Market liquidity is usually a pretty banal subject, garnering little attention. But in the last year, it has gone from being a dry afterthought to being the subject of frequent articles claiming it’s a major concern, particularly in the bond markets. So much so, that Bloomberg’s Matt Levine had a running section of his daily link wrap titled, “People Are Worried About Bond Market Liquidity” for months and rarely ran low on articles to share. It is now bigger news when there aren’t “People Worried About Bond Market Liquidity!” So what is market liquidity, and are the recent fears justified—or overblown?
Market liquidity refers to how easily an asset can be bought or sold without dramatically impacting the price or incurring large costs. It’s a defining feature separating asset classes, a key consideration for investors. Some financial assets, like listed stocks, are easy to buy or sell with little price impact and small commissions—they’re “liquid.” Conversely, commercial real estate takes time to sell and likely includes high commissions and significant negotiations—it is “illiquid.” For most investors, particularly those with potential cash flow needs, liquidity is an important facet of any investment strategy.
Bonds are among the more liquid investments available for investors, though liquidity varies among different types. Treasurys, among the deepest markets in the world, are highly liquid. Corporates and municipals are less so, and some fancier debt is actually quite illiquid.
Flags fly in front of the Parthenon in Athens. Photo by Bloomberg/Getty Images.
After five years of Greek crisis, two defaults and going-on three bailouts, many still fear a contagion across the eurozone. While default and “Grexit” risk persist, the risk of a contagion has fallen significantly over the last few years. The eurozone economy is improving, foreign banks hold less Greek debt, bank deposits aren’t fleeing other peripheral nations, and euroskeptic parties poll well behind traditional parties across the eurozone. Greece’s problems are contained and shouldn’t put the broader eurozone at risk.
|By Fisher Investments Editorial Staff, 03/27/2015|
In Friday’s third revision to Q4 US GDP growth, one thing that seemed to catch a few eyeballs was a drop in US Corporate Profits[i], which some hyperbolically labeled “the worst news.” Others claim a “profit recession”—whatever that means—looms. But here is the thing: A down quarter for corporate profits is not unusual amid a bull market. Here are two charts to illustrate the point. The first shows the Bureau of Economic Analysis’ measure of corporate profits excluding depreciation. The second includes depreciation. The gray bars indicate bear markets and the blue dots denote a negative quarter of profits in a bull market. As you can see, such dips aren’t exactly rare and occur at random points throughout a bull market and expansion.
Exhibit 1: US Corporate Profits After Tax Without Inventory Valuation and Capital Cost Adjustment
Thursday marked the beginning three days of voting across the 28 EU nations in the first European Parliamentary (EP) elections since 2009. Also, the first pan-EU elections since the eurozone’s debt crisis and 18-month long recession that ended in mid-2013. When the polls close, voters are expected to add more euroskeptics—members of parties favoring less federalism and, in some cases, leaving the euro. With euro jitters still lingering in the background, some suspect this will rekindle breakup fears anew. However, polls suggest euroskeptics gain some ground but fail to shift power away from more traditional European political parties. The movement toward a more integrated Europe likely continues and, with it, support for the common currency likely remains strong. Should polls hold true, the biggest influence I believe the euroskeptics may have is pressuring the pro-euro groups on economic policy.
European Union Government
European Council: Heads of each EU member state with no formal legislative power. The Council defines general EU political directions (and addresses crises).
European Commission (EC): Executive body of the EU, consisting of a President (elected by the European Parliament) and 27 commissioners selected by the European Council and the EU President. They are responsible for proposing legislation, implementing decisions and addressing day-to-day EU operations.
European Parliament (EP): Directly elected legislative body of the European Union (five-year terms). The EP is an approval body. They do not initiate legislation, instead voting on and amending European Commission proposals. The EP directly elects the European Commission President and confirms the European Commission after its formation.
