Commentary

Fisher Investments Editorial Staff
Into Perspective

Flat Past Returns Don’t Foretell Future Flatness

By, 04/29/2016
Ratings234.652174

While the recent correction seems to have subsided, many investors are weary of the market flatness that has lasted the better part of the past year, presuming recently flat returns predicts future flatness—or show the “old” bull is running out of steam. With recent volatility burned into their memories, many wonder whether they’ll be rewarded for equities’ volatility. It is true this has been an elongated period—over 300 calendar days—of basically flat returns. However, this isn’t abnormal in bull markets historically—and it doesn’t foretell weak or flat returns ahead.

The present is the ninth flat period exceeding 300 days during bull markets since 1926 and, as Exhibit 1 shows, average returns over the 12, 18 and 24 months after they ended were solidly positive. We aren’t arguing past flatness suggests big returns ahead—rather, we’re telling you there is nothing predictive about flat periods whatsoever. Allowing past market returns to cloud your outlook is a behavioral investing error—it’s why past-return drunk investors fail to see faltering fundamentals in a bubble. Fretting flatness foretells flatness is the same behavioral error, only a more pessimistic flavor.

Exhibit 1: Flat Point-to-Point Returns in Bull Markets Don’t Foretell Weakness

Commentary

Fisher Investments Editorial Staff
GDP, Media Hype/Myths, Forecasting

Don’t Fret the Q1 US GDP Slowdown

By, 04/29/2016
Ratings774.194805

The US economy grew just 0.5% (SAAR) in Q1, missing expectations of 0.7% and triggering all sorts of handwringing in the financial press. Slowest pace of growth in two years! Biggest drop in business investment since the recession! Consumers still not spending their gas savings! Far be it from us to try to sugar coat any of this, as it surely wasn’t a great quarter, but it also doesn’t mean much for stocks. This entire bull market has occurred against a backdrop of below-average growth, so a sluggish quarter is just more of what stocks have enjoyed for about seven years now. Moreover, the Q1 GDP report is a flawed view of economic activity that stocks have already lived through, priced in and moved beyond. Stocks look forward, not backward, and Q1’s so-so results have no bearing on future growth.

Though growth slowed across almost all categories, many focused on the -5.9% drop in business investment—a plunge on par with the last three recessions. Considering swings in business spending tend to drive economic cycles, the jitters are understandable. But falling business investment isn’t always a harbinger of recessions. While it’s unusual for business investment to fall this much during an expansion, it isn’t unprecedented. In Q1 1987, business investment fell -9.1%, but no recession came. Sizable one-off drops also occurred in 1967, 1956, 1952 and 1951—smack in the middle of economic expansions. There is a strong reason to believe this drop should prove to be a blip, not a sign the broader economy is about to go kaput: Once again, the cratering Energy industry bears a lot of the blame. Investment in mining structures—which includes oil wells—fell -86%, the worst reading ever. That one category detracted -3.4 percentage points from business investment, making it responsible for more than half the drop.

Exhibit 1: Mining’s Drag on Business Investment

Commentary

Fisher Investments Editorial Staff
Inconvenient Truths, Media Hype/Myths

The Elusive Passive Investor

By, 04/29/2016
Ratings733.808219

Over the last decade, index funds—in the form of both mutual funds and ETFs—have risen greatly in prominence in the investment world. Passive products, folks often remind us, are taking share from active products—evidence to media types and pundits that passive investing is on the rise. But, as we’ve written before, owning passive products does not make you a passive investor.Virtually all managers and individual investors who use passive products do so in an active manner, making their strategy active. There is nothing wrong with that, but it effectively renders the passive vs. active debate moot.

Passive investing means owning the broad stock market, or some mix of stocks and bonds, via index funds—and never veering from this throughout your entire investment time horizon. The idea stems from the belief markets are so efficient it’s virtually impossible to beat them.[i] Because passive investment vehicles mirror an index, they perform similarly over time, less their relatively low fees and tracking error—how much the fund deviates from the underlying index. Proponents argue this approach will generate better long-term returns than active managers that deviate further from the indexes. But in the non-theoretical world—real life—very few investors can successfully be passive and reap the long-term benefits.

