Commentary

Christopher Wong
Into Perspective, Media Hype/Myths

Giving Thanks for Stocks’ Resiliency

By, 11/22/2017
Ratings393.923077


We have much to be thankful for indeed. Photo by Chris Wong.

Here is a thought exercise: Imagine yourself a year ago, Thanksgiving week 2016. If I gave you a list of real headlines from 2017, would you have said stocks were higher or lower overall by Thanksgiving week 2017? I’m guessing many folks would say “lower.” Yet we know reality: Global stocks are up 19% year-to-date and 21.8% since Thanksgiving Day 2016.[i] In my view, this is a keen reminder of stocks’ ability to look past the noise and price in reality far better than any one person can—something investors can give thanks for this year.

Here is a non-comprehensive list of major headlines from 2017:

Commentary

Elisabeth Dellinger
Inflation

How Not to Measure Inflation: Turkey Edition

By, 11/21/2017
Ratings493.806123


Wild turkeys frolic around Bryan Ranch in Alamo, CA, safe in the knowledge that they will not be your Thanksgiving dinner. Photo by Elisabeth Dellinger.

Every November, the American Farm Bureau Federation releases our favorite niche inflation indicator: the annual Thanksgiving Dinner Cost. It is our favorite not because it is the best. Rather, it is the most fun. We like Thanksgiving. We like turkey. We like pie. And we like some good-natured teasing of tongue-in-cheek fake indicators. And most importantly, we like reminding folks that very few inflation measures—silly or otherwise—bear any resemblance to one’s actual cost of living.

Trigger warning: I’m about to tear into the Farm Bureau’s indicator. Not because it’s dumb. Not because I’m an anti-farm-ite. Rather, because it’s illustrative.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

One Valuation Tool’s Extreme Backwards Bias, Revealed

By, 11/21/2017
Ratings214.619048

High valuations are a common concern among investors lately, with many touting the Shiller P/E (or Cyclically Adjusted Price-to-Earnings ratio, CAPE) as particularly concerning. At 31.3, most commentary on the subject highlights the factoid this level has occurred only twice before in history: The late 1990s and 1929, which many claim suggests trouble looms. Yet here is the thing: CAPE is a broken indicator, and the math underlying it can help you see why.

Stocks look forward, but valuation measures are backward looking, to varying degrees. Forward 12-month price-to-earnings ratios (P/Es) are based on analysts’ earnings forecasts—projections made at a particular point in time. Trailing 12-month P/Es are based on past quarters’ results. CAPE, however, is far worse: In an effort to smooth earnings and get a longer view, it averages together a decade’s results (adjusted for inflation). As we have often noted on these pages, that means events from many years ago—like the Financial Crisis, presently—impact CAPE. But, of course, an event ending eight and a half years ago isn’t relevant to where stocks head in 2017 and beyond. It is over.

Yet CAPE is still inflated by the crisis. Exhibit 1 shows why, plotting the raw data behind the CAPE’s divisor—real earnings. The 2007 – 2008 crisis jumps off the page. We’ve circled it here, although we doubt it was necessary.

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Reality Check

How to Break the Brexit Blues

By, 11/17/2017
Ratings463.902174

Based on recent headlines, the UK might not seem ok. Brexit talks are plodding along, leaving business leaders antsy. Conservative Prime Minister Theresa May is facing a rebellion from her own ministers. Projections are bleak on the economic front. Sounds bad! However, in our view, many investors fail to appreciate the UK economy’s strength—a sign of sentiment’s disconnect from reality—which sets up bullish upside surprise.

Brexit and its alleged negative consequences continue influencing just about every major economic and political UK narrative. Talks between UK and EU negotiators seem constantly stalled, frustrating both pols and businesses alike. Domestically, controversy has embroiled UK politics. Two ministers resigned from May’s government recently, prompting speculation that the prime minister has lost control—and rumblings of a leadership challenge have started. 20 Tory MPs have also threatened to revolt against a bill enshrining March 29, 2019 in UK law as the official EU exit date.

