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.


Surveys Still Say No to Global Recession

With each passing day, we see more and more headlines warn of impending global recession. Yet economic data still generally don’t support that argument, in our view. The latest business surveys imply ongoing growth—another overlooked positive amid today’s dreary sentiment backdrop.

Though most major developed countries’ flash May purchasing managers’ indexes (PMIs) missed consensus expectations, they were also uniformly well above 50—suggesting expansion. (Exhibit 1) On an individual nation basis, many headlines focused on the UK’s weakest services PMI reading in 15 months, as survey respondents blamed economic and geopolitical uncertainty for the slowdown in client demand.[i] What got a little less attention: PMIs out of the eurozone and its two largest economies, Germany and France, continued showing growth despite myriad warnings that the Russia – Ukraine war would roil economic activity on the Continent.

Exhibit 1: The Latest PMIs

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Why We Don’t Think Valuations Should Worry You

With stocks flirting with bear market territory lately, negative analyses abound as fearful headlines tout reasons things will only get worse. One subject cropping up: valuations, which many claim are still too high. Some take a near-term, cyclical view, suggesting today’s valuations aren’t at trough levels. Others suggest current valuations point to historically low long-term returns ahead. But we think you can set such worries aside: History and data show valuations predict neither short-term nor long-term returns.

Valuations, especially price-to-earnings (P/E) ratios, are among the most watched market metrics out there. Hence, many have noticed the big drop in the S&P 500’s 12-month forward P/E, to use one example. (Though forward earnings are only estimates, analysts often prefer using them in P/Es’ denominator because investors typically own stocks for future, not past, profits.) From 23 at the year’s start, it has fallen to 16 now, a roughly 30% discount.[i] Cheaper! However, 16 is about average historically.[ii] Similarly, trailing 12-month P/Es, which compare current prices to the past 12 months’ earnings, are also around average. Even broader indexes like the MSCI World show something similar.

To hear many bargain hunters say it, average isn’t cheap—or at least, it isn’t cheap enough for the market slide’s bottom to be near. It especially isn’t cheap enough for Tech, a high-flyer up until this year. But as we showed last September, P/Es don’t predict turning points in markets—or returns over the next year. Using a statistical measure called R2, which tells you how much P/Es can explain the next 12 months’ returns—ranging from 0 (not at all) to 1 (fully)—the R2 is 0.01.[iii] Whatever valuation stocks are at—high, low or average—it is a coin flip what direction stocks will go from there. “Expensive” stocks can always become more expensive. “Cheap” stocks can always get cheaper.

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The Lingering Uncertainty Set to Fall After Australia’s Federal Election

Editors’ Note: MarketMinder favors no party nor any politician, assessing political developments solely for their potential impact on markets and economies.

After nine years in power and three prime ministers (PMs), Australia’s Liberal-National Coalition (L-NC) and (now-former) center-right PM Scott Morrison are out. The center-left Australian Labor Party (ALP) won Saturday’s federal election, and its leader—Anthony Albanese—was sworn in as PM Monday morning. In our view, the market takeaways from this vote are pretty limited. There is the potential, much-discussed in the press, for a sharper climate shift in policy. We aren’t passing any judgment on the wisdom of that, but for investors, it is worth watching for potential effects on Australia’s huge mining industry. That said, we wouldn’t overrate the chances of a sharp turn. This seems like lingering election uncertainty that should fall in the coming months as that becomes more clear.

The exact scope of the ALP’s victory is still being tallied. As we type, the Australian Electoral Commission reports it is ahead in 75 of 151 House of Representatives races, well ahead of the L-NC’s 55.[i] A smattering of smaller parties lead in 14, and there are roughly 7 seats still too close to call. The ALP could still eke out a House majority, as the tally above implies. Somewhat surprisingly, this matches the outcome polls predicted—unlike 2019’s election.

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Last Week in Oils

Another week, another flurry of activity in oil markets. Or rather, oils—crude and, perhaps less top of mind for most folks, palm. The EU revealed details of its plan to wean itself off Russian fossil fuels, Russia continued to find buyers for its discounted crude, and Indonesia lifted its ban on palm oil exports. What does it all mean for investors? Let us explore!

The EU’s Plan Is a Little … Lacking

For weeks now, the world has eagerly anticipated Brussels’ explanation for how and when it will wean the EU off Russian energy. The concerns are at the fore today given Europe’s energy needs water down sanctions, ensure Europe continues funding Russia and raise the risk that Russian retaliation leaves the EU (to some extent literally) in the dark. But it has also been a long-running sore spot, especially with Russia occasionally throttling pipelines in order to exert political pressure and gain concessions from EU leaders. So a long-term pivot away from Russia has been talked of for years.

