Commentary

Fisher Investments Editorial Staff
Market Cycles

Bear Market? Correction? Why You Shouldn’t Presume All Negative Markets Are Equal

By, 08/26/2016
Ratings184.666667

Humans are hard-wired to hate losses, and all market declines—no matter the cause—result in smaller numbers, red font and down arrows when you log into your brokerage account or open your statement, as the case may be. The red is hard to avoid when you tune into CNBC. Hence, it is understandable that, on the heels of sharply negative markets from mid-2015 to early 2016, some folks’ nerves remain a bit frayed. Negative markets are an unavoidable part of investing—in stocks, bonds, and pretty much anything other than cash. A key step toward dealing with negativity is having rational expectations. And, to that end, it’s crucial to understand not all market negativity is the same. Knowing the differences can help you interpret financial media and keep an even keel whenever negativity strikes next. Preparing now for that eventuality helps make you a savvier investor.

An important first step is understanding the language of market negativity. Not every firm or media outlet, let alone every pundit, uses the same terminology. To be clear, we are not discussing volatility. Volatility may be negative, but it can also be positive. A 2% daily rise is equally as volatile as a -2% drop. It is directionless. Negativity, obviously, isn’t. The two most commonly used terms to discuss periods of market negativity are bear markets and corrections. Less common, but still worth discussing, is the term drawdown. We’ll cover all three of these terms and include some real-world examples.

What Is a Bear Market? What Causes Bear Markets?

Commentary

Fisher Investments Editorial Staff
Reality Check, Media Hype/Myths

Stocks’ Rise Doesn’t Rely on Dividends

By, 08/26/2016
Ratings174.117647

Evidently, dividends are the new stock buybacks. Yep, after years of “stock buybacks are the only thing fueling this bull market,” buybacks have slowed, dividends are up, and now those lovely cash payouts are getting the credit for stocks’ continued rise. As the narrative goes, ultra-low bond yields drove yield-starved investors to high-dividend stocks, inspiring companies to raise their payouts, driving demand higher, and sending prices and dividends higher in happy lockstep. But, they warn, it may not last: With dividends representing a steadily larger chunk of earnings, and earnings not so hot lately, payouts might not be able to keep rising, and some firms might have to cut. And if that happens, bye-bye rally. Frankly, it is one of the more convoluted hypotheses we have ever heard, and it doesn’t hold water. Dividends’ and stocks’ tandem rise is coincidental, not causal, and this bull market should continue regardless of what companies do with their dividend streams.

Now, we’ll grant one thing: Dividends’ rise as a percentage of earnings—also known as the dividend payout ratio—is anomalous in recent history. The dividend payout ratio fell during the prior two bull markets (Exhibit 1). Dividends per share were largely flat during the 1990s bull’s second half, but rose during the 2002-2007 bull as stock buybacks reduced share count (Exhibit 2).

Exhibit 1: S&P 500 Dividend Payout Ratio

Commentary

Fisher Investments Editorial Staff
Into Perspective, Reality Check

Searching for Meaning in ‘Quiet’ Times

By, 08/25/2016
Ratings354.385714

By a show of hands, who finds recent market movements boring? If your hand is up right now, you aren’t alone—many in the financial media agree. To us, stocks are stocks and there is pretty much always something interesting, but we’ll grant that narratives about stocks can be boring. And news in August tends to hit a bit of a lull as families fit in that last vacation before school begins. That said, some pundits argue boredom will soon beget excitement of a bad sort, claiming stocks’ historic sleepy streak portends trouble for markets soon. For investors, beware reading too much into short-term market movement: Recent stock bounciness (or lack thereof) means nothing for future direction.  

Experts’ divining meaning from short-term market movement isn’t new—not this current market cycle, not ever. Back in May 2014, we dubbed this an attempt to search for meaning in bouncy times.[i] Two months later, that shifted to “uppy times[ii].” And of course, lots of folks attempted to find meaning in the couple days’ swings around Brexit, the correction before that and even just assets trading similarly (oil and stocks, bonds and stocks). Now, in our view, all these analyses are much too myopic. Stock returns are variable, full stop. They come in unpredictable clumps, and currently, we are in a positive clump, even if that positivity isn’t galloping every day. That’s a good thing. However, analysts can’t help themselves, arguing stocks are again too quiet today.