There will be slight structural differences in Parliament, regardless of the voting. Between 2009’s election and this year’s, the EU ratified the Lisbon Treaty, altering the structure of the body, modestly reducing the influence of larger nations like Germany. The EP will consist of 751 seats, 15 fewer than before. Representation will still be based on population, but with certain caveats. The Lisbon Treaty caps each member state at a maximum of 96 and mandates a minimum of six seats to all. This will automatically reduce Germany’s standing from the present Parliament and slightly boost the power of small EU nations. However, national distribution isn’t really at issue in the race. It’s much more about pro-euro versus euroskeptic.
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|By Anna-Louise Jackson and Phil Kuntz, Bloomberg, 04/29/2016|
MarketMinder's View: This bull market is now history’s second longest, and this is a fun collection of factoids about its seven-plus (and counting) year run. They’re all backward-looking, but still, it’s pretty powerful to see exactly how history’s least-loved bull market has rewarded disciplined investors. Interestingly, its best week thus far was also its first week, underscoring the importance of being invested when bull markets begin—and avoiding the temptation to sell after big bear market declines. As for that titular $1,000 to $102,408, that refers to the gain if you’d invested in the S&P 500’s highest-returning stock on the bull’s first day and hung on till now. Not a realistic thing to pin one’s hopes, dreams and financial future on.
|By Dave Michaels, The Wall Street Journal, 04/29/2016|
MarketMinder's View: The headline is a little overstated, as firms have long reported earnings with and without accounting tweaks that differ from Generally Accepted Accounting Principles, better known as GAAP. Securities laws require firms to report GAAP earnings, but many firms will also publish pro-forma earnings, which treat depreciation, ad hoc costs and subscription revenues differently—believing pro-forma methods better reflect the underlying business. Whether these are more or less accurate is a matter of opinion, but in our view, pro-forma earnings aren’t hoodwinking anyone. Again, firms publish GAAP earnings front and center, the distinction is widely discussed, and it’s up to the investor to decide which is more meaningful. Should the SEC change some rules to limit acceptable non-GAAP earnings, that’s up to them, but it doesn’t necessarily make reporting more transparent or accurate. It will, however, skew earnings growth rates whenever the changes take effect, which will be something to watch out for.
|By Andrew Mayeda, Bloomberg, 04/29/2016|
MarketMinder's View: Congratulations and sorry to China, Japan, Germany, South Korea and Taiwan: Thanks to a new law, you have officially been designated by the Treasury as currency manipulators! Thankfully the penalties here are utterly feckless, because the methodology is senseless—as we suspect you figured out based on the inclusion of Germany, which—of course—doesn’t control its own exchange rate, seeing as how it uses a shared currency, with monetary policy set by reps from each eurozone member state. Germany can no more manipulate its currency than we can turn the sky green. But the law says any country meeting two of these three criteria is a currency manipulator: a 3%-of-GDP or higher current account surplus, US trade surplus north of $20 billion annually and foreign asset purchases equal to or greater than 2% of GDP annually. And Germany meets the first two. China got nailed, too, even though its officials are intervening to strengthen the yuan. This is the height of pointless political grandstanding.
|By Andrew Sentence, The Telegraph, 04/29/2016|
MarketMinder's View: Here is a fantastic ode to the wonders of a 21st century service-based economy, as well as a dynamite argument against the many, many, many articles claiming UK growth is unbalanced and unsustainable. We’d offer a quote as a teaser, but it’s hard to choose, and you’re best off just reading the whole thing, because it’s that good. And then, if you like, you can see our commentary on the exact same topic.
Market Wrap-Up, Thursday, April 28, 2016
Below is a market summary as of market close Thursday, April 28, 2016:
- Global Equities: MSCI World (-0.5%)
- US Equities: S&P 500 (-0.9%)
- UK Equities: MSCI UK (+0.4%)
- Best Country: New Zealand (+2.8%)
- Worst Country: Japan (-0.9%)
- Best Sector: Materials (+0.5%)
- Worst Sector: Information Technology (-1.1%)
Bond Yields: 10-year US Treasury yields fell 0.02 percentage point to 1.83%.
Editors' Note: Tracking Stock and Bond Indexes
Source: Factset. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.