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.


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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Today in Brexit, Day 1,641

For the second weekend in a row, the UK and EU’s Brexit negotiation teams blew through a self-imposed Sunday deadline without agreeing on a trade deal. The main sticking point remains fishing rights, leading to all sorts of headlines about talks floundering, officials carping about fisheries, talks facing a sole stumbling block and EU officials being koi about whether they would allow a provisional deal to take effect without ratification if one were reached in the coming days.[i] Both sides say talks will continue, but the UK government has already ruled out extending the post-Brexit transition period beyond year-end, so the clock is ticking down toward a no-deal Brexit. However, markets are already confronting a reality including the practical implications of a no-deal Brexit, reducing whatever shock factor Brexit had left.

You see, the mutated strain of the novel coronavirus that is now circulating through London and southeast England has led governments to take actions resembling the hardest of Brexits imaginable. French President Emmanuel Macron responded by banning all freight and travel from Britain, effectively closing British ports along the English Channel. The highways are clogged with hundreds of trucks, and several thousand more have been diverted. In short, it is an extreme version of the so-called nightmare scenario of a no-deal Brexit, in which pundits feared new customs checks would cause a paperwork nightmare for truckers and result in … the highways being clogged with hundreds of trucks going nowhere for days. Only in that scenario, container ships would still be making the short journey and Brits would still be able to travel to the EU, so congratulations 2020, you have once again managed to kick society harder than anyone thought possible.

As we write, UK Prime Minister Boris Johnson is finalizing a plan to mass-test all truck drivers heading into France, and Macron has indicated a negative test result would give entrants a green light. So there is a pathway for the chaos to end, much to everyone’s relief, and by the time you read this things may be heading back to normal. But step back a bit: Is this really so different from how no-deal-Brexit-related chaos would resolve? No one expected that outcome to permanently cease trade. Rather, most expected a few days of chaos as understaffed ports tried to process reams of new paperwork, much of which might not be correct on the first attempt. But then drivers would get the hang of it, the kinks would iron out, and in the end trade would require just a bit more red tape. That is basically the process we are seeing right now. Chaos, followed by people figuring out a new system with more red tape. If society can get through that this week, is there some reason they can’t get through a second iteration after New Year’s? We have a strong hunch that this week’s events are further sapping any lingering negative surprise power. As a general rule, when markets fear something bad will happen, and the bad thing happens—or, a parallel bad thing—it enables people to see things play out, see society overcome the bad thing, and then move past the fear. Like ripping a really big bandage off, or something.

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Much Ado About Digital Taxes

“They aren’t paying their fair share!” In addition to concerns over competition, EU politicians’ standard criticism of huge US Tech firms is that they don’t pay much in local taxes, thanks to global tax rules. Hence, when they aren’t busy lobbying the US and other major nations to agree on changing these rules, they are threatening to adopt a unilateral digital services tax—a threat that returned to headlines recently as global talks once again fizzled. “Fair” is, of course, a squishy concept—one that is often politicized and hinges on who is speaking. MarketMinder doesn’t adjudicate “fairness” disputes. But it is worth considering a grand irony in this debate. There is ample evidence the EU’s digital taxes don’t—and won’t—make big Tech pay their “fair share.” They are a lot more likely to make normal Europeans pay up—one reason tax changes don’t seem like a huge threat to big Tech, whichever way the EU’s policy winds up going.

The EU has been considering a digital tax for eons. Currently, big Tech and Tech-like companies are subject to taxation only in countries where they have a physical presence. Naturally, this motivates them to set up shop in low-tax countries like Ireland and Luxembourg. Governments in other EU nations argue this unfairly prevents them from taxing commerce that occurs within their borders.[i] Partly in response to this, the Organization for Economic Cooperation and Development (OECD) has been exploring some kind of a global digital tax reform for years, but to no avail.

