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.

Are Drug-Price Cut Plans a Depressant?

In July, President Joe Biden signed an executive order ostensibly to promote competition in a broad swath of sectors and industries, including Health Care and Pharmaceuticals. Last week, the US Department of Health and Human Services (HHS) released its plan to cut prescription drug prices by empowering the federal government to bargain for them in Medicare, among other measures. The concern among investors: As Medicare purchases a lot of prescription drugs for seniors, prices it negotiates could also serve as a baseline for private insurers. So how would this affect Health Care stocks’ earnings in the near and longer term? Before expecting this to create big waves, we think it is helpful to step back and consider what this executive order actually does and what the likelihood of change is.

The Biden administration’s drug-price reduction initiative mostly amounts to a series of proposals outlining legislative approaches for Congress to take, as well as a few studies for HHS to undertake. We will start with the latter, as these are actually under HHS’s direct purview. The plan would have HHS perform a series of analyses, including:

  • Studying payments based on drugs’ clinical effectiveness
  • Collecting data from insurers and pharmacy benefit managers about prices, rebates and out-of-pocket spending on medications to improve transparency
  • Working with states to develop drug importation programs

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Behind the Jolt in European Power Prices

If we were to hazard a guess about which single word best sums up European consumers’ feelings right now, that word would be: Ouch. Or perhaps: Oof. Either would be an entirely logical reaction to electricity prices’ astronomical spike this month, which smacked households all over Europe and the UK. Governments across the Continent are racing to try and relieve the pressure, and their efforts thus far are largely a mixed bag. Unsurprisingly, pundits on both sides of the Atlantic warn this will drive inflation even faster, creating headaches for the Bank of England (BoE), European Central Bank (ECB) and stocks. We don’t doubt this spike will show up in eurozone September inflation when the preliminary report hits Friday, but beware extrapolating that into something bigger or presuming central banks can do anything about it. Electricity prices in Europe these days stem largely from structural and political factors, not monetary ones, and their impact probably is a lot milder than pundits allege.

Not that we are dismissing the pain for households and businesses, which is real. The UK, which has taken the worst of it, saw wholesale power prices top £480 per megawatt-hour intraday on Wednesday, according to The New York Times.[i] FactSet data show they settled by closing to about £415—still over 9 times their pre-pandemic average.[ii] They are lower across the Continent, but not by much, leaving politicians scrambling. Italy’s government is reportedly planning to use public funds to curb households’ energy costs, according to Bloomberg. Spain’s government announced a suite of electricity tax cuts, which should help, as well as measures to promote clean energy (which makes zero sense as a solution to the current issues, as we will discuss momentarily) and plans to cap utilities’ profits through special taxes, which probably do more harm than good in the long run as they dissuade investment. Meanwhile, the UK is already proving the law of unintended consequences, as price caps enacted in 2017 have forced providers out of business—including two that fell last week as prices spiked. Fewer producers mean less competition and, you guessed it, higher prices.

None of the measures announced thus far address the root cause of today’s high prices: Power supply. Whether you think this push is spot-on or not, European governments are major proponents of lower-emissions energy generation, which means switching domestic energy production from coal to renewables.

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Checking In on Inflation’s August Slowdown

The Consumer Price Index (CPI) inflation rate moderated again in August, slowing to 5.3% y/y from July’s 5.4%—and to just 0.3% m/m versus July’s 0.5%.[i] That month-over-month rate is quite notable, in our view, as it is equal to the average monthly inflation rate since data begin in 1947—making this a return to normal in many senses of the term. A quick look under the hood shows many of the categories that drove faster inflation earlier this summer and spring are also moderating significantly. In our view, this all provides more evidence that while math might keep the annual inflation rate high for a while longer, price pressures in the here and now are easing considerably. We never thought inflation was likely to prove a market risk this year, but the latest data should help defang fears further.