Beyond these developments, policymakers and experts bemoan the state of the UK economy. BoE Governor and metaphorical “unreliable boyfriend” Mark Carney said the economy would be “booming” if it wasn’t for Brexit. Analysts worry inflation’s 3.0% y/y rise in October—a repeat of September’s rate, which was the highest in five years—could choke consumer spending, especially since wages rose only 2.2% y/y in the same month (implying they fell in real terms). UK retail sales rose 0.3% m/m in October, beating expectations, but headlines dwelled on the first year-over-year contraction in four years.[i] UK industries have also expressed concern future trade deals could hurt them significantly in the long term. The underlying theme: Things are bad now, and they will only get worse when the UK actually exits.

Research Analysis

Pete Michel
Into Perspective

About That High Yield Selloff

By, 11/17/2017
Ratings574.043859

Editors’ note: MarketMinder does not recommend individual securities. The below simply represent a broader theme we wish to highlight.

Is it over for high-yield bonds? Is their selloff the canary in the coalmine for stocks? These questions preoccupied investors as high-yield bonds fell in recent days, reminding some of early 2016’s weakness. However, like that selloff, this one is mostly concentrated in one sector. Moreover, the move in high-yield spreads is in line with other small moves we’ve seen in the recent past, and the high-yield market appears to be functioning fine despite liquidity concerns. And as always, bond and stock markets are similarly liquid and price in widely known information simultaneously. One can’t be a canary in the coalmine for the other. Markets are too efficient.

While January 2016’s high-yield selloff was centered in the Energy sector, this one is largely concentrated in Telecom, which accounts for about 10% of the high-yield market by par value. While triggers are always difficult (and usually impossible) to pinpoint, this one began as the T-Mobile and Sprint merger fell apart. Both companies are big junk bond issuers with sizable maturities coming due in the next few years. Weak Q3 earnings from other Telecom firms also contributed to the weakness. The Senate’s proposal to delay the corporate tax cut until 2019 may also have contributed, as well as a general realization by investors a tax bill won’t be as easy to pass as some presumed—potentially impacting future debt issuance. All those factors plus more likely contribute to a sudden slight souring of sentiment, hitting high yields.

Commentary

Fisher Investments Editorial Staff
Finance Theory, Forecasting

Volatility (or Lack Thereof) Isn’t Predictive

By, 11/16/2017
Ratings374.040541

It has been 50 trading days since the S&P 500 fell more than -0.5% in a day.[i] Do you know where your children are? While it’s tempting to think danger lurks under still waters—and financial media provide prompts aplenty—calm periods don’t portend big price movements ahead. Nor do they herald further tranquility. Volatility—low or high; up or down—is incapable of foretelling the future.

Low volatility spans the world. US volatility is low whether you measure it by daily percent moves or the VIX’s “options-implied”[ii] volatility. US stocks’ streak without a half-percent decline is the longest since 1968. Moreover, the S&P 500 has risen every month year to date on a total return basis, a first-ever.[iii] October registered the VIX’s lowest monthly average on record (since 1990). Outside America, European stocks’ VIX—VStoxx—also hit record lows. Japan’s Topix index hadn’t fallen by -0.4% or more in 31 trading days until a recent spate of volatility last Friday. Up to then, the Nikkei VIX was near its lowest in a dozen years. Meanwhile, the MSCI All-Country World Index’s[iv] daily percent moves haven’t exceeded half a percent for a couple weeks. That’s some unvolatility! But none of this tells you about future moves. Stocks aren’t serially correlated. Past price movements, whether volatile or not, don’t affect what happens next.[v] Volatility just describes what already happened. It is a measure of past performance, which is never predictive.

Some argue sanguine stocks in the face of seeming threats—geopolitical, political, central bank-related or otherwise—are dangerously complacent. But markets deal efficiently with all widely known information, including headline fears. Yes, they can be irrational in the short term. But nothing widely feared today is new. Nor should stocks have some automatic reaction to any of the day’s news. While headlines dwell on an event or two, stocks consider everything that’s going on. What if all the other (good) variables simply outweigh whatever headlines are scared of? What if what people don’t talk about happens to be more meaningful (and positive) for future corporate profits?

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

The Art of Not Actually Scrapping Trade Deals

By, 11/16/2017
Ratings314.387097

Here are some headlines from about a year ago:

These stories aren’t cherry-picked—in the immediate aftermath of Donald Trump’s surprise US presidential election win, concerns about an approaching wave of protectionism were everywhere. Yet a year later, he hasn’t actually done much on the trade front. To us, this shows the importance of not letting campaign trail talk drive investment decision-making.