The supposed evidence passive is winning out over active is the fact retail investors have largely moved away from actively managed funds and into index funds over the last decade or so. But this doesn’t mean those buying index funds are employing a passive strategy. Investors must still decide whether to invest in all stocks or a mix of stocks and bonds—their asset allocation. This is an active decision, and arguably the one that most determines whether or not you achieve your long-term financial goals. So is the next layer down, picking which funds to own. If stocks, US or global? S&P 500 or Wilshire 5000? If bonds, government or corporate? More active decisions.

Commentary

Fisher Investments Editorial Staff
Personal Finance

Patience Pays

By, 04/29/2016
Ratings504.48


Keep calm and stay invested. Photo by Paul Harizan/Getty Images.

When stocks slip on a day-to-day basis, we here at MarketMinder often repeat the following message: Short-term volatility is the price to pay for equities’ long-term gains. We realize this isn’t a revolutionary statement. Many others highlight a similar message, citing the large amount of data supporting the claim. But as persuasive as the historical evidence is, investors must deal with a deafening amount of noise screaming why they shouldn’t be in stocks—and that isn’t even accounting for humans’ natural tendency to avoid anything that immediately feels uncomfortable (e.g., a two-week market drop). That is a lot to handle! While it isn’t easy, the process is also straightforward: Successful long-term investing requires staying disciplined and minimizing easy-to-make mistakes during sentiment-driven downturns. 

The concept is simple: Long-term investors who require equity-like growth should own stocks the vast majority of the time. Why? Historically speaking, stocks have provided the best return of any similarly liquid asset class over longer time horizons. On a day-to-day, month-to-month, even year-to-year basis, stock returns can vary tremendously. Since 1926 stocks’ long-term annualized average return is 9.9%[i]—and that includes both bull and bear markets. Even if you’re skeptical about stocks, what is a better alternative? Other asset classes lag stocks over the same timeframe.[ii] US corporate bonds returned 6.1% while Treasurys provided 5.3% annualized. US muni bonds? Their annualized return was less than half of stocks’ at 4.2%.  

Commentary

Fisher Investments Editorial Staff
GDP, Developed Markets

Strong Services Sustain Britain

By, 04/27/2016
Ratings234.543478

Britain grew again in Q1 2016, but you could be forgiven for thinking otherwise. The popular reaction to Wednesday’s UK GDP release fits somewhere between “meh” and “harrumph” (frowny face implied). Modest growth that sits near the top of the developed world, for many, isn’t reason enough to cheer. Because services do all the heavy lifting, while heavy industry mostly limps, most see UK growth as unbalanced and therefore unsustainable. Such was the reaction—again—to UK Q1 GDP, which grew 0.4% q/q (1.6% annualized), a tick slower than Q4 2015’s 0.6% q/q (2.4% annualized).[i] Services grew 0.6% q/q, but the other three sectors—agriculture, industry and construction—all contracted. But take heart! Nothing here should imply the UK is losing steam, or extra-vulnerable because growth relies on services. Actually, it’s the opposite. The hefty service sector helps insulate Britain from the economic impact of a global manufacturing and trade slowdown. Mass sentiment might not appreciate this, but UK stocks should.

It is generally well-known that heavy industry has struggled globally for months. JPMorgan’s Global Manufacturing Purchasing Managers’ Index (PMI) has flirted with contraction on and off since mid-2015. US Manufacturing PMI contracted from October 2015 through February 2016. Industrial production has slowed markedly in China and fallen often in the US, Europe and Japan. Trade is quite choppy, too, with several major regions struggling. As interconnected as global supply chains are, it is fairly natural that UK heavy industry would feel a pinch as well. The steel industry’s struggles—highlighted by the Redcar plant closure late last year—add another headwind and, according to earlier reports from the Office for National Statistics (ONS), bear much of the blame for weak industrial production in early 2016. Add in the oil industry’s well-known problems—mining and quarrying fell another -2.2% q/q in Q1—and heavy industry’s latest detraction from GDP is no surprise.

