Political uncertainty is stoking fear across much of the developed world. In the US, pundits pontificate about the potential negative market impact from either a Donald Trump or Hillary Clinton presidency. Similarly, recent and upcoming votes in the eurozone’s four biggest economies—Spain, Italy, France and Germany—have contributed to an environment of fear and loathing across the Continent, causing many to miss the region’s overall fine economic results. Time and again, forecasted political “disasters” have had a limited impact on the fundamental environment in Europe. The Brexit vote increasingly appears to have had little economic impact, with the most recent data pointing to the 14th consecutive quarter of expansion in Q3. Even long-beleaguered European Financials stocks are doing better, as issues like negative interest rates and regulatory changes have failed to live up to fears. While the upcoming votes might bring minor political shifts, all appear unlikely to result in big, sweeping change. Instead, they likely push governments deeper into gridlock—an underappreciated positive—which reduces uncertainty and legislative risk.
Spain is likely headed to its third general election in a year after its fragmented parliament failed to form a government following June’s election. Prime Minister Mariano Rajoy of the center-right Popular Party (PP) was unable to win a confidence vote to form a minority government with upstart, centrist Ciudadanos. If neither Rajoy nor the opposition Socialist Party is able to form a government by Halloween, Spanish voters will return to the voting booth—potentially on Christmas Day.
Editors’ Note: Our discussion of politics is focused purely on potential market impact and is designed to be nonpartisan. Stocks don’t favor any party, and partisan ideology invites bias—dangerous in investing.
Are drug prices running rampant? After The New York Times reported on Sunday that a small private Pharmaceuticals firm, Turing Pharmaceuticals, jacked up the price of a 62-year-old drug by 5,000-ish percent, that question has sparked a media firestorm.[i] Monday, partly in reaction to the news, Democratic Presidential front-runner Hillary Clinton fueled further debate by vowing to “deal with skyrocketing out-of-pocket health costs and particularly, runaway prescription drug prices.” All week, media articles aplenty have focused on the issue and wondered whether Federal price controls are necessary to put a lid on the rise. But whatever your opinion of the sociological merits of this plan or drug prices, price controls in general have a long history of causing more harmful unintended consequences—including dinging stock prices—than any positive they may bring. That being said, pharmaceutical price controls seem unlikely to come to fruition any time soon.
For those interested in the details of Mrs. Clinton’s plan, here are the major proposals:
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
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|By Justin Wolfers, The New York Times, 09/30/2016|
MarketMinder's View: This piece attempts to use short-term futures market wiggles during Monday night’s debate and the change in odds of a Trump win to mathematically calculate the magnitude of a correction that would presumably follow a Trump win. Folks, this is not how markets work. Nor market forecasting. You can’t just math it out like this. Moreover, it mistakes near-term fear for a fundamental long-term driver. Just because people fear a certain candidate whose name rhymes with Brump will be bad for business doesn’t mean a President Brump would actually do any of the things that scare people now. (Same goes if you fear the other candidate, but we have a harder time rhyming that one.) Gridlock and the limits of executive power likely get in the way, as they usually do when new presidents try to make good on their campaign pledges. Stocks move on the gap between expectations and reality. If people fear bad things, and things end up less bad than feared, it’s generally good for stocks. Look, we aren’t pro- or anti- any candidate, party, ideology or screed. We’re agnostic through and through, as bias blinds. But articles like this could easily play into investors’ pre-existing biases, leading to hasty decisions, and it is our mission to help you keep from hurting yourself. (P.S.: An added reason to question those maths is that the prediction markets haven’t been particularly accurate lately. See Brexit for just one example.)
|By Allister Heath, The Telegraph, 09/30/2016|
MarketMinder's View: This is a tad biased in favor of Brexit and makes rather too much of one economic report (albeit a lovely one, showing UK service sector output rose 0.4% m/m in July), but it makes two really great points. First, July’s services jump outright contradicts the July service Purchasing Managers’ Indexes, which pointed to a steep contraction—illustrating the folly of relying heavily on these surveys. They’re an estimate of the breadth of growth and a rough sentiment gauge, but they don’t measure output. Second: “The truth is that the costs and benefits of Brexit were never about any supposed immediate shock caused by sentiment and animal spirits. They are about the medium and long-run: whether Brexit Britain ends up becoming a more open, better place that encourages work, investment, entrepreneurship and productivity growth, and whether, on balance, we become a more rather than less free-trading nation.” This will take years to determine, not weeks, and markets will have time to assess and adapt.
|By Jason Zweig, The Wall Street Journal, 09/30/2016|
MarketMinder's View: Hear, hear! “I am not here to lament the demise of the stock split. In fact, that is good news. It is a sign that the investing world may finally be learning the distinction between the price of a stock and the value of a business. In a typical ‘two-for-one’ split, a company doubles the number of its shares outstanding while halving the per-share price. That is the stock-market equivalent of exchanging one dime for two nickels. You end up holding twice as many units each worth half its former price. You’d be foolish to think that makes you richer.”
|By Barry Ritholtz, Bloomberg, 09/30/2016|
MarketMinder's View: Here is your antidote to the laundry list of headline fears. Enjoy!
Market Wrap-Up, Thursday, September 29, 2016
Below is a market summary as of market close Thursday, September 29, 2016:
- Global Equities: MSCI World (-0.3%)
- US Equities: S&P 500 (-0.9%)
- UK Equities: MSCI UK (+1.0%)
- Best Country: Norway (+3.1%)
- Worst Country: Japan (-0.0%)
- Best Sector: Energy (+1.7%)
- Worst Sector: Health Care (-1.6%)
Bond Yields: 10-year US Treasury yields fell -0.02 percentage point to 1.55%.
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.