’s top-performing sectors globally in 2021’s first half. Those two sectors comprise just 17% of MSCI World market capitalization.[iii] Exhibit 1 shows the full breakdown, with apologies to those of you who believe pie charts are a sin against graphic design.

Exhibit 1: Is It a Pie or a Hockey Puck?

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What Investors Need Most When Greed Blinds

With global equities up 92.6% since March 2020, many investors are seeing green everywhere they look—and not just among blue-chip stocks.[i] A parade of faddish investments have cycled through headlines, stoking a whole lot of FOMO—fear of missing out—in the process. Meme stocks. Cryptocurrencies. Non-fungible tokens (NFTs). As a result, many seem to be wondering if they should dive in to the Next Hot Area, snapping up a huge stake in Reddit’s next favorite meme stock or taking a flyer on a big bounce back in dogecoin (et al). Those impulses signal greed may be afoot—an emotion critical to resist late in a bull market. In my view, this is where an adviser can add tremendous value for clients—so long as they don’t simply say what clients want to hear. An adviser should show their client the troubles with giving into greed, not indulge every whim. In other words, when greed lurks, you need a true adviser—not a Yes Man.

Greed is usually easier to identify in others than in ourselves, so here is a hypothetical conversation between a client, Jim, and his adviser:

Jim: My neighbor told me about a new crypto coin developed by her nephew’s college roommate’s company. We have some spare cash. What do you think about taking a flyer on this coin? Can’t hurt, right?

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From the Mailbag—June 2021 Edition

With summer here and the news cycle a tad slow lately, we took a look into our mailbag for some possible common questions we could address. Among many we found three that seemed ripe: valuations, lending and the Fed’s supposedly “hawkish” turn in June. Without further ado, here they are.

Aren’t stocks overvalued and set to fall? Look at P/Es!

That question, or some variation of it, crops up frequently after stocks have been rising for a spell. This time is no different, as our mailbag is chock full of questions on whether high valuations imply trouble lurks ahead. But as we have written many times, this overrates price-to-earnings ratios’ (P/Es’) predictive power by a longshot. Here is a quick look at why.

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