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.


No Surprises in China’s Slowdown

Chinese GDP growth slowed to 4.9% y/y in Q3, with most pundits agreeing the problems at Evergrande and associated real estate woes, combined with September’s electricity shortage, took a big bite out of the economy. While we agree those issues did have some negative effects, most of today’s coverage overstated them and ignored a simple but important point: Q3’s growth rate is right in line with the long-running trend. In our view, that makes these results a return to pre-pandemic normal, not a sign of sudden big problems in the world’s second-largest economy—a fine backdrop for stocks.

Also lost in most coverage: Chinese GDP is so far on track to meet the government’s full-year target of at least 6%, as it is up 9.8% year to date from 2020’s first three quarters.[i] Obviously there is some COVID skew there, but according to China's National Bureau of Statistics’ (NBS) press release, the compound growth rate over the past two years is 5.2%.[ii] That is very much in line with pre-pandemic growth rates. So is Q3’s 4.9% growth, as Exhibit 1 shows—it largely extends the decade-long slowdown from the double-digit growth rates of old.

Exhibit 1: Slowing Growth Is the Norm in China

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Shhh … Elevated Inflation Rates Still Look ‘Transitory’

Transitory – adjective.

tran-zә-tȯr-ē

Definition:

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Brexit Fears Are Back but Still Lack Bite

Editors’ Note: MarketMinder is politically agnostic. We favor no politician or political party and aren’t inherently for or against political developments like Brexit. We assess events for their potential economic and market impact only.

It’s aliiiiiive! Just in time for Halloween, the Brexit monster is back from the beyond! And with it all the talk of trade wars and economic calamity on both sides of the English Channel. The issue this time? The Northern Ireland Protocol, which established customs checks on goods traveling from Great Britain to Northern Ireland in order to prevent a hard border between it and the Republic of Ireland, an EU member. Neither side thinks the present system is working well, with the recent “sausage war” over the protocol’s ban on British meat entering Northern Ireland but one high-profile example. UK Brexit Minister David Frost[i] officially announced his intent to renegotiate the agreement on Tuesday, and EU Vice President Maros Sefcovic outlined the EU’s position Wednesday. We won’t hazard a guess at how this plays out, but we still don’t believe this is a wallop in waiting for the UK, European or global markets.

Two years ago, when UK and EU officials were racing against time to strike a Brexit deal before the deadline, Northern Ireland was among the biggest sticking points. As it is one of the UK’s constituent countries, it probably goes without saying that UK leaders wanted trade across the Irish Sea to remain unfettered. But the Good Friday Accords, which cemented the peace agreement between paramilitary groups in Ireland and Northern Ireland, required an open, frictionless border between the two. To preserve that, the UK and EU agreed Northern Ireland would remain in the EU’s customs union. Hence, goods crossing the Irish Sea were subject to checks.

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What September Jobs Tell—and Don’t Tell—Investors

According to the US Bureau of Labor Statistics (BLS), nonfarm payrolls added 194,000 jobs last month while the unemployment rate fell to 4.8% from August’s 5.2%.[i] In a vacuum, September’s numbers look just fine: jobs up, unemployment down. Yet disappointment dominated most coverage, with many pundits arguing the smallest monthly job gain since December 2020 showed the Delta variant’s harmful economic impact. In our view, that is a bridge too far. Backward-looking jobs data won’t reveal much about the economy’s health today, let alone its future direction—worthwhile perspective for investors to keep in mind, in our view.

For one, the latest jobs numbers may not be as weak as they appear. Government jobs were the biggest detractor in September, falling -123,000 m/m.[ii] The education sector drove the drop, as public school jobs fell by -144,000 m/m.[iii] However, this doesn’t mean schools laid off staff and faculty in droves—rather, these numbers reflect seasonal adjustments. Since many economic data series fluctuate depending on the time of year, reporting agencies apply adjustments to account for expected skew, making it easier to do month-to-month comparisons.