When Trump won, investors were largely fearful. Markets generally prefer freer trade, but Trump had talked a big protectionist game during the campaign. He declared other countries are “killing us on trade,” pronounced NAFTA the “worst deal ever” and promised to label China a “currency manipulator” on “day one” of his presidency.[i] Soon after taking office, President Trump appeared to fulfill the worst fears by withdrawing the US from the Trans-Pacific Partnership (TPP), a pending free-trade agreement between America and 11 other nations. But the TPP torpedoing was mostly symbolic. The agreement was likely dead in the water anyway, with both Trump and Hillary Clinton opposed, insufficient popular or legislative support in the US, and ratification roadblocks in other participating countries.

Commentary

Elisabeth Dellinger
Currencies

A Whole Latte Nonsense About the Dollar

By, 11/10/2017


Which one of these is overvalued? Photo by Elisabeth Dellinger.

Did you hear? The US dollar is simultaneously “11% overvalued” and “5% undervalued.” Weird, right? Well those are the competing conclusions of just two of the many, many outfits spending time trying to calculate whether the dollar is too high, too low or just right. It is largely a fruitless effort: In currencies, there is no such thing as some inherent fair value. The value of a free-floating currency, always and everywhere, is what the market says it is.

Thursday’s online edition of The Wall Street Journal included a rather entertaining chart showing five supranational organizations’ estimates of whether 17 major global currencies are over- or under-valued. It has us half-wondering if people forget currencies trade in pairs, with movement heavily influenced by moves in expected interest rates. Given currencies’ tendency to move with relative interest rates, is the dollar really 11% overvalued, as the Council on Foreign Relations estimates, when US interest rates are among the developed world’s highest? With most observers expecting the Fed to keep gradually hiking interest rates? Or is the market perhaps rationally pricing in those interest rate expectations?[i]

Commentary

Fisher Investments Editorial Staff
GDP

The Global Economy Keeps on Growing

By, 11/08/2017
Ratings674.223881

Halfway through Q4, countries are releasing Q3 GDP numbers and many research outlets happily note economies are finally growing in sync. Huzzah! Granted, broad-based global growth isn’t necessary for stocks to rise higher—this bull market has run eight years despite weak spots and regional contractions—but it shows how far the expansion has come. While backward-looking, these GDP reports show the global economy was in solid shape entering Q4. More investors realizing this reality could contribute to warming investor sentiment—a bullish development.

North America Is Dealing With Some Natural Disasters

US Q3 GDP rose 3.0% annualized, a smidge below Q2’s 3.1%—the first back-to-back quarters of 3% growth in three years. While headlines called this “impressive growth despite hurricanes,” key areas experienced slowdowns. For example, personal consumption expenditures slowed to 2.4% from Q2’s 3.3%, and trade was also weaker: Exports rose 2.3% and imports contracted -0.8% (compared to Q2’s respective 3.5% and 1.5% rates). This import contraction actually contributes to a higher headline GDP number—a statistical quirk as GDP calculates trade as net exports (exports – imports)—which misses the fact imports represent domestic demand.   

Commentary

Fisher Investments Editorial Staff
Taxes

Don’t Let the House’s Tax Plan Tax Your Nerves

By, 11/06/2017
Ratings1734.16474

They say life’s only certainties are death and taxes, but we’d add a third: Politicians endlessly debating taxes. This is why we were half-tempted not to write up the House GOP’s shiny new tax proposal for you, dear readers: As much as there is to discuss, the likelihood tax reform happens exactly as this bill envisions is somewhere between zero and close-to-zero. Senate Republicans are set to release their own plan in the next week or two, and both chambers will probably tear into each bill during the legislative process. The final tax bill—if it even gets that far—could have little resemblance to what the House released. And, of course, even that would be subject to debate and change. Hence, we caution anyone against thinking any of this is likely to come to fruition. But what we can do now is use this proposal to illustrate why neither tax hikes nor tax cuts have a predetermined economic or market impact. Simply exploring the fact that all tax changes—whether advertised as hikes or cuts—create winners and losers can help investors understand why there is never much material market reaction. So let’s dive in.