When discussing inflation, we don’t typically focus on month-over-month changes. They are quite volatile—especially in individual categories—and the year-over-year inflation rates help smooth out that bumpiness and make the trends easier to see. Plus, public policy officials and the Fed focus on annual inflation rates. But in recent months, we have made month-over-month changes in CPI the centerpiece of our analysis, as events from a year or more ago are still skewing the year-over-year rate higher. We are referring, of course, to the sharp, temporary deflation that accompanied lockdowns in March, April and May 2020, which dragged down the denominator in the year-over-year calculations this spring. In our view, the effect lingered into the summer, as prices took a bit of time to rebound last year. Therefore, focusing on the monthly inflation rate removed that backward-looking skew and enabled us to zero in on the present.

In doing so, we found that most of 2021’s price pressures were coming from the categories affected directly by reopening: travel and leisure, automobiles, transportation services, food and energy. Some of these stemmed primarily from the unleashing of pent-up demand as people were finally able to travel and dine out again (e.g., airfares, hotels and fuel). Others received an assist from shortages, as resurgent demand coincided with supply chain kinks (e.g., food, automobiles and rental car prices). Used car prices, which jumped 31.4% between February and July, were at the nexus of all these factors.[ii] Reopening spurred demand for cars, but the global semiconductor shortage drove a shortage of new vehicles. That forced shoppers to turn to the used car market at the exact moment rental car companies were scrambling to rebuild their fleets after selling off inventory to shore up their finances during last year’s lockdowns. It was a perfect, if temporary, storm.

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Our Take on the House’s New Tax Plan

Editors’ Note: MarketMinder favors no party nor any politician, assessing developments solely for their potential impact on the economy, markets and/or personal finance.

At long last, after months of sparring and insinuations, House Democrats have finally released a specific tax proposal. As with most proposed tax overhauls, it is broad and, if enacted, would create a range of winners and losers. Yet it is also much tamer than what several Democratic legislators and the Biden administration have called for, leaving out several rumored provisions that spooked investors earlier this year. Passage remains a big if, though, given the deep divisions within the Democratic Party and looming 2022 midterms. There is a long way to go between the House Ways & Means Committee’s vote, scheduled for this week, and actual new tax law. Still, the process thus far shows why overrating political chatter—especially in the tax realm—is a big investing error. Stocks’ history of fine returns after tax hikes is but one reason why.

Since the presidential primary campaign, investors have grappled with a number of big tax proposals. There was the wealth tax championed by some high-profile candidates. Some floated the idea of taxing unrealized capital gains or removing the step-up in cost basis that occurs when assets pass from a deceased owner to heirs. Oh, and lest we forget, steep increases to personal and corporate tax rates were a near-constant part of the conversation.

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20 Years Later, We Remember 9/11

Twenty years ago tonight, no one outside the evil perpetrators went to bed knowing the world would fundamentally change forever the next morning. On September 11, 2001, Americans and the world watched in horror as terrorists attacked the World Trade Center and the Pentagon. Two decades later, we have not forgotten that tragic day in American history—and never will. Now is a time to remember the innocent lives lost—and the family and friends they left behind. To remember the survivors left with permanent physical and emotional scars. To remember—and honor—the heroes from that day: the first responders who charged into hell to save lives; the organizations who gave resources for the displaced; the ordinary people who provided comfort to those who needed it. And to take solace in America’s—and the western world’s—resiliency.      

We aren’t going to expound on any personal 9/11 retrospectives here—you can find plenty of poignant, well-done pieces elsewhere. However, we all remember where we were upon first hearing the news, and some of us know people who were in New York that fateful Tuesday. Like other Americans, the attacks on the Twin Towers shook us to our core.

But critically, 9/11 didn’t end the American way of life—a reality markets recognized, too. As we detailed several weeks ago, the S&P 500 dropped -11.6% between market close on September 10 - September 21, the post-attack low.[i] The shocking assault—unprecedented in American history—came amid a pre-existing bear market and further stoked uncertainty and knocked already-weak sentiment.