If the UK were a manufacturing-heavy economy, this might be enough to tip the country into recession. But it isn’t! Like all advanced economies, Britain has evolved. Services, communication and information dominate, as they do in America and much of developed Asia and Western Europe. It’s tempting to jeer this development, as heavy industry’s historical role inspires abundant affection, and it’s very sad when old mining and factory towns become shadows of their former selves, but it isn’t a net negative for Britain’s economy. For one, it’s no coincidence that life expectancies have grown leaps and bounds as the service sector has become responsible for an increasing share of jobs. Quality of life has also improved for retirees, who are far less burdened by old work-related injuries or decades of exposure to certain toxins. And service-sector jobs have enjoyed faster wage growth during the ONS industry pay dataset’s limited history. Since January 2000, service sector wages have risen 60.8%, compared to 55.6% for manufacturing.[ii]

Commentary

Fisher Investments Editorial Staff
Behavioral Finance

The Maddening Mr. Market’s Favorite Trick

By, 04/22/2016
Ratings2124.200472

The Dow broke 18,000! The S&P 500 topped 2,100! Other round numbers tremble in fear, wondering if they’re next! Ok, we made up the last one, but our point remains: Folks have taken notice of stocks’ big rebound following mid-February’s lows, especially since they crashed through some “psychologically important” barriers.[i] Some wonder if it’s a sign of economic stabilization, while others suggest this is a temporary reprieve before a further fall. However, we believe stocks are doing what they typically do during bull markets: rise higher, without any predictable pattern. The market’s sharp rebound serves as a keen reminder to investors who thought the bull was stuck or tapped out—stocks can move quickly, both down and up, and staying disciplined and invested is paramount to reaping their long-term gains. 

Many have focused on what stocks have done so far this year, especially since the movement has been so dramatic: a clear example of how quickly stocks can rebound. (Exhibits 1-2)

Exhibit 1: MSCI World in 2016

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Across the Atlantic

Really, the UK Unemployment Report Wasn’t Bad

By, 04/20/2016
Ratings324.078125

Usually, a labor market report showing modest job growth and a flat unemployment rate would barely rate attention. Such data are generally a veritable snoozefest, with no forward-looking implications—despite what you will read most everywhere else, job markets follow broader economic trends at a very late lag, not the other way around. But these are not normal times. For one, pundits globally are looking for a cloud in every silver lining, eager for evidence to support their “eek the global economy is about to roll over and die” warnings. This is especially true in the UK, as politicians use every last data point to support their preconceived notions about the economic implications of “Brexit”—the scarier and more colorful, the better. And so the very benign, very boring February UK Labour Market Report attracted all sorts of attention, solely because it showed a slight increase in the number of unemployed people. Some called it a sign of creeping weakness. Others called it evidence Brexit risk is taking a toll. In our view, neither of those statements is true. Dive into the data, and there is more to cheer than jeer.

We probably wouldn’t even be writing this article if Work and Pensions Secretary Stephen Crabb hadn’t said the following in a BBC interview: “There will be companies right now today who have been looking at major investments into the UK who are hanging back and considering whether that’s the right thing to do. So of course that will have an impact. Now, I’m not saying that the increase of 21,000 in unemployment is as a direct result of that, but it’s an example of the kind of really gritty questions that those people who say Britain should leave the single market need to respond to and explain why their vision of coming out of the single market actually makes the picture better and enhances job opportunities for British workers.” That statement caused a firestorm in the Conservative Party, pitting the pro- and anti-Brexiters against each other once again. It was also widely lampooned by the press, as the data in question come from the December – February period, all but six days of which occurred before PM David Cameron scheduled the EU referendum and Brexit talk became daily front-page fodder.

But we’ll leave it to others to pillory the political cynicism on both sides of the Brexit debate. We remain neutral and will merrily concede convincing arguments on both sides. Heck, good old Mervyn King, the former BoE Chief, might have said it best Wednesday: “I think it’s very important that people should not exaggerate the impact, either of staying in or leaving. I do worry that people on both sides treating this as a public relations campaign rather than as a debate on the future of our country are inclined to exaggerate because they feel they are selling a position.” Economically, whether the UK stays or leaves will probably be a footnote in 100 years’ time.