Specifically, some point out this has been the least volatile 30-day period in more than 20 years, with “volatile” defined as a daily move of +/- 0.5%. Others cite the CBOE’s Volatility Index (commonly known as the VIX), near two-year lows, as another sign of market boringness. Some pundits view the lack of movement as a potentially ominous sign. Those concerns include certain assumptions, like a low VIX indicates market complacency—suggesting a spate of volatility is due. Another common media theory: Current market tranquility depends on central banks, which could quickly lose control should they shift monetary policy in a way markets dislike.

Commentary

Fisher Investments Editorial Staff
Emerging Markets, The Global View

Around the World in Lots of Data

By, 08/25/2016
Ratings314.258065

Discussion of the developing world often focuses on the big economies, playing up their challenges, real and perceived. Today, that means China’s slowing growth and occasional debt worries, plus the damaging effects of low energy prices on oil-exporting countries like Brazil and Russia. This focus is understandable, but the media fixation may cause you to miss the broader picture. In that light, we present a roundup of recent growth reports you may have missed.[i] While challenges exist, on balance, the developing world’s economic health is better than widely appreciated—and continues supporting global growth. Heck, even Greece grew! And beyond those nations pining for the days of triple-digit oil prices, the outlook is broadly positive.

Let’s begin in Europe. The European Union’s growth slightly slowed in Q2, (0.4% q/q versus Q1’s 0.5%), but developing EU nations grew quicker. Frontier Markets Romania and Bulgaria, Slovakia, and Emerging Markets Poland and Hungary clustered at the top of Q2 growth rates, with 21 of 28 countries reporting so far. On balance, these five nations accelerated in Q2—with two flipping from slight contraction to expansion. After plunging furthest following the financial crisis, Eastern Europe’s yearly growth rates have mostly surpassed the EU as a whole.

Exhibit 1: Eastern Europe Leads EU Growth

Commentary

Fisher Investments Editorial Staff
Reality Check, Media Hype/Myths

Sales, Not Surveys

By, 08/23/2016
Ratings303.566667

Something funny happened along the way from UK consumer confidence’s post-Brexit plunge to the much-predicted consumer spending shock: Consumers spent. A lot. While it’s just one month (and an incomplete look at total household spending), July’s smashing retail sales are a sign the UK recession many predicted is, so far, nowhere to be seen.

UK July retail sales volumes jumped 1.4% m/m, smashing estimates of 0.2%. This echoes a similar British Retail Consortium-KPMG survey, released August 9, which estimated July retail sales climbed 1.9% y/y, the fastest rate in six months. Per the official report, demand for discretionary items was especially strong. Sales of footwear and leather surged 13.1% m/m, clothing rose 2.5%, and watches and jewelry rose 3.1%. Meanwhile, sales of household goods inched up just 0.4%—folks weren’t just stocking up on paper towels and toothpaste. Some say shoppers merely responded to deep discounts, and maybe promotions did lure people to the shops. But they still spent more overall: Sales values rose 1.7%. Others say the weak pound likely drove foreign tourists to go on a shopping spree, artificially boosting sales. While this is true to some extent, it’s a stretch to say foreign demand is the sole reason sales rose, and there is nothing “artificial” about a tourism boost.

July is just one month, and this doesn’t necessarily mean Brexit dread won’t kill the UK economy’s animal spirits in the future, particularly if exit negotiations go south. But it does underscore a key point: Nothing fundamentally changed with the vote to make an economic slowdown necessary or automatic.  

Commentary

Fisher Investments Editorial Staff
Into Perspective

A Stock Selection Lesson in Red Flag Avoidance

By, 08/19/2016
Ratings573.938596

(Editor's Note: MarketMinder does NOT recommend individual securities; companies referenced herein are merely cited as examples of a broader theme we wish to highlight.)