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What Forecasts of a Dire Distant Future Reveal About Sentiment Now

There is no one, perfect way to measure sentiment—it is more art than science. Gauges like investor and consumer confidence surveys can help. But, beyond metrics, one way we gauge the broad mood: What are financial headlines saying? We have recently seen an uptick in warnings of “forever changes,” and most of them are negative, tied to current events. In our view, this is further evidence of widespread pessimism, setting a low bar for reality to clear—a reason to believe 2022’s downturn may not have much left in the tank, as difficult as that may be to fathom during bouts of sharp volatility.

The dour forever changes purportedly taking hold run the gamut. For example, some analysts argue the selloff among big Tech companies signals the party is over, with their leadership coming to an end and struggles the new norm. We see it in experts’ hyper focus on Nasdaq returns—with some invoking comparisons to the early 2000s’ Tech bubble—as well as the many anecdotes of venture capital (VC) funding drying up—hinting at a potential new dark age for Silicon Valley startups.

Beyond stocks, some economists worry the economy is moving to an era of permanently higher inflation, reversing the trend from the past four decades. Those elevated prices are, in turn, allegedly forever altering consumer spending patterns, with higher prices driving people to favor cheaper goods over more expensive experimental products—a trend they argue would stifle innovation. Elsewhere, others fear two of the biggest stories over the past two years—COVID and supply chain issues—are permanently changing the global economy’s structure. Some speculate COVID has forever rewired labor markets, while others posit today’s global supply chain system is untenable, so the future is regional networks—thereby spelling the end of globalization. 

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The Strong Dollar Fans Fears Worldwide

The S&P 500 charted a new closing low after falling -4.0% in price terms on Wednesday, extending earlier declines across Europe.[i] Much of the downturn appeared to be sympathy selling as two large American retailers announced high costs are pressuring their earnings, but that wasn’t the only negative story making the rounds. The strong dollar remained top of mind, with pundits warning of the danger it poses to economies overseas, including its contribution to the UK’s big April inflation jump. While we think some of these warnings are fair to a degree, others seem quite overstated. More broadly, though, we don’t think currency strength or weakness has a set impact on a given country’s returns.

Why Is the Dollar Up?

Most dollar observers blame “divergent monetary policy” for the dollar’s ascension, implying the Fed’s rate hike plans represent a unique tightening trajectory. Which seems like a mixed conclusion based on the evidence. The Bank of England (BoE) has actually tightened more aggressively thus far and has signaled similar plans as the Fed. The European Central Bank (ECB) hasn’t yet started raising rates, but it is tapering its asset purchases and has jawboned about hiking later this year. Canada and Australia have also started hiking. The only true developed world outlier is the Bank of Japan (BoJ), which is sticking with negative rates and pegging the 10-year Japanese Government Bond (JGB) yield to a ceiling of 0.25% and buying “unlimited” quantities of JGBs to do so.

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Why Cryptocurrencies’ Recent Swoon Holds Limited Impacts for Stocks

Editors’ note: MarketMinder doesn’t make individual security recommendations. Companies mentioned here serve only to illustrate a broader investment theme.

This year may feel like one blow after another. Russia’s brutal war in Ukraine and China’s lockdowns extending supply chain havoc have ramped inflation higher and longer than we initially expected. This has central banks attempting to rein it in more aggressively, roiling sentiment. While this has affected markets broadly, it dramatically hit one asset last week: stablecoins, cryptocurrencies designed to maintain fixed values against currencies like the dollar. One collapsed spectacularly, sparking broader fallout in the crypto world—and seemingly putting other stablecoins on the brink. This spurred fears of a crypto-Lehman moment, with broader market ramifications. While possible, and we are watching for contagion effects, it doesn’t seem likely to us.

The headling-grabbing collapsed stablecoin was TerraUSD (UST), which claimed a one-to-one exchange rate with the dollar. But unlike most stablecoins, it didn’t hold any cash equivalents or traditional securities to back it. Instead, UST was backed—or, to use its lingo, “algorithmically stabilized”—by a sister token named Luna, which was free-floating. As Luna got caught up in the broader crypto selloff, it sparked a flight from UST, culminating in huge sales on May 7 that caused liquidity to vanish.[i] The peg broke, and both Terra and Luna collapsed.