As you have probably seen from the media’s deluge of coverage, the House’s tax plan aims to cut corporate tax rates, adjust the incentives for US-based firms with operations overseas, and streamline the personal income tax code. The corporate tax rate would fall from 35% to 20%, below the international average, but most of the deductions firms use to avoid paying that 35% rate would go away. So-called “pass through” corporations, which includes most small businesses, would see their headline tax rate drop from 39.6% to 25%. Taxation of most foreign profits would cease, replacing the bizarre system where firms pay foreign taxes up-front and defer US taxes until they repatriate the profits. In theory, that removes the incentive to park cash overseas, helping money move more freely. But it isn’t a free lunch: Firms’ “high-profit foreign subsidiaries” (whatever that means) would face a 10% tax.

The personal income tax changes are more complex. Essentially, they reduce the number of tax bands from seven to four, eliminate most itemized deductions, nearly double the standard deduction, and remove the personal exemption. To save three thousand words, here are three pictures.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

The Art of Not Actually Scrapping Trade Deals

By, 11/16/2017
Ratings314.387097

Here are some headlines from about a year ago:

These stories aren’t cherry-picked—in the immediate aftermath of Donald Trump’s surprise US presidential election win, concerns about an approaching wave of protectionism were everywhere. Yet a year later, he hasn’t actually done much on the trade front. To us, this shows the importance of not letting campaign trail talk drive investment decision-making.

When Trump won, investors were largely fearful. Markets generally prefer freer trade, but Trump had talked a big protectionist game during the campaign. He declared other countries are “killing us on trade,” pronounced NAFTA the “worst deal ever” and promised to label China a “currency manipulator” on “day one” of his presidency.[i] Soon after taking office, President Trump appeared to fulfill the worst fears by withdrawing the US from the Trans-Pacific Partnership (TPP), a pending free-trade agreement between America and 11 other nations. But the TPP torpedoing was mostly symbolic. The agreement was likely dead in the water anyway, with both Trump and Hillary Clinton opposed, insufficient popular or legislative support in the US, and ratification roadblocks in other participating countries.

Commentary

Elisabeth Dellinger
Currencies

A Whole Latte Nonsense About the Dollar

By, 11/10/2017


Which one of these is overvalued? Photo by Elisabeth Dellinger.

Did you hear? The US dollar is simultaneously “11% overvalued” and “5% undervalued.” Weird, right? Well those are the competing conclusions of just two of the many, many outfits spending time trying to calculate whether the dollar is too high, too low or just right. It is largely a fruitless effort: In currencies, there is no such thing as some inherent fair value. The value of a free-floating currency, always and everywhere, is what the market says it is.

Thursday’s online edition of The Wall Street Journal included a rather entertaining chart showing five supranational organizations’ estimates of whether 17 major global currencies are over- or under-valued. It has us half-wondering if people forget currencies trade in pairs, with movement heavily influenced by moves in expected interest rates. Given currencies’ tendency to move with relative interest rates, is the dollar really 11% overvalued, as the Council on Foreign Relations estimates, when US interest rates are among the developed world’s highest? With most observers expecting the Fed to keep gradually hiking interest rates? Or is the market perhaps rationally pricing in those interest rate expectations?[i]

Commentary

Fisher Investments Editorial Staff
GDP

The Global Economy Keeps on Growing

By, 11/08/2017
Ratings674.223881

Halfway through Q4, countries are releasing Q3 GDP numbers and many research outlets happily note economies are finally growing in sync. Huzzah! Granted, broad-based global growth isn’t necessary for stocks to rise higher—this bull market has run eight years despite weak spots and regional contractions—but it shows how far the expansion has come. While backward-looking, these GDP reports show the global economy was in solid shape entering Q4. More investors realizing this reality could contribute to warming investor sentiment—a bullish development.

North America Is Dealing With Some Natural Disasters

US Q3 GDP rose 3.0% annualized, a smidge below Q2’s 3.1%—the first back-to-back quarters of 3% growth in three years. While headlines called this “impressive growth despite hurricanes,” key areas experienced slowdowns. For example, personal consumption expenditures slowed to 2.4% from Q2’s 3.3%, and trade was also weaker: Exports rose 2.3% and imports contracted -0.8% (compared to Q2’s respective 3.5% and 1.5% rates). This import contraction actually contributes to a higher headline GDP number—a statistical quirk as GDP calculates trade as net exports (exports – imports)—which misses the fact imports represent domestic demand.   