In selecting securities, very often the name of the game isn’t so much to find the glitziest firm you can, but rather, to avoid those with identifiable red flags. For some, it’s what they are excluding in presenting non-GAAP earnings.[i] For still others, it’s outstanding legal actions or confusing business structures. But one timely red flag, particularly in an election year: a firm that relies heavily on government policy for its sustainability.

Thursday, investors in two Real Estate Investment Trusts (REITs) were taught this lesson rather harshly, after the US Department of Justice (DoJ) announced it would cease using private prisons to house federal inmates over the next few years. From a market-wide perspective, this announcement has the weight of a butterfly. Even from a sociological or political one it isn’t huge: Only about 11% of federal inmates (~22,100 people) are housed at privately run facilities. But for Corrections Corporation of America and GEO Group, it is much larger.

Commentary

Fisher Investments Editorial Staff

Investors Want to Have Their Cake and Eat It, Too

By, 08/18/2016
Ratings924.097826

After a long, frustrating flat run, stocks are now partying like it’s 1999! And, somewhat predictably, investors are celebrating by … worrying? Now, far be it from us to tell anyone how they should feel, but we like it when stocks rise. Yet the worried reaction to stocks’ latest all-time highs reveals a common theme of this bull market. Pundits bemoan one perceived negative, but when they get what they want, they conjure reasons to fret that, too! In our humble estimation, this is a prime example of folks wanting it both ways, and things don’t really work that way.[i] Here are three stories investors have flip-flopped on recently—evidence people are still looking for clouds in a silver lining and illustrating sentiment still has lots of room to improve as this bull market progresses.

Fretting the Flats or Fearing Heights?

Before the latest stock market records, headlines mostly focused on the market’s inability to hit a new high since May 2015. However, after that flat point-to-point spell, driven in part by a long correction, the S&P 500 finally claimed a new record about a month[ii] ago, and it has continued to charge higher since. Though global stocks haven’t recovered completely yet, they aren’t far off, either.

Commentary

Elisabeth Dellinger
Politics

Clinton, Trump and … Linus Van Pelt?

By, 08/18/2016
Ratings1794.086592

Eighty-three days from now, America will pick someone to spend four years signing laws and speechifying. In those 83 days, we will see increasingly more campaign theatrics and media dissections, and most all of it will be hot air. True political wisdom will be a precious commodity, but I know where you can find it: You’re Not Elected, Charlie Brown, which will air back-to-back with It’s the Great Pumpkin, Charlie Brown at some point in October.[i] It teaches a time-honored lesson—and a vital one for investors—more simply than any history lesson or political science textbook can.

Our hero is not everyone’s favorite hapless reject, Charlie Brown, but his loyal, blankie-toting best friend, Linus Van Pelt—brother to Lucy, not-quite paramour to Sally, faithful believer in the Great Pumpkin. In this special, Linus is running for student body president. Like all politicians, he makes sweeping campaign promises—all frightening or exhilarating, depending on one’s perspective:

If I am elected student body president, I will purge the kingdom! My administration will release us from our spiritual Babylon! My administration will bring down the false idols in high places! If I’m elected school president, I will demand immediate improvements! I will demand across-the-board wage increases for custodians, teachers and all administrative personnel! And any little dog who happens to wander onto the playground will not be chased away, but will be welcomed with open arms! If I’m elected, I will do away with cap-and-gown kindergarten graduations and sixth grade dance parties! In my administration, children will be children and adults will be adults! If I’m elected school president, my first act will be to appear before the school board. … (Lucy comes up and whispers in his ear) … I’m sorry, I will not be able to appear before the school board, they meet at 8 o’clock, and I go to bed at 7:30.

Commentary

Jamie Silva
Alternative Investments

Non-Traded REITs Are No Treat

By, 08/17/2016
Ratings964.098958

Although US capital markets were pretty developed in the mid-20th century, one sector was still tough for the little guy to break into—real estate, where access generally required buying whole buildings or properties. So in 1960 Congress created Real Estate Investment Trusts (REITs), which offer ownership of large, income-producing real estate ventures to the investing public in tradeable share form. Investors were jazzed! By law, REITs are taxed specially—if they pay out at least 90% of their income to shareholders, the REIT isn’t taxed at the corporate level. That can mean high “dividends,” sometimes with special tax wrinkles. These perks aren’t as great as they look, for reasons I’ll get into, but let’s not quibble—if the mission was to open the gated community[i] of real estate investing to all, well, mission accomplished. REIT shares today are highly liquid, traded on public exchanges and more or less function as stocks. In fact, this October they’ll say goodbye to their longtime home as a community in the Financials sector, and bravely venture out as their own, independent Real Estate sector.  