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A Loose Check-In on Supply and Demand in the US Economy

Hot on China’s heels, the US released two major economic data points on Tuesday: April retail sales and industrial production. The former garnered the most attention, with several outlets portraying retail sales’ 0.9% m/m rise—and an upward revision to March’s results—as a sign consumers remain resilient in the face of inflation.[i] While we appreciate the optimism, we wouldn’t read that far into the report—and we found far more noteworthy developments in the industrial production report. Both are backward-looking for stocks, but we think understanding the nitty gritty can help investors put the latest headlines in context—and they yield hints about recent trends on the demand and supply side of America’s economy.

What Retail Sales Do—and Don’t—Show

As we explained last month, retail sales aren’t hugely telling about how inflation is affecting demand for a simple reason: The monthly data aren’t inflation-adjusted. The Census Bureau reports the amount spent across a range of stores, and it applies seasonal adjustments, but it doesn’t report the quantity of goods sold. Therefore, until the Bureau of Economic Analysis’s personal consumption expenditures report hits just before month-end, we don’t have a great read on things.

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Our Take on China’s Weak April Data

China’s National Bureau of Statistics (NBS) released the rest of its April economic data overnight Sunday, and as you may have surmised given Shanghai and other major economic centers remain under heavy COVID restrictions, the results weren’t pretty. In a press release titled “General Trend of High-Quality Development Remained Unchanged Despite the Increased Downward Pressure on Economy,” the NBS revealed retail sales’ contraction deepened, services output fell hard, industrial production flipped negative and fixed asset investment slowed. The release highlighted strength in information technology-related services as a silver lining, but we think it is better for investors to just look the weakness in the eye. For stocks don’t move on what just happened, but rather what happens over the next 3 – 30 months, and we see a strong case for growth to resume in relatively short order, helping ease global economic uncertainty.

For nearly two months now, analysts have tried to assess the economic damage from this spring’s lockdowns. But it hasn’t been easy. There isn’t a whole lot of transparency, and trying to figure out which cities are under restrictions has required observers to put their finest detective hats on. Even in areas where the lockdowns are widely known, the impact hasn’t been entirely clear, in part due to companies’ boasting about factory and office bubbles—arrangements for workers to live at their place of business in order to keep production up. While that generated some positive sentiment at the outset, it soon became clear these bubbles couldn’t maintain production if trucks couldn’t deliver components. So consensus expectations weren’t great, but the results turned out to be even worse. The consensus expected industrial production to slow to 0.4% y/y growth from March’s 5.0%. Instead, it fell -2.9%.[i] Retail sales fell a whopping -11.1% y/y, much worse than the expected -6.1% slide and March’s -3.5%.[ii] The Index of Services Production fell -6.1% y/y.[iii]

So, not good. But also, we at least now have more numbers—more data backing and illuminating what the world knew intuitively. As we wrote after March’s data release, every bit of hard information helps reduce uncertainty. That is still true of the April release. April was the first full month with COVID restrictions in place this year—March was only a partial look. Now we have a more complete picture, helping us compare today to 2020’s lockdowns. As Exhibit 1 shows, retail sales to date have endured a milder decline this time, which we think speaks to people’s ability to adapt as well as lockdowns’ modestly more limited geographic reach. Industrial production’s decline now is deeper in percentage terms, as Exhibit 2 shows, but the level of output remained over twice as high as the average level in January and February 2020, when the first national lockdown occurred. Now, there are some seasonal factors affecting the latter comparison, as China doesn’t seasonally adjust these data, but April 2022’s level is also above April 2020’s, which was inflated by reopening.

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Weighing the Good and Bad in UK GDP

Has a UK recession begun? That is the question headlines globally explored Thursday when news broke that, while UK GDP grew in Q1 overall, it declined in March—with consumer-facing services seemingly leading the way down. As the consensus viewpoint goes, that isn’t a good sign for a country that swallowed steep cost of living increases in April, ratcheting up the pressure on households. And we don’t totally disagree. Yet we do think investors benefit from taking a broad, measured view—of the silver linings as well as the clouds.

Now, considering we are nearly halfway through May—and stocks are forward-looking—Q1 GDP is pretty ancient history. But it is worth a look regardless, at it provides more clarity on the trends stocks should have already priced, and the contrast between full-quarter and March figures seems to have hit sentiment.

Or, it should provide more clarity. After reading through the entire data release from the UK Office for National Statistics, we hesitate to draw sweeping conclusions for good or ill. As the release explained, Q1’s figures are subject to more uncertainty and revision than usual due to some recent methodology changes that statisticians are still ironing out. Those affected trade (particularly trade with the EU) as well as consumption. Pandemic-related skew also lingers due to the way public services—particularly the National Health Service—are accounted for in GDP. Lastly, because government services aren’t sold at market prices, the inflation adjustment applied to it is largely imaginary. In the release, the ONS takes great pains to discourage readers from comparing results from quarter to quarter.

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