Commentary

Fisher Investments Editorial Staff
Developed Markets

More 'Broken Windows' in Japan

By, 04/19/2016
Ratings344.308824

Barely five years after the Great Tohoku Earthquake and tsunami, Earth’s tectonic plates have wreaked havoc on Japan again—this time with several strong quakes in Kyushu, centered on Kumamoto Prefecture. The first, a 6.5 temblor, hit last Thursday. A 7.3 quake hit one and a half days later, followed by a series of aftershocks. Ordinarily, the world’s reaction would center on the devastating loss of life and property—42 have perished, over 1,000 more are injured and 110,000 are displaced, at last count—much as it did following Ecuador’s 7.8 quake last weekend. Our thoughts are with those impacted by these disasters. But in Japan, many headlines almost immediately leapt to speculating about the economic impact. We saw it in 2011 and we see it again now: Many believe the quake will trigger fiscal and monetary stimulus, boosting prospects for Japanese stocks. While it’s possible Japanese stocks might get a short, sentiment-driven boost, we’d advise against trying to capitalize on it. The notion of post-disaster stimulus-fueled growth is a fallacy, and Japan’s longer-term fundamentals remain quite lackluster.

Exhibit 1 shows Japanese stocks’ relative performance since the end of 2010. After the Great Tohoku Earthquake and Fukushima Daiichi nuclear disaster, Japanese stocks plunged, trailing the MSCI World Index badly. But in early April Japan stabilized, and the country outperformed handsomely for a few months. The ride was short-lived, however, and by early October Japan was lagging the world again. A couple of sentiment-driven bumps aside, they’ve lagged, overall and on average, ever since.

Exhibit 1: Japanese Stocks’ Relative Performance

Commentary

Fisher Investments Editorial Staff
Inconvenient Truths, Media Hype/Myths, Unconventional Wisdom

Living Wills Are No Way for Banks to Die

By, 04/19/2016
Ratings434.406977

No one likes planning for their demise. Not you. Not us. And not banks, if the Fed and FDIC are to be believed. Last week these regulators told five big banks to go back to the drawing board and revamp their “living wills”—plans drafted annually to serve as a “how to” manual for unwinding a big bank if they fail. In letters to these banks, regulators said their living wills failed to credibly prove they could fail in a hypothetical crisis and be unwound without touching taxpayer money. As with anything even just tangentially related to bank failure and 2008, the media is making a big deal about this, echoed by politicians. They claim these banks “are large enough that any one of them could crash the economy again if they started to fail and were not bailed out,” “If these banks don’t fix their problems over time, then regulators need to break them apart,” and "I continue to think that the largest banks in the country are too big to fail." But whatever your thoughts about big banks posing a systemic financial risk, practically speaking, living wills are powerless. They are regulators’ feckless attempt to make banks plan for an unknowable future that adds little-to-no clarity about the present.

The idea stems from 2008’s financial crisis. Many believe failing big banks—and difficulties unwinding failed banks like Lehman—caused the crisis to intensify and cascade from one bank to another. Politicians concluded Chapter 11 filing alone was insufficient, surmising a law requiring the biggest banks to plan ahead for an orderly wind down in the event they fail will help prevent or mitigate another crisis, forestalling the “need” for government bailouts. Hence the requirement for the eight biggest banks to draft “living wills.” These plans hinge on the current-day understanding of allegedly risky parts of that business. The Fed and FDIC then review and independently grade the plans for “credibility.” If either of them deem the plan credible, the bank passes. If not, they must resubmit. If they fail again, they could face higher capital requirements, stricter leverage limits or even, in extreme cases, forced divestment of certain businesses.

This year, both the Fed and FDIC gave failing grades to five banks: JPMorgan Chase, Bank of America, Wells Fargo, Bank of New York and State Street. This forced them to sufficiently rework their living wills by October 1. So what specifically was insufficient about these five banks’ resolution plans? Bloomberg’s Matt Levine summarized:

Commentary

Fisher Investments Editorial Staff
Across the Atlantic

Fact-Checking the Brexit Debate

By, 04/15/2016
Ratings813.598765

Here at MarketMinder, we like facts. Facts are our friends. No matter how much you try to spin them, they remain facts, their truthfulness unspoiled. What we don’t like is when opinions, biased perspectives and speculation masquerade as facts. When contentious issues arise, folks frequently claim “the facts” support their arguments, overlooking the fact their evidence isn’t really factual. This is commonly the case for the June “Brexit” referendum, in which Brits will decide whether or not to remain in the EU. Since Prime Minister David Cameron announced the vote in February, both the Leave and Remain camps have played fast and loose with the truth. Here are several Brexit “facts” offered by both sides that we would like to add color to or outright dispel for investors. Like all political matters, we’re neutral on the actual debate, but some myth-busting should help investors assess the vote’s potential economic impact (or lack thereof).