So far, so successful. But there is another, shadier type of REIT—the non-traded kind. They’re touted as exclusive opportunities, even higher-yielding than their boring cousins (4-6% vs around 3%) and a hedge against volatility.  Which might sound great, but this kind of pitch—higher than market yields with presumably less volatility—is a red flag of epic proportions. Sure enough, non-traded REITs are chock full of downsides, restrictions and caveats that catch many investors by surprise. They are The Money Pit of investment products.

For starters, they aren’t traded on public exchanges. Instead, they’re often sold by independent dealers, who may in turn contract with outside parties who sponsor, advise on, manage or market the product. Predictably, they cost a lot: Fees can run as high as 15% all told, which should take the shine off those extra-high dividends. What if you want to sell your chunk of a non-traded REIT before the end of the up to eight year-long holding period? Sorry, but since they aren’t traded, finding a ready buyer is tough. The original seller can take it off your hands, but only for a steep discount—up to 10%

Commentary

Fisher Investments Editorial Staff
Commodities

Oil Supply Glut Still Saps Energy Earnings

By, 08/17/2016
Ratings284.464286

What’s down, up, down, then up again? Oil in 2016!  After WTI crude bottomed out in the $20s in February, it surged past $50 in early June, pulling Energy stocks along for the ride. Then came a summer swoon, sapping enthusiasm, before an August rebound. Yet this time, some say, sentiment has turned, making Energy stocks a prime contrarian play. Hedge funds betting on another dive, high inventories and record output hog headlines, and few seem to expect significantly higher prices for a year at least. But before you start seeing dollar signs all over the oil patch, a word of caution: While expectations do seem a tad more reasonable, on balance, supply and demand drivers suggest oil probably bounces around today’s low levels for the foreseeable future, keeping the squeeze on Energy earnings. Even if a new plunge isn’t in the cards, we wouldn’t expect lasting Energy outperformance any time soon. 

From February to early June, the media played up oil’s rebound and Energy’s outperformance, and most extrapolated those trends forward. However, the summer slide drew more attention to the supply glut, resetting expectations somewhat—especially after OPEC output hit another record high in July at over 33 million barrels a day, about 7% more than its 2014 monthly average. An IEA report highlighting high global inventories of refined oil products like gasoline drew countless eyeballs, as did its forecast for slower demand growth. At the same time, however, the report sowed seeds of optimism for higher prices, as it projected declining global crude production later this year as firms draw down those stockpiles, chipping away at the glut and helping prices recover. For real this time.

While this hypothesis might seem plausible, hold your horses. Other, less-noticed factors should keep supply elevated for quite some time. Prices might not plummet anew, but they don’t seem likely to soar either. First, oil and gas firms today are doing more with less as they adapt to a prolonged period of depressed prices. The aggressive push to trim fat includes fewer new exploration projects, job cuts and contract renegotiations with suppliers, to name a few.[i] These efforts are paying off: Global breakeven prices for proven but untapped reserves are down $19 since 2014 to just $51, so producers can survive longer and pump more even if prices remain low—a powerful supply support not just today, but in the future.  

Commentary

Fisher Investments Editorial Staff
Into Perspective

A Stock Selection Lesson in Red Flag Avoidance

By, 08/19/2016
Ratings573.938596

(Editor's Note: MarketMinder does NOT recommend individual securities; companies referenced herein are merely cited as examples of a broader theme we wish to highlight.)

In selecting securities, very often the name of the game isn’t so much to find the glitziest firm you can, but rather, to avoid those with identifiable red flags. For some, it’s what they are excluding in presenting non-GAAP earnings.[i] For still others, it’s outstanding legal actions or confusing business structures. But one timely red flag, particularly in an election year: a firm that relies heavily on government policy for its sustainability.