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The Dividend Divide

With long-term bond yields down about half a percentage point from their early-2021 not-so-high highs, chatter has inevitably returned to high-dividend stocks as an alternative income generator. While 10-year US Treasurys pay a paltry 1.35%, the MSCI World High-Dividend Yield Index boasts a 3.44% yield, spurring an avalanche of headlines like “5 High-Yield Dividend Stocks for Healthy Income” and “6 Dividend Stocks With Big Payouts and Less Risk.”[i] What better time, in our view, to explain once again why high-dividend stocks aren’t the magic solution to all your investing dilemmas?

Dividends have long had the reputation as steady workhorses that churn out reliable payments while avoiding the brunt of the stock market’s occasional declines. If we were to hazard a guess, we would posit that this stems from days gone by, when dividend checks came in the mail, there was no CNBC or Internet, and tracking stock prices required a daily perusal of your newspaper’s Business section. That took deliberate effort, whereas the checks just showed up, giving the perception of stability.

It is a quaint, comforting image—and wrong. We like dividends! But they aren’t special. They don’t add to returns. They aren’t even a return on your investment—they are a return of your investment. Every time a company pays a dividend, the exact dollar amount is removed from the share price. The company is basically slicing off a small piece of its total value and sending it to shareholders. It can be hard to see due to market volatility, but by rule, every time a stock pays a $1 dividend, the share price falls by $1.

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Why We Don’t Think High Valuations Signal a Dim Future

Valuations are historically high, a fact more and more headlines seem to be touting as a negative allegedly frothy markets are overlooking. As the plausible-seeming explanation goes, valuation metrics like price-to-earnings (P/E) ratios show markets are at their most expensive since the dot-com bubble, supposedly foretelling poor returns. Sometimes folks claim this is about returns immediately ahead—and that a bear market may lurk around the corner. Other times it refers to the long-run future. But to us, this implies valuations are predictive. History shows you otherwise, a lesson worth taking note of now, in our view.

P/Es come in various flavors depending chiefly on the earnings denominator. Some use trailing 12-month earnings. Others include those hinging on analysts’ 12-month forward earnings estimates or the bizarrely distorted cyclically adjusted P/E (CAPE), which employs a 10-year average of inflation-adjusted earnings. But lately, it is the first—the trailing P/E—most fearful headlines seem to tout. According to data from Global Financial Data, Inc., the S&P 500’s trailing 12-month P/E is presently hovering around 35—in the top 3% of readings since 1926.[i] Sound alarming? It isn’t. Here is why.

For one, last year’s lockdown-skewed quarterly results are still influencing the calculation. The destruction of firms’ profits last year plus the steep rally in stocks—which anticipated better corporate results ahead tied to reopening—inflated P/Es massively. This also explains why the current level (35.3) is actually down from June’s peak (45.7)—Q2’s blockbuster earnings helped. But the current valuation still includes depressed earnings in Q3 and Q4. Against this backdrop, we don’t think it is abnormal for valuation ratios to seem elevated.

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No, September Isn’t a ‘Bad Month’ for Stocks

Last week, the calendar turned to September, and with the flip came the usual warnings that September is the stock market’s worst month. This time around, the September caution started appearing in early August, with pundits warning seasonal volatility is sure to strike. Thus we bring you our annual reminder: Seasonal patterns aren’t predictive, and the calendar isn’t a market driver.