Commentary

Fisher Investments Editorial Staff
Taxes

Don’t Let the House’s Tax Plan Tax Your Nerves

By, 11/06/2017
Ratings1734.16474

They say life’s only certainties are death and taxes, but we’d add a third: Politicians endlessly debating taxes. This is why we were half-tempted not to write up the House GOP’s shiny new tax proposal for you, dear readers: As much as there is to discuss, the likelihood tax reform happens exactly as this bill envisions is somewhere between zero and close-to-zero. Senate Republicans are set to release their own plan in the next week or two, and both chambers will probably tear into each bill during the legislative process. The final tax bill—if it even gets that far—could have little resemblance to what the House released. And, of course, even that would be subject to debate and change. Hence, we caution anyone against thinking any of this is likely to come to fruition. But what we can do now is use this proposal to illustrate why neither tax hikes nor tax cuts have a predetermined economic or market impact. Simply exploring the fact that all tax changes—whether advertised as hikes or cuts—create winners and losers can help investors understand why there is never much material market reaction. So let’s dive in.

As you have probably seen from the media’s deluge of coverage, the House’s tax plan aims to cut corporate tax rates, adjust the incentives for US-based firms with operations overseas, and streamline the personal income tax code. The corporate tax rate would fall from 35% to 20%, below the international average, but most of the deductions firms use to avoid paying that 35% rate would go away. So-called “pass through” corporations, which includes most small businesses, would see their headline tax rate drop from 39.6% to 25%. Taxation of most foreign profits would cease, replacing the bizarre system where firms pay foreign taxes up-front and defer US taxes until they repatriate the profits. In theory, that removes the incentive to park cash overseas, helping money move more freely. But it isn’t a free lunch: Firms’ “high-profit foreign subsidiaries” (whatever that means) would face a 10% tax.

The personal income tax changes are more complex. Essentially, they reduce the number of tax bands from seven to four, eliminate most itemized deductions, nearly double the standard deduction, and remove the personal exemption. To save three thousand words, here are three pictures.

Commentary

Fisher Investments Editorial Staff
Monetary Policy

Mr. Ordinary and the Wizards of Constitution Avenue

By, 11/03/2017
Ratings723.930556


Photo by traveler1116/iStock by Getty Images.

The wait is finally over! After months of speculation and DC cocktail bar chatter, President Trump has named his pick for Fed head: Jerome Powell, currently a member of the Fed’s Board of Governors. The Wall Street Journal calls him “Mr. Ordinary,” which is a refreshing change from nicknames implying magic videogame powers, like “Super Mario” Draghi at the ECB or former Fed head “Helicopter Ben” Bernanke. Wall Street-types are already cheering him as more pro-market than his soon-to-be predecessor, economist Janet Yellen, thanks to his private equity background. Those hoping for deregulation like that he served in George H.W. Bush’s Treasury. Republicans like him because he is a Republican. Yet many also view him as being a lot like Yellen, implying he’ll love low rates and extend the status quo. Those are all opinions. Maybe they are valid! But it’s impossible to know today. What central bankers say before taking the helm and do afterward are often quite different, and you can’t know in advance whether it will be “good different” or “bad different.” All we can do is weigh their decisions as they make them.

Fed-watchers will argue you can find clues on Powell’s monetary policy preferences from his public speeches, past writings, interest rate votes and occasional mentions in Fed minutes. We guess the last two, at least, measure actions (to an extent). But they’re incomplete. People thought they had a good read on Yellen when she took office since she had been at the Fed for years, but in reality, we knew next to nothing. This is the Fed’s fault: They keep full transcripts of every meeting and conference call, which would give investors (and senators) a treasure trove of insight—not just into their actions and opinions, but also into the logic, evidence, biases and mindset behind them. Unfortunately, the Fed releases these at a five-year lag.

Commentary

Fisher Investments Editorial Staff
Others

Mutual Fund Ratings and Past Returns

By, 11/03/2017
Ratings1034.368932

Most people prefer to watch movies that got two thumbs up[i] from the critics. The best restaurants in the world get Michelin stars. Critics award wine “points.” Online shoppers buy top-rated products from top-rated sellers. Higher ratings mean better products, right? So it’s no surprise folks also seek out investments with high ratings—whether measured in stars, medals, “buy” recommendations or something else. In our view, however, relying on these ratings is misguided: Fund ratings don’t aid investors’ decisions, as they are mostly an incomplete analysis of past returns—not predictive.