Attempting to remedy this, in March 2018, the European Commission (EC) proposed taxing digital companies with over €750 million annual global revenue and annual taxable EU revenue above €50 million based on users’ location. However, not all member states agreed, so an EU-wide digital tax failed to materialize. As a result, some countries have either imposed or proposed their own taxes. (Exhibit 1)

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Flash PMIs Put a Potential No-Deal Brexit Into Perspective

December is only half over, but the good folks at IHS Markit always get a jump on December data to get ahead of the holidays, which means … drumroll … it is Flash PMI time! PMIs, or purchasing managers’ indexes, are monthly snapshots of business activity that aim to measure the percentage of businesses growing—the “Flash” version being something of a sneak peek. PMIs aren’t perfect, but they are fast (especially Flash versions, as the name implies), and they often contain interesting nuggets. So it is in December, with results in the US, UK and eurozone overall mixed. The UK improved as its composite PMI (services plus manufacturing) inched back over 50, implying expansion. The eurozone contracted at a slower rate, and the US grew a tad more slowly. But the real eye-popping figures came from UK and eurozone manufacturing, which soared to multiyear highs. The reason why, in our view, offers investors some insight into a big Brexit fear.

That reason: Soaring supplier delivery times. These add to PMIs, as a delay in obtaining parts from suppliers implies demand is surging. That is the theory, at any rate, and it is often true. But sometimes delivery times shoot up because of issues at ports. This happened in America when West Coast ports had labor disputes a few years ago, causing container ships to stack up offshore. It is happening again today worldwide—and most notably in Southern California and the UK—as the combination of online holiday shopping and ports’ social distancing requirements is causing huge backlogs of unloaded containers from Asia. This is a big side effect of the pandemic and one that is quite clearly creating winners and losers, even if PMIs treat it as a big positive, which we think underscores the need to look under the hood when assessing even good-looking data.

Note, we aren’t saying this is some huge forward-looking negative. It isn’t even the first time ports stacked up this year. As Markit’s press releases note, supplier delivery times were even higher during the first lockdown. Port operators worked through the backlogs, truckers dispersed the delayed goods, and we all got our toilet paper, videogame consoles, gizmos, loungewear and pantry staples. Factories, too, got what they needed and were able to ramp up output bigtime over the summer. The same is likely this time around.

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What to Make of Recent Chinese Defaults?

For years, a conundrum has confronted investors and Chinese officials alike: How do you move to a more market-oriented system if it means state-owned enterprises (SOEs) lose their implicit government guarantee and are allowed to default, fanning fears of a debt crisis?

That problem took center stage again lately following over a dozen defaults by SOEs this year alone. One striking example occurred a little over a month ago, when local SOE Yongcheng Coal & Electricity defaulted on a $150 million AAA-rated issue—a credit rating that clearly stemmed from the perception of government backing. Interestingly, Yongcheng appeared to have enough cash to cover the note, but it transferred major assets to other SOEs without compensation a week prior, ostensibly to hide them from creditors. Thus, the events suggested SOEs could dictate default on their terms, making it more difficult for markets to assess credit risk, which runs counter to the purpose of allowing default. That compounds questions about local governments’ blanket support of local SOEs. With local SOE bonds accounting for 60% of China’s onshore market, the circumstances understandably spooked investors and aggravated long-standing fears of a debt crisis. However, while there are important takeaways from the development, the response from Beijing, its policy priorities and the relatively small scale suggests systemic risks remain minimal. 

There are two primary risks related to broader credit events. The first, and most immediate, surrounds liquidity: Do banks have access to funds on a short-term basis to roll over their obligations? In the days after the default, one-year interbank rates jumped to nearly twice that of earlier this year.[i] In response, the People’s Bank of China quickly intervened to calm nerves, injecting $30 billion in one-year loans with the promise it would conduct another medium-term lending operation on December 15 to roll over maturing loans for the month. In the weeks since, liquidity measures have stabilized.