As the BLS noted, “Most back-to-school hiring typically occurs in September. Hiring this September was lower than usual, resulting in a decline after seasonal adjustment. Recent employment changes are challenging to interpret, as pandemic-related staffing fluctuations in public and private education have distorted the normal seasonal hiring and layoff patterns.”[iv] Reopening schools did hire people in September—public school jobs rose by 718,000 m/m on a non-seasonally adjusted basis—just not as many as they would have in a typical year.[v]

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No Shortage of Souring Sentiment

Hear the one about supply chain bottlenecks knocking global growth, threatening the economic recovery from lockdowns? The IMF did—and ratcheted down its projection for developed-world growth this year from 5.6% to 5.2%. So did the people surveyed by Germany’s ZEW Institute, whose measure of German investor confidence slipped to its lowest level since COVID panic set in last year. And the US small business owners surveyed by the National Federation of Independent Business, whose sentiment measure fell again in September. And US CEOs surveyed by The Conference Board—their confidence level slipped almost -20% in Q3 on, you guessed it, supply issues. This all comes on the heels of The Conference Board’s broad US consumer confidence measure sinking to a seven-month low in August. Many pundits are treating these increasingly dour sentiment readings as portending to weak economic activity ahead in a self-fulfilling economic prophecy. We think that is a stretch. To us, these surveys and projections show the state of sentiment—and what markets have priced in—likely extending this bull market’s wall of worry in the process.

We do think it is fair to say everyone citing supply shortages as an economic headwind is on to something. While strong demand and overflowing order books are great, at the end of the day, output and spending are what show up in economic statistics. If businesses can’t get the supplies they need, they can’t make their widgets, and output drops. If they can’t get finished widgets to customers in a timely fashion, then sales likely drop. Both can weigh on industrial production, retail sales, GDP and other hard data.

Thing is, stocks don’t have a one-to-one relationship with any economic statistic. They don’t need growth to be fast or even particularly good. Just ok and not so bad are quite fine outcomes if expectations are low enough. This is because stocks move not on absolute reality, but the gap between reality and expectations. The lower expectations become, the easier it is for reality to beat them, even if reality is not so wonderful.

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This Week in Debt and Taxes

Editors’ note: MarketMinder is nonpartisan, preferring no party nor any politician. Our analysis serves solely to ascertain government actions’ potential market impact—or lack thereof.

On Thursday, two widely watched political measures took steps forward: In the US, Congress advanced a measure to raise the debt limit, while Ireland signed on to the US-backed global minimum corporate tax deal. Here we will bring you up to speed on these matters—and put them in broader perspective.

Congress’s itty-bitty debt-ceiling can kick: Wednesday, Republican Senate Minority Leader Mitch McConnell cleared the way for Democrats to pass a standalone debt limit extension. As his statement noted, he would “allow Democrats to use normal procedures to pass an emergency debt limit extension at a fixed dollar amount to cover current spending levels into December.”[i] In other words, he wouldn’t filibuster a bill to raise the debt ceiling a smidge, so Democrats could pass it with a simple majority. 11 GOP Senators joined him, enough to allow a vote to advance—although not without intraparty rancor. Democratic Senate Majority Leader Chuck Schumer took him up on the offer the next day.

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Who Keeps Snapping Up US Debt?

Among the many talking points surrounding the ongoing debt ceiling debate is a simple question: If the US keeps adding debt, won’t we run out of buyers? Where is all the demand going to come from? While no one can know what the future holds precisely, recent history can be instructive—and perhaps put one of investors’ debt fears to bed for the time being.

The recent history we refer to is the approximately $5.1 trillion added to net public debt since the end of 2019—all the bonds issued to fund COVID relief and other spending.[i] This is the largest, fastest increase outside of wartime, and during the middle of a global economic crisis to boot. Yet that didn’t deter Treasury demand. Buyers abounded, and that robust demand is a big reason why 10-year US Treasury yields are lower today than they were at 2019’s end.

Exhibit 1 details this demand, showing the increase in major owners’ holdings of US debt between December 2019 and July 2021—the latest month for which the Treasury has published information on international owners. As it shows, demand was broad-based.

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Why Rising Interest Rates Needn’t Stall Big Tech

Are Treasury markets hinting at trouble ahead for the Tech and Tech-like giants that have led this bull market higher? Some pundits say so, based on the observation that rising interest rates have coincided with short-term pullbacks in Tech stocks at various points this year, including the present. With the Fed signaling that quantitative easing (QE) will wind down soon, many think a continued rise in long rates means tough times for Tech and Tech-like firms from here. But history shows rising rates aren’t automatically negative for Tech stocks. While we don’t expect rising rates to persist, we still think that is worth keeping in mind.