This isn’t just our opinion. A recent Wall Street Journal investigation found Morningstar mutual fund ratings don’t predict future ratings or returns for said mutual funds.[ii] Highly rated funds usually fall back to earth and/or disappear. To quote:

“Of funds awarded a coveted five-star overall rating, only 12% did well enough over the next five years to earn a top rating for that period; 10% performed so poorly they were branded with a rock-bottom one-star rating. … The Journal’s analysis found that most five-star funds perform somewhat better than lower-rated ones, yet on the average, five-star funds eventually turn into merely ordinary performers.”

Research Analysis

Christo Barker
Into Perspective, Debt

Is China Experiencing the World's Biggest Credit Bubble?

By, 09/05/2017
Ratings794.126582

China credit bubble concerns are one of the oldest, most recycled false fears of today’s bull market. Bubble-warning headlines from seven years ago could run today with minimal changes. However, despite numerous examples of Chinese credit not being properly allocated—a side effect of the government’s centralized control—no bubble has burst yet. Unless a massive negative surprise creates a wallop or euphoria creeps back into markets, the likelihood a Chinese credit bubble pops and roils the economy—with ill effects spreading globally—in the immediate future is low, in my view.

To understand why Chinese credit bubble fears are overwrought, investors must first understand some critical differences between how credit works in China’s centralized, government-steered economy and a typical free market economy (like the US). China’s Communist Party exhibits heavy control over economic areas like capital flows, currency strength, interest rates and money supply. This desire for control—particularly over money supply—means China relies on banks to provide the majority of credit access (67% compared to 17% in the US[i]). In comparison, entities in the US have more options thanks to America’s deep, robust capital markets (e.g., bond, asset-backed security, short-term commercial paper and repo markets).

While bank-driven credit gives the government more control over money supply, Chinese banks must make loans that capital markets would typically underwrite in the US. For example, Chinese banks make lots of loans to the government, but in the US, the federal government can issue Treasurys while states and cities float muni bonds. Also in the US, mortgage and asset-backed securities comprise a nearly $11 trillion market—in China, this secondary market doesn’t exist. China’s bank dependency inflates the size of those institutions’ balance sheets, making them look scary and bubblicious. However, aggregating the total outstanding credit—the sum of all debt from capital markets and loans—for China and the US gives a better apples-to-apples comparison. When scaled to GDP, China’s total outstanding credit is actually lower than the US’s. (Exhibit 1)

Research Analysis

Fisher Investments Editorial Staff

Market Insights Podcast: North Korea Update – August 2017

By, 08/30/2017
Ratings263.769231

In this podcast, Communications Group Manager Naj Srinivas speaks with Content Analyst and MarketMinder Editor Elisabeth Dellinger about recent tensions between the US and North Korea and our current outlook.

Time stamps:

Research Analysis

Fisher Investments Editorial Staff
Into Perspective

Market Insights Podcast Emerging Markets Update-June 2017

By, 06/23/2017
Ratings273.925926

In this podcast, Communications Group Manager Naj Srinivas speaks with Research Analyst Scott Botterman about recent developments within Emerging Markets and our current outlook.

0:50 – MSCI announces Chinese A shares to be included in Emerging Markets index

Research Analysis

Christo Barker
Into Perspective

Victory to En Marche!

By, 06/19/2017
Ratings104.15

The fourth and final round of French national elections concluded over the weekend, clearing a major milestone in the year of falling political uncertainty. President Emmanuel Macron’s centrist La République En Marche! party and its ally, the Democratic Movement (MoDem), gained a clear majority in the National Assembly after winning 61% of the seats (350 of 577) in the second round of the French parliamentary election. (Exhibit 1)

At a surface level, this result technically reduces political gridlock in France. However, the En Marche party is itself an exercise in gridlock, as it is essentially a blend of center-left and center-right politicians. It includes lawmakers that defected from both of the traditional Socialist and Republican Parties. A centrist coalition likely pursues more moderate policies aimed at incremental change rather than broad, sweeping legislation with the potential to really shock markets. For example, the party’s primary policies likely include reforming labor laws, cutting corporate taxes, reducing a bloated civil sector and promoting entrepreneurship. Yet none of the proposals unveiled thus far appear terribly radical. Labor market reforms, for example, appear to dance around third rails like France’s 35-hour workweek. Plus, En Marche is also just over a year old, and over half of its National Assembly members haven’t held any political office before. How well these political novices work with the old guard—and how well the center-right and center-left can agree on policy details—will be worth monitoring, but intraparty gridlock likely creates additional hurdles to legislation.