Thursday, investors in two Real Estate Investment Trusts (REITs) were taught this lesson rather harshly, after the US Department of Justice (DoJ) announced it would cease using private prisons to house federal inmates over the next few years. From a market-wide perspective, this announcement has the weight of a butterfly. Even from a sociological or political one it isn’t huge: Only about 11% of federal inmates (~22,100 people) are housed at privately run facilities. But for Corrections Corporation of America and GEO Group, it is much larger.

Commentary

Fisher Investments Editorial Staff

Investors Want to Have Their Cake and Eat It, Too

By, 08/18/2016
Ratings924.097826

After a long, frustrating flat run, stocks are now partying like it’s 1999! And, somewhat predictably, investors are celebrating by … worrying? Now, far be it from us to tell anyone how they should feel, but we like it when stocks rise. Yet the worried reaction to stocks’ latest all-time highs reveals a common theme of this bull market. Pundits bemoan one perceived negative, but when they get what they want, they conjure reasons to fret that, too! In our humble estimation, this is a prime example of folks wanting it both ways, and things don’t really work that way.[i] Here are three stories investors have flip-flopped on recently—evidence people are still looking for clouds in a silver lining and illustrating sentiment still has lots of room to improve as this bull market progresses.

Fretting the Flats or Fearing Heights?

Before the latest stock market records, headlines mostly focused on the market’s inability to hit a new high since May 2015. However, after that flat point-to-point spell, driven in part by a long correction, the S&P 500 finally claimed a new record about a month[ii] ago, and it has continued to charge higher since. Though global stocks haven’t recovered completely yet, they aren’t far off, either.

Commentary

Elisabeth Dellinger
Politics

Clinton, Trump and … Linus Van Pelt?

By, 08/18/2016
Ratings1794.086592

Eighty-three days from now, America will pick someone to spend four years signing laws and speechifying. In those 83 days, we will see increasingly more campaign theatrics and media dissections, and most all of it will be hot air. True political wisdom will be a precious commodity, but I know where you can find it: You’re Not Elected, Charlie Brown, which will air back-to-back with It’s the Great Pumpkin, Charlie Brown at some point in October.[i] It teaches a time-honored lesson—and a vital one for investors—more simply than any history lesson or political science textbook can.

Our hero is not everyone’s favorite hapless reject, Charlie Brown, but his loyal, blankie-toting best friend, Linus Van Pelt—brother to Lucy, not-quite paramour to Sally, faithful believer in the Great Pumpkin. In this special, Linus is running for student body president. Like all politicians, he makes sweeping campaign promises—all frightening or exhilarating, depending on one’s perspective:

If I am elected student body president, I will purge the kingdom! My administration will release us from our spiritual Babylon! My administration will bring down the false idols in high places! If I’m elected school president, I will demand immediate improvements! I will demand across-the-board wage increases for custodians, teachers and all administrative personnel! And any little dog who happens to wander onto the playground will not be chased away, but will be welcomed with open arms! If I’m elected, I will do away with cap-and-gown kindergarten graduations and sixth grade dance parties! In my administration, children will be children and adults will be adults! If I’m elected school president, my first act will be to appear before the school board. … (Lucy comes up and whispers in his ear) … I’m sorry, I will not be able to appear before the school board, they meet at 8 o’clock, and I go to bed at 7:30.

Commentary

Jamie Silva
Alternative Investments

Non-Traded REITs Are No Treat

By, 08/17/2016
Ratings964.098958

Although US capital markets were pretty developed in the mid-20th century, one sector was still tough for the little guy to break into—real estate, where access generally required buying whole buildings or properties. So in 1960 Congress created Real Estate Investment Trusts (REITs), which offer ownership of large, income-producing real estate ventures to the investing public in tradeable share form. Investors were jazzed! By law, REITs are taxed specially—if they pay out at least 90% of their income to shareholders, the REIT isn’t taxed at the corporate level. That can mean high “dividends,” sometimes with special tax wrinkles. These perks aren’t as great as they look, for reasons I’ll get into, but let’s not quibble—if the mission was to open the gated community[i] of real estate investing to all, well, mission accomplished. REIT shares today are highly liquid, traded on public exchanges and more or less function as stocks. In fact, this October they’ll say goodbye to their longtime home as a community in the Financials sector, and bravely venture out as their own, independent Real Estate sector.  