According to those worried rising interest rates will weigh on Tech and Tech-like firms’ returns, when yields are low, investors are more willing to buy growth-oriented companies on the expectation of big future profits. But rising yields suggest investors feel more optimistic about the economy, so they supposedly prefer companies poised to benefit most from stronger economic activity in the present—ordinarily, value stocks. To back this claim, we have seen analysts cite a mix of recent data as interest rates have ticked higher. For example The Wall Street Journal reported on a $1.2 billion outflow from Tech mutual and exchange-traded funds in the week ending September 22—the first net withdrawal in three months.[i] Others noted that Tech stocks fell when interest rates rose this year, using a Tech-heavy ETF as a proxy for the sector.[ii]

But looking beyond what just happened shows reality isn’t so simple. Recent history proves Tech can do just fine alongside rising rates. From July 25, 2012 to 2013’s end, the 10-year Treasury yield rose from 1.43% to 3.04%.[iii] Tech rose 36.9% over that stretch—a bit behind global markets’ 42.3%, but still up nicely.[iv] Or consider when the Treasury yield climbed from 1.37% to 3.24% between July 8, 2016 and November 8, 2018.[v] Tech’s 69.7% return over that timeframe more than doubled global stocks’ 30.8%.[vi]

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Inside the Global Energy Price Spike

In the energy crunch heard ’round the world, households and businesses reliant on oil and gas are scrambling, driving headline fear from the UK to China as oil hits a seven-year high. Pundits warn the shortages and price spikes will hurt households, raise businesses’ costs and compound global supply-chain dysfunction as factories slash output. We don’t doubt many will feel a pinch, yet we also think a little perspective is in order. While it may take time to iron out production wrinkles and shortages, in the 3 to 30 month timeframe we believe forward-looking markets evaluate, the winter fuel “chaos” pundits hype isn’t likely to tank global growth—or stocks.

What is behind the global energy crunch? Regional factors. As we wrote last Tuesday, China implicitly banned Australian coal imports over a geopolitical spat, while it has also been trying to cut its coal dependence generally. Last year, China became the world’s largest liquid natural gas (LNG) importer, and its appetite has only grown since. But switching to gas-fired electrical generation hasn’t been smooth. China’s government caps electricity prices, so utilities can’t pass their rising costs to consumers. Spiking wholesale power prices force them to operate at a loss, so many cut output, sparking blackouts.

In the UK and much of Europe, weak wind power generation has also driven up demand for gas, which smaller utilities struggled to manage, leading to outages. Adding to the crunch: low reserves, as Russian gas export curbs have depleted inventories to decade-low levels. Dutch near-term gas futures, the European benchmark, quintupled to a record-high €100 per megawatt hour last Thursday from €20 in April.[i] This is having knock-on effects globally. In the US, natural gas prices more than doubled from $2.43 per million British thermal units in April to $5.94.[ii] Except for intermittent spikes associated with brief supply disruptions, like this February’s winter cold snap that literally froze natural gas production amid surging demand, prices are at their highest in more than a decade.

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The Behavioral Quirk Recent Choppiness Reveals

The pullback that began in September isn’t over yet, as Monday’s -1.3% drop added to the S&P 500’s rough patch.[i] As with all short-term volatility, we think it is impossible to know when it will end. But we have already seen an age-old truth play out: When pundits call for the stock market to do X and it does Y, they pout. Yet when it complies, they don’t cheer, either. Understanding this behavioral quirk can help make headlines easier to navigate.

This is a regular occurrence in bull markets. If stocks rise as forecast, headlines will call them overvalued. If pundits say the market is overvalued and needs a pullback to let some froth out, they will inevitably treat an actual decline as a sign the bottom is about to fall out. This isn’t universal—there are always exceptions—but it happens often enough.

The latter is what we are seeing now. Over the summer, we saw oodles of articles observing that the S&P 500 hadn’t had a -5% pullback since last autumn and warning the market was too calm—ignoring the Delta variant, inflation, supply shortages and all the other ghost stories hogging headlines daily.[ii] The implication was that some volatility would be healthy, bringing prices more in line with reality.

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