On Trade

One of the biggest misperceptions voiced by the Remain camp is that a Brexit will torpedo UK trade. Everyone from Cameron to the IMF warns forfeiting EU membership would cost Britain free trade with other member-states as well as nations that signed free-trade agreements with the EU. Indeed, it wouldn’t be great if the UK were suddenly cut off, because even though the majority of British exports go outside the EU, the Continent still receives a significant chunk of those goods and services. UK consumers also benefit from a wealth of EU imports. However, a decision to Brexit doesn’t immediately nullify all agreements. Per Article 50 of the Lisbon Treaty, the UK will have two years to negotiate a new relationship with the EU, during which all treaties will remain in effect. During those two years, the UK can negotiate new trade agreements with the EU and its extant free-trade partners. Some in the Leave camp argue trade will be even freer outside the EU, as the UK will finally be able to negotiate its own bilateral deals. While it is true the UK would be able to negotiate bilateral deals for the first time in decades, it’s speculative to claim that spells better, or even equivalent, deals. New trade deals aren’t exactly easy to nail down. Most take far more than two years. So any potential improvements would come in the very long term.

Commentary

Fisher Investments Editorial Staff
Behavioral Finance

The Maddening Mr. Market’s Favorite Trick

By, 04/22/2016
Ratings2124.200472

The Dow broke 18,000! The S&P 500 topped 2,100! Other round numbers tremble in fear, wondering if they’re next! Ok, we made up the last one, but our point remains: Folks have taken notice of stocks’ big rebound following mid-February’s lows, especially since they crashed through some “psychologically important” barriers.[i] Some wonder if it’s a sign of economic stabilization, while others suggest this is a temporary reprieve before a further fall. However, we believe stocks are doing what they typically do during bull markets: rise higher, without any predictable pattern. The market’s sharp rebound serves as a keen reminder to investors who thought the bull was stuck or tapped out—stocks can move quickly, both down and up, and staying disciplined and invested is paramount to reaping their long-term gains. 

Many have focused on what stocks have done so far this year, especially since the movement has been so dramatic: a clear example of how quickly stocks can rebound. (Exhibits 1-2)

Exhibit 1: MSCI World in 2016

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Across the Atlantic

Really, the UK Unemployment Report Wasn’t Bad

By, 04/20/2016
Ratings324.078125

Usually, a labor market report showing modest job growth and a flat unemployment rate would barely rate attention. Such data are generally a veritable snoozefest, with no forward-looking implications—despite what you will read most everywhere else, job markets follow broader economic trends at a very late lag, not the other way around. But these are not normal times. For one, pundits globally are looking for a cloud in every silver lining, eager for evidence to support their “eek the global economy is about to roll over and die” warnings. This is especially true in the UK, as politicians use every last data point to support their preconceived notions about the economic implications of “Brexit”—the scarier and more colorful, the better. And so the very benign, very boring February UK Labour Market Report attracted all sorts of attention, solely because it showed a slight increase in the number of unemployed people. Some called it a sign of creeping weakness. Others called it evidence Brexit risk is taking a toll. In our view, neither of those statements is true. Dive into the data, and there is more to cheer than jeer.

We probably wouldn’t even be writing this article if Work and Pensions Secretary Stephen Crabb hadn’t said the following in a BBC interview: “There will be companies right now today who have been looking at major investments into the UK who are hanging back and considering whether that’s the right thing to do. So of course that will have an impact. Now, I’m not saying that the increase of 21,000 in unemployment is as a direct result of that, but it’s an example of the kind of really gritty questions that those people who say Britain should leave the single market need to respond to and explain why their vision of coming out of the single market actually makes the picture better and enhances job opportunities for British workers.” That statement caused a firestorm in the Conservative Party, pitting the pro- and anti-Brexiters against each other once again. It was also widely lampooned by the press, as the data in question come from the December – February period, all but six days of which occurred before PM David Cameron scheduled the EU referendum and Brexit talk became daily front-page fodder.