So far, so successful. But there is another, shadier type of REIT—the non-traded kind. They’re touted as exclusive opportunities, even higher-yielding than their boring cousins (4-6% vs around 3%) and a hedge against volatility.  Which might sound great, but this kind of pitch—higher than market yields with presumably less volatility—is a red flag of epic proportions. Sure enough, non-traded REITs are chock full of downsides, restrictions and caveats that catch many investors by surprise. They are The Money Pit of investment products.

For starters, they aren’t traded on public exchanges. Instead, they’re often sold by independent dealers, who may in turn contract with outside parties who sponsor, advise on, manage or market the product. Predictably, they cost a lot: Fees can run as high as 15% all told, which should take the shine off those extra-high dividends. What if you want to sell your chunk of a non-traded REIT before the end of the up to eight year-long holding period? Sorry, but since they aren’t traded, finding a ready buyer is tough. The original seller can take it off your hands, but only for a steep discount—up to 10%

Commentary

Fisher Investments Editorial Staff
Commodities

Oil Supply Glut Still Saps Energy Earnings

By, 08/17/2016
Ratings284.464286

What’s down, up, down, then up again? Oil in 2016!  After WTI crude bottomed out in the $20s in February, it surged past $50 in early June, pulling Energy stocks along for the ride. Then came a summer swoon, sapping enthusiasm, before an August rebound. Yet this time, some say, sentiment has turned, making Energy stocks a prime contrarian play. Hedge funds betting on another dive, high inventories and record output hog headlines, and few seem to expect significantly higher prices for a year at least. But before you start seeing dollar signs all over the oil patch, a word of caution: While expectations do seem a tad more reasonable, on balance, supply and demand drivers suggest oil probably bounces around today’s low levels for the foreseeable future, keeping the squeeze on Energy earnings. Even if a new plunge isn’t in the cards, we wouldn’t expect lasting Energy outperformance any time soon. 

From February to early June, the media played up oil’s rebound and Energy’s outperformance, and most extrapolated those trends forward. However, the summer slide drew more attention to the supply glut, resetting expectations somewhat—especially after OPEC output hit another record high in July at over 33 million barrels a day, about 7% more than its 2014 monthly average. An IEA report highlighting high global inventories of refined oil products like gasoline drew countless eyeballs, as did its forecast for slower demand growth. At the same time, however, the report sowed seeds of optimism for higher prices, as it projected declining global crude production later this year as firms draw down those stockpiles, chipping away at the glut and helping prices recover. For real this time.

While this hypothesis might seem plausible, hold your horses. Other, less-noticed factors should keep supply elevated for quite some time. Prices might not plummet anew, but they don’t seem likely to soar either. First, oil and gas firms today are doing more with less as they adapt to a prolonged period of depressed prices. The aggressive push to trim fat includes fewer new exploration projects, job cuts and contract renegotiations with suppliers, to name a few.[i] These efforts are paying off: Global breakeven prices for proven but untapped reserves are down $19 since 2014 to just $51, so producers can survive longer and pump more even if prices remain low—a powerful supply support not just today, but in the future.  

Commentary

Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths

Five Fallacies About “Overvalued” Stocks

By, 08/16/2016
Ratings904.422222

Death and taxes might be life’s only certainties, but one of this bull market’s trends gives them a run for their money: As soon as stocks hit a record high, pundits start warning of “too-high” valuations and imminent malaise. They’re doing it now, on the heels of Friday’s fantastically arbitrary milestone, the first simultaneous record high in the S&P 500, Dow and Nasdaq since 1999. Some point to traditional P/E ratios, some to the ever-trendy cyclically adjusted P/E (CAPE), and some to less splashy metrics like price-to-book ratios. All make the same error: presuming the past predicts the future. And all who heed their warnings make another error: confusing fact with opinion. Yes, “stocks are overvalued” is an opinion, based on one interpretation of some numbers. Stocks discount all widely known information, including widely held opinions, and often surprise everyone by defying them.