While one could argue French gridlock could dash hopes for big pro-business reforms, potentially setting up stocks for disappointment, Macron’s relatively watered-down agenda is already widely known. Moreover, having less potential for radical legislation means less chance for new laws to create winners and losers, which reduces one source of risk for markets.  

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What We're Reading

By , Financial Times, 11/24/2017

MarketMinder's View: An excellent critique of the use of thick jargon and overly complex language targeting economists. We’d only add: They may be taking their cues from the investment world, where meaningless jargon that obscures a layperson from gaining a true understanding of the product (or the practitioner’s expertise) abounds. This passage captures our sentiments near perfectly: “It is surprisingly easy to write like this when you don’t know what you think, or cannot agree, or dare not say. The result occupies the overlap on a Venn diagram between unobjectionable and incomprehensible.” Think through that the next time some stock analyst prattles on about “risk assets” or “divergent monetary policy” or what have you.

By , The Wall Street Journal, 11/24/2017

MarketMinder's View: This is one of those articles prematurely worrying about the flattening yield curve. (See the prior article for all that’s wrong with the thesis flattening = imminent trouble.) But we’re sharing this one because of the way it mischaracterizes much of recent economic history. The article argues the Fed’s bond purchases—which flattened the yield curve by dragging down long rates—should have spurred fast growth and inflation. But now we are told to fear yield-curve flattening as a sign of a slowdown. You can’t have it both ways: A flat yield curve either slows growth or it doesn’t. We think it does, by making bank lending less profitable (banks borrow short term to fund long-term loans). But that actually reveals the fallacy of the whole notion Fed “stimulus” is responsible for growth and equity returns in this cycle. And destroys this article’s argument.

By , Pragmatic Capitalism, 11/24/2017

MarketMinder's View: This is a solid antidote to the preponderance of news stories fretting over the flattening (read: not inverted) yield curve. Here’s the upshot: “So, the bottom line is that the curve isn’t inverted, doesn’t appear close to inverting and won’t be cause for concern until a decent amount of time after it inverts. So let’s hold off on scary yield curve stories for now.” The only point we see a bit differently is the notation that “a recession usually materializes about a year after a curve inversion.” Yes, yield-curve inversion does lead—and sometimes by a lot—but it isn’t a regular amount of time. Furthermore, investors can’t wait for a recession to clearly substantiate the yield curve’s signal—stocks are also a forward-looking indicator. But otherwise, this is a solid look at where we stand today.

By , Bloomberg, 11/24/2017

MarketMinder's View: Germany’s economy seems to be in fine shape, as data like these illustrate: “[Gross] domestic product increased 0.8 percent -- in line with a Nov. 14 estimate -- putting the economy firmly on course for its best annual performance in six years. … A composite Purchasing Managers’ Index rose to 57.6 from 56.6 in October, IHS Markit said in a separate report. New orders surged the most in more than 6-1/2 years, leading companies to add jobs at one of the fastest rates in at least two decades.” Yet most focus these days is on the second part of this article: the struggles Chancellor Angela Merkel faces in constructing a coalition government following September’s election—and the fretting over what happens if new elections are held. Taken in concert, this is a microcosm of the sentiment/reality disconnect in the eurozone presently—a bullish concoction. As political uncertainty clears, folks should see the strong fundamentals and bid stocks up.

Global Market Update

Market Wrap-Up, Thursday, November 23, 2017

Below is a market summary as of market close on Thursday, November 23, 2017:

  • Global Equities: MSCI World (+0.2%)
  • US Equities: S&P 500 (0.0%)
  • UK Equities: MSCI UK (+0.6%)
  • Best Country: Japan (+1.1%)
  • Worst Country: Germany (-0.6%)
  • Best Sector: Telecommunication Services (+1.0%)
  • Worst Sector: Information Technology (-0.2%)

Bond Yields: 10-year US Treasury yields remained at 2.32%.

Note: US markets were closed for Thanksgiving.  

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. S&P 500 returns are presented including gross dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.