As usual, the data supposedly supporting the sour September theses vary. Some cite the S&P 500’s average September return over the long term, -0.61%.[i] Others allege corrections (sharp, sentiment-fueled pullbacks of -10% to -20%) tend to happen in September. One rather creative study averaged returns since 1950 when a new party is in the White House and—whaddaya know—found a modest September pullback. Research citing lunar phases and star alignments that average returns when Jupiter is in Aquarius probably isn’t far behind.[ii]

To us, the notion of a bad September—or any “good” or “bad” calendar stretch—has long seemed very silly. Markets are efficient—they digest all widely known information near-instantaneously. The Gregorian calendar has been in use since the 16th century. Most everyone in the world has one on their wall, desk, computer and/or smartphone. We kind of think that meets the definition of “widely known”? To the extent September ever had any predictable negativity, markets would have priced it in decades ago, erasing its psychic powers. Traders would have quickly front-run it out of existence.

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Some Quick Perspective on August’s Jobs Report

The Bureau of Labor Statistics (BLS) released its widely watched “Employment Situation Summary” (aka, the jobs report) for August today, and based on a perusal of headlines, it was a bit of a stinker. Though payrolls rose, they were far short of expectations—dampening pundits’ moods going into Labor Day weekend. While August’s numbers weren’t particularly revelatory in terms of new news, we think the reaction to the report is more evidence of today’s tempered sentiment—implying the bull market has more wall of worry to climb.

If you took August’s numbers in a vacuum, they would seem pretty growthy. Nonfarm payrolls rose by 235,000—the seventh straight positive month and about 78,000 hires above the pre-COVID median—though far short of consensus expectations, which foresaw 750,000.[i] August’s tally was also a marked slowdown from July’s upwardly revised 1.1 million.[ii] Other widely watched labor metrics improved, too. The U-3 rate (the “official unemployment rate,” which refers to the total unemployed as a percent of the civilian labor force) fell to 5.2% from July’s 5.4%.[iii] The U-6 rate—which casts the widest net, as it includes the total unemployed, those marginally attached to the labor force and those employed part time for economic reasons—also improved slightly, falling from July’s 9.2% to 8.8%.[iv]

But it was the hiring figures that garnered the most attention, with observers generally blaming the slowdown on the Delta variant. Many highlighted the leisure and hospitality industries in particular, as hiring was flat in August after averaging 350,000 per month over the prior six months.[v] Based on August’s figures, some expect the Delta variant to continue weighing on hiring for the foreseeable future. Many now also presume the weaker-than-expected jobs numbers will discourage the Fed from slowing its quantitative easing asset purchases (i.e., “tapering”) at its September meeting, arguing the economy still needs central bank “support.” 

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Has Japan’s Revolving Door Returned?

Editors’ Note: MarketMinder is politically agnostic globally, favoring no party nor any politician. We assess political developments solely for their potential impact on markets and personal finance.

Friday, Japanese Prime Minister Yoshihide Suga surprised many, announcing he won’t seek re-election as Liberal Democratic Party (LDP) chief almost a year after taking office. Hence, the country will get a new prime minister shortly after September 29’s party vote—with the victor likely leading the LDP into the general election, due by November 28. Japanese stocks jumped on the news, with many observers suggesting a “more charismatic” leader who champions additional fiscal stimulus could help reduce Japanese stocks’ huge lag versus the world. But we think that oversells it. This shift is likely to prove little more than a personality change, and it could signal the return of Japan’s revolving door that saw eight prime ministers lead the country between 2006 and 2012. The ouster of an unpopular leader could perk sentiment some short term, but we doubt this does anything material for Japan’s longer-term fundamentals.

In explaining his decision, Suga cited the country’s struggles with the Delta variant, claiming he couldn’t simultaneously campaign for the leadership post and do his job running a country facing a crisis. That is a good-sounding rationale, but most observers think the actual explanation is simpler: Suga’s approval rating is … bad. When he took office following long-tenured Shinzo Abe’s resignation on health grounds last September, Suga’s cabinet was actually quite popular. According to broadcaster NHK, its approval was 62% immediately after appointment. Other polls put it even higher, hovering near 70%. Suga is the son of a strawberry farmer and hails from the rural north, not Tokyo. He put himself through college by working at a factory before entering politics, giving him a particular “man of the people” appeal.

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