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Ratings Agencies Meet Realism in 2020

If misery indeed loves company, then what follows should be a heartwarming tale. For, you see, all of us normal people aren’t the only ones who have had an awful 2020. Credit ratings agencies have taken it on the chin, too. First they downgraded Canada and the UK and … few noticed. Then they downgraded two Australian states and pundits responded by rhetorically downgrading the agencies in noting just how feckless these ratings have become. Not that we are reveling in anyone getting kicked in the pants, but we think it is noteworthy that the world is catching on to the meaninglessness of ratings changes—illustrating how much the world has moved on since S&P downgraded the US nearly a decade ago and giving investors one less thing to fear.

Once upon a time, conventional wisdom held that if one of the three Nationally Recognized Statistical Ratings Agencies (NRSROs) downgraded a government’s credit rating, it would trigger mass selling of that issuer’s bond, sending interest rates soaring as investors fled the allegedly heightened credit risk. That was the raging fear when S&P downgraded the US’s credit rating from AAA to AA+ on August 5, 2011. At the time, the 10-year US Treasury yield sat at a benign 2.58%.[i] But the world did not end. Pension funds and overseas governments (cough, China) didn’t dump their holdings en masse. Yields did not soar. Instead, they fell. One month later, the 10-year was down to 1.98%.[ii] A year after the downgrade? 1.59%.[iii] And now, of course, they are all the way down to 0.9%.[iv] In the interim the US has had no debt crisis and no trouble finding buyers for new debt, despite quite a bit of new issuance. Other nations receiving downgrades in this era, including France, the UK and a host of other stalwarts, could tell similar tales.

None of the downgrade chatter since 2011 has matched the panicky hyperbole we saw then, but we have still seen a fair amount of fear—particularly when the UK faced another round of downgrades after the Brexit vote. This year, however, downgrade fear seems largely absent, and in our view, for good reason. It has always been clear to us that the NRSROs—S&P, Moody’s and Fitch—based their decisions on backward-looking information. That would be the same information that markets previously digested. In 2011, S&P’s stated downgrade rationale was the protracted debt ceiling battle, which had ended three days prior.[v] Investors had spent months dealing with panicky headlines and shouting politicians. Markets, which deal efficiently with widely known information, reflected all of it—including the many rumors of S&P’s impending decision. The announcement merely tied a bow on everything, adding S&P’s official opinion to the many, many, many opinions yields had already priced in. Investors then seemingly decided they were perfectly capable of weighing risks on their own and acting accordingly, and they continued buying, sending yields lower.

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Why Bonds Still Make Sense in a Low-Yield World

No matter where you look or how you cut it, bond yields are historically low. That has many asking: Why hold them at all? In our view, bonds’ primary purpose is to dampen portfolio volatility to mitigate swings for those needing to draw cash flow. Yes, yields today are miniscule, but we think bonds’ ability to cushion against short-term volatility endures—and makes a compelling case for them, should your goals and needs make smaller swings optimal.

On August 4, 10-year Treasury rates dropped to a record-low 0.5%, and they have hovered below 1% since.[i] Meanwhile, investment-grade corporate bond yields have fallen below 2% for the first time.[ii] Both are well below their averages during the 2009 – 2020 economic expansion (2.4% for 10-year US Treasurys, 3.5% for corporates), when people were also complaining about yields being too low.[iii] Yet even then, investors could assume a bit more credit risk, buy corporate bonds with still-low default probabilities and earn positive inflation-adjusted returns. Not hugely so, of course, but still positive. Now, this refuge is dwindling.

Contrary to what many yield-focused investors may think, record-low rates don’t mean bonds play no role in portfolios today for those who need cash flow. They tend to fluctuate less than stocks in the short term—a vitally important point for these investors to weigh. If your long-term financial goals require a relatively high rate of cash flow, a blend of stocks and bonds can be very beneficial. Yes, portfolio income—bond interest or dividends—can help fund withdrawals. But as we have written, selling slices of securities is often a better, more reliable means. With this in mind, the combination of price movement and income—total return—is what matters most.

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