But we’ll leave it to others to pillory the political cynicism on both sides of the Brexit debate. We remain neutral and will merrily concede convincing arguments on both sides. Heck, good old Mervyn King, the former BoE Chief, might have said it best Wednesday: “I think it’s very important that people should not exaggerate the impact, either of staying in or leaving. I do worry that people on both sides treating this as a public relations campaign rather than as a debate on the future of our country are inclined to exaggerate because they feel they are selling a position.” Economically, whether the UK stays or leaves will probably be a footnote in 100 years’ time.

Commentary

Fisher Investments Editorial Staff
Developed Markets

More 'Broken Windows' in Japan

By, 04/19/2016
Ratings344.308824

Barely five years after the Great Tohoku Earthquake and tsunami, Earth’s tectonic plates have wreaked havoc on Japan again—this time with several strong quakes in Kyushu, centered on Kumamoto Prefecture. The first, a 6.5 temblor, hit last Thursday. A 7.3 quake hit one and a half days later, followed by a series of aftershocks. Ordinarily, the world’s reaction would center on the devastating loss of life and property—42 have perished, over 1,000 more are injured and 110,000 are displaced, at last count—much as it did following Ecuador’s 7.8 quake last weekend. Our thoughts are with those impacted by these disasters. But in Japan, many headlines almost immediately leapt to speculating about the economic impact. We saw it in 2011 and we see it again now: Many believe the quake will trigger fiscal and monetary stimulus, boosting prospects for Japanese stocks. While it’s possible Japanese stocks might get a short, sentiment-driven boost, we’d advise against trying to capitalize on it. The notion of post-disaster stimulus-fueled growth is a fallacy, and Japan’s longer-term fundamentals remain quite lackluster.

Exhibit 1 shows Japanese stocks’ relative performance since the end of 2010. After the Great Tohoku Earthquake and Fukushima Daiichi nuclear disaster, Japanese stocks plunged, trailing the MSCI World Index badly. But in early April Japan stabilized, and the country outperformed handsomely for a few months. The ride was short-lived, however, and by early October Japan was lagging the world again. A couple of sentiment-driven bumps aside, they’ve lagged, overall and on average, ever since.

Exhibit 1: Japanese Stocks’ Relative Performance

Commentary

Fisher Investments Editorial Staff
Inconvenient Truths, Media Hype/Myths, Unconventional Wisdom

Living Wills Are No Way for Banks to Die

By, 04/19/2016
Ratings434.406977

No one likes planning for their demise. Not you. Not us. And not banks, if the Fed and FDIC are to be believed. Last week these regulators told five big banks to go back to the drawing board and revamp their “living wills”—plans drafted annually to serve as a “how to” manual for unwinding a big bank if they fail. In letters to these banks, regulators said their living wills failed to credibly prove they could fail in a hypothetical crisis and be unwound without touching taxpayer money. As with anything even just tangentially related to bank failure and 2008, the media is making a big deal about this, echoed by politicians. They claim these banks “are large enough that any one of them could crash the economy again if they started to fail and were not bailed out,” “If these banks don’t fix their problems over time, then regulators need to break them apart,” and "I continue to think that the largest banks in the country are too big to fail." But whatever your thoughts about big banks posing a systemic financial risk, practically speaking, living wills are powerless. They are regulators’ feckless attempt to make banks plan for an unknowable future that adds little-to-no clarity about the present.

The idea stems from 2008’s financial crisis. Many believe failing big banks—and difficulties unwinding failed banks like Lehman—caused the crisis to intensify and cascade from one bank to another. Politicians concluded Chapter 11 filing alone was insufficient, surmising a law requiring the biggest banks to plan ahead for an orderly wind down in the event they fail will help prevent or mitigate another crisis, forestalling the “need” for government bailouts. Hence the requirement for the eight biggest banks to draft “living wills.” These plans hinge on the current-day understanding of allegedly risky parts of that business. The Fed and FDIC then review and independently grade the plans for “credibility.” If either of them deem the plan credible, the bank passes. If not, they must resubmit. If they fail again, they could face higher capital requirements, stricter leverage limits or even, in extreme cases, forced divestment of certain businesses.

