|By Fisher Investments Editorial Staff, 10/11/2016|
MarketMinder’s editorial staff sits down with Fisher Investments Capital Markets Analyst Scott Botterman.
|By Fisher Investments Editorial Staff, 10/11/2016|
MarketMinder’s editorial staff sits down with Fisher Investments Capital Markets Analyst Austin Fraser.
Pundits have taken to calling the Bank of Japan’s latest policy trick—negative interest rates on central bank deposits—a Jedi Mind Trick. But BoJ Governor Haruhiko Kuroda seems to have a different pop cultural inspiration when he stated last year: “I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it.’ Yes, what we need is a positive attitude and conviction. Indeed, each time central banks have been confronted with a wide range of problems, they have overcome the problems by conceiving new solutions.”
Trouble is, in Peter Pan, flying also required magic fairy dust, and neither quantitative easing (QE) nor negative interest rates qualify. They’re more like forcing banks to walk the plank.
The BoJ’s massive QE program, now coupled with negative interest rates on new excess reserves, has pushed Japanese yields negative all the way out to 10-year maturities. Negative yields are intended to make Japanese Government Bonds (JGBs) unattractive—effectively a “tax” on savers (lenders)—promoting consumption or investment in higher yielding or riskier assets. Yet in the short term, it has done the opposite.
Stop me if you’ve heard this one: China is slowing, and that spells trouble for the world economy. I’m going to go ahead and presume the vast, vast, majority of readers are familiar: A slowdown in Chinese economic activity has been feared for years and was an enduring concern in 2015. Investor anxiety surrounding the world’s second-largest economy was widely blamed for a mid-year global equity market correction. But in an interesting twist, while China slowed, the eurozone—which many consider an economic quagmire to this day—sped. And, given the eurozone’s larger aggregate GDP, the acceleration has more than made up for a slower China in the last two years.
Fears of a seemingly unending European malaise the last several years suddenly faded this summer as China’s fast growth slowed. Facts were inconvenient— it didn’t seem to matter much that:
1. The slowing was largely government-orchestrated and has been occurring for years.
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.
Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.
|By Nicole Bullock, The Financial Times, 10/25/2016|
MarketMinder's View: According to this, it’s a good thing S&P 500 earnings look likely to have grown in Q3, because otherwise, with the Fed (supposedly) eager to start hiking rates a lot, stocks would swoon. This argument relies way too much on a metric known as the equity risk premium, which stipulates earnings must grow X for stocks to rationally return a premium over higher-yielding bonds. This is an age-old industry myth, however. The equity risk premium is a backward-looking observation, not a predictive tool. Saying otherwise presumes past performance drives future returns, which is never true. Nor is it true that stocks have some intrinsic fair value. They are always and everywhere worth what the next guy or gal is willing to pay. Earnings are one influence on that demand. There are a host of others, and supply factors matter, too. This is why it’s totally normal for bull markets to continue while earnings are sad. Maybe stocks are up because investors are “counting on” an earnings reacceleration. Or maybe they’re up because reality is beating expectations on multiple fronts. Stocks move on surprise, after all, and economic surprises are mostly positive the world over.
|By Anthony Mirhaydari, CBS News MoneyWatch, 10/25/2016|
MarketMinder's View: Well, we wouldn’t call current M&A activity a “mania”—in Q3, worldwide deal activity was down 27% y/y, a far cry from the (presumably way more maniacal) M&A environment in 2015. Monday might have been hot, but it’s one day, people. Anyway, this article argues mergers are generally bad, “because they’re often more about executive vanity and empire building than boosting corporate performance and investor wealth,” and may leave shareholders worse off. Sure, some mergers work out for the firms in question, while some don’t—but this isn’t an indicator of broader markets’ direction. More important is the longer-term impact deals have on stock supply—cash-based M&A shrinks it, and stock-based M&A expands it. A rash of the latter might be worrisome, but there is no evidence that’s occurring today, notwithstanding the pile of new stock that will finance a certain merger between a telecom and media giant. According to FactSet, cash-based deals represent over half the 2016 M&A total, compared to just 12.8% for stock-based. (A combination of the two made up the difference.) More broadly, stock supply is shrinking, as buybacks and cash-based mergers outrun IPOs and secondary offerings. As for the scary chart of falling “old-fashioned investment,” allegedly “a solid predictor of recessions over the last 40 years,” it seems odd to us to use a measure that includes real estate investment and inventory change. It’s also weird to use year-over-year numbers, which give the past too much influence, instead of the quarterly annualized rate. Here is a more telling series: the annualized quarterly change in pure business investment since 1950. Most often, investment starts falling after a recession has begun. Sometimes it dips without sparking a downturn. And bear markets generally precede recessions anyway, rendering the measure even less useful in isolation. Lastly, while this article focuses on a merger between two specific firms, we don’t (and never do) recommend buying, selling or otherwise transacting any company’s shares.
|By Joshua M. Brown, The Reformed Broker, 10/25/2016|
MarketMinder's View: “This business” is investing, and “one of the worst things” is as follows: “… take a given correlation and then extrapolate it out to infinity. Correlations – especially between markets and asset classes – are ephemeral. Sometimes they exist and sometimes they don’t. Sometimes perfectly correlated markets become perfectly inversely correlated … and no one waves a flag when these relationships are about to shift.” Quite true! And just as important, we seldom see anyone waving a flag after they’ve shifted, either. The same supposed relationships can appear, disappear or reverse—and pundits generally fixate on the most recent trend as if it were a law of market behavior. Hence misperceptions can live on in multiple, even contradictory forms, each emerging when myopic data support them, and lying dormant when later myopic data are less friendly. Apparent connections in markets’ and metrics’ vast web of complexity will forever frighten or lure investors away from their long-term financial path. We aren’t saying no connections exist, but there must always be fundamental causation.
|By Carl Richards, The New York Times, 10/25/2016|
MarketMinder's View: To dig even deeper (as this article later does), ask yourself: “Why is my money invested the way it is?” If the answer isn’t, “because this is probable to reach my goals,” or your portfolio’s construction doesn’t align with those goals, we suggest doing some serious thinking about why not, and if it’s wise to stake your financial future on it.
Market Wrap-Up, Tuesday, October 25, 2016
Below is a market summary as of market close Tuesday, October 25, 2016:
- Global Equities: MSCI World (-0.3%)
- US Equities: S&P 500 (-0.4%)
- UK Equities: MSCI UK (-0.2%)
- Best Country: New Zealand (+1.1%)
- Worst Country: Denmark (-1.4%)
- Best Sector: Utilities (+0.3%)
- Worst Sector: Consumer Discretionary (-0.7%)
Bond Yields: 10-year US Treasury yields fell 0.01 percentage point to 1.76%.
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.