This year, both the Fed and FDIC gave failing grades to five banks: JPMorgan Chase, Bank of America, Wells Fargo, Bank of New York and State Street. This forced them to sufficiently rework their living wills by October 1. So what specifically was insufficient about these five banks’ resolution plans? Bloomberg’s Matt Levine summarized:

Commentary

Fisher Investments Editorial Staff
Across the Atlantic

Fact-Checking the Brexit Debate

By, 04/15/2016
Ratings813.598765

Here at MarketMinder, we like facts. Facts are our friends. No matter how much you try to spin them, they remain facts, their truthfulness unspoiled. What we don’t like is when opinions, biased perspectives and speculation masquerade as facts. When contentious issues arise, folks frequently claim “the facts” support their arguments, overlooking the fact their evidence isn’t really factual. This is commonly the case for the June “Brexit” referendum, in which Brits will decide whether or not to remain in the EU. Since Prime Minister David Cameron announced the vote in February, both the Leave and Remain camps have played fast and loose with the truth. Here are several Brexit “facts” offered by both sides that we would like to add color to or outright dispel for investors. Like all political matters, we’re neutral on the actual debate, but some myth-busting should help investors assess the vote’s potential economic impact (or lack thereof).

On Trade

One of the biggest misperceptions voiced by the Remain camp is that a Brexit will torpedo UK trade. Everyone from Cameron to the IMF warns forfeiting EU membership would cost Britain free trade with other member-states as well as nations that signed free-trade agreements with the EU. Indeed, it wouldn’t be great if the UK were suddenly cut off, because even though the majority of British exports go outside the EU, the Continent still receives a significant chunk of those goods and services. UK consumers also benefit from a wealth of EU imports. However, a decision to Brexit doesn’t immediately nullify all agreements. Per Article 50 of the Lisbon Treaty, the UK will have two years to negotiate a new relationship with the EU, during which all treaties will remain in effect. During those two years, the UK can negotiate new trade agreements with the EU and its extant free-trade partners. Some in the Leave camp argue trade will be even freer outside the EU, as the UK will finally be able to negotiate its own bilateral deals. While it is true the UK would be able to negotiate bilateral deals for the first time in decades, it’s speculative to claim that spells better, or even equivalent, deals. New trade deals aren’t exactly easy to nail down. Most take far more than two years. So any potential improvements would come in the very long term.

Commentary

Elisabeth Dellinger
Across the Atlantic

Brexit or No, People Are Buying UK Bonds

By, 04/15/2016
Ratings323.84375

The UK had a hugely successful 30-year bond auction this week, and ordinarily that would not be news. But people have been worried about demand for gilts, believing the high current account deficit and looming specter of “Brexit” will scare off investors and drive yields skyward, imperiling Her Majesty’s finances. Compounding matters, two big European banks resigned as primary dealers in recent months, blaming regulatory barriers. After an auction for £4 billion worth of five-year gilts just barely went off on January 20, most presumed a failed sale (when the full offering isn’t sold) was only a matter of time.

Since that auction, the current account deficit has risen to record highs, and Brexit fears have hit fever pitch. On January 20, Prime Minister David Cameron hadn’t finished renegotiating Britain’s EU membership terms with his fellow EU leaders. Since then, he has wrapped up talks and scheduled the vote (for June 23), warnings of economic doom should the UK leave have hit headlines daily, and polls have narrowed considerably. If you follow the popular narrative, this should have further eroded gilt demand.

Yet it hasn’t.

Research Analysis

Pete Michel
Into Perspective

Why Bond Market Liquidity Fears Don’t Hold Much Water

By, 09/22/2015
Ratings933.956989

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.

Research Analysis

Scott Botterman
Into Perspective

Greek Contagion Risk Is Minimal

By, 08/11/2015
Ratings274.703704

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.

Research Analysis

Fisher Investments Editorial Staff
Reality Check

Quick Hit: ‘Corporate Profits Recession’ and Stocks—There Is No ‘There!’ There

By, 03/27/2015
Ratings364.069445

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

Research Analysis

Scott Botterman
Into Perspective

European Parliament Elections—Setting Expectations

By, 05/23/2014
Ratings493.295918

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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What We're Reading

By , 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 , 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 , 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 , 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.

Global Market Update

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.