Contrary to popular myth, no level of valuation is inherently too low, too high or just right. Many presume a given metric’s long-term average is “just right,” but that is just wrong. Sorry. Historical averages can help you put today’s valuations in context, but they are not some mean today’s valuations must revert to. For stock prices, there is no such thing as fair value. Stocks’ value is always and everywhere what investors are willing to pay for them.

As the next few charts show, no valuation today is wildly out of kilter with its long-term average. That, on its own, doesn’t mean stocks aren’t overvalued. But if you view valuations as a sentiment indicator, as we do, it does suggest we haven’t yet seen the runaway increase in confidence that typically marks a bull market’s peak. Valuations’ modest drift higher is mostly consistent with the gradually improving sentiment that’s typical of maturing bull markets.

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 , The Wall Street Journal, 08/26/2016

MarketMinder's View: Another meeting, more wishy-washy commentary from the Fed. Financial pundits waited with bated breath for this week’s central banker shindig in Jackson Hole, WY, particularly hot for Fed head Janet Yellen’s speech. In it, she repeated the same message as other Fed speakers from the past several weeks in making the case for “gradually reducing accommodative policy.” Specifically, Yellen said, “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.” Then she went on to dial the whole thing back, basically telling the audience in highfalutin and difficult-to-unpack terms that everything she just said may be completely moot by the next time they meet. Folks, all this handwringing and excitement is unnecessary. The Fed has repeatedly demonstrated its talk doesn’t foretell its actions. What’s more, the US economy and yield curve can handle another hike.

By , RTT News, 08/26/2016

MarketMinder's View: This is actually a pretty darn positive downward revision. US Q2 GDP growth was revised down by 0.1 percentage point (1.1% vs 1.2%) for benign reasons: Imports (which subtract from GDP) were revised higher, signaling stronger domestic demand, and state and local government spending was revised lower. Non-residential fixed investment and consumer spending, meanwhile, were both higher than initial estimates. Other recent data are also positive: After-tax corporate profits rose 4.9% q/q in Q2, core consumer prices rose a moderate 1.8% y/y, and the Conference Board’s US Leading Economic Index (LEI) rose in July for the second straight month. No recession has ever begun while LEI was rising. Now, most of these numbers (GDP, profits, prices) describe the past and may be revised again in the future, and markets in the present have moved on—but they do add to an economic picture rosier than many appreciate.

By , Bloomberg, 08/26/2016

MarketMinder's View: Folks, we highlight this not to depress you on a Friday, but rather, as a prime example of inconclusive statistics making for a scary headline. Here is the argument: Higher unemployment leads to fewer auto accidents, since fewer people are commuting. Now, from a high level, perhaps you find yourself nodding along and saying, “Well, that makes sense!” However! We took a closer look at the methodology here (you can too!) and came away with more questions than answers. Like, are we to extrapolate one dataset (provided by one insurance company) from one state (Ohio) as being emblematic for the entire U-S-of-A? Look, we understand Ohio commonly gets bestowed “national barometer” status due to its swing state-status for presidential elections, but we know from experience that driving conditions in Dayton, Ohio do not match those in Los Angeles, CA or central Texas. Also, the data are self-selected (drivers who allow their driving to be monitored in exchange for a discount from the insurance company), introducing more limitations. And, finally: The time series is limited here, considering the ability to monitor driving doesn’t predate the present economic cycle. We do this data deep-dive on your behalf, dear reader, as a friendly reminder that you should always be skeptical of click-baity headlines that may play to certain biases—remember, bias blinds, a detriment in investing.       

By , CNNMoney, 08/26/2016

MarketMinder's View: French GDP was flat in Q2, a sharp slowdown from Q1’s 0.7% q/q growth. The underlying components weren’t great: Household consumption was also flat, exports and imports contracted (-0.1% and -2.0%, respectively) and business investment fell, too (-0.4%). Now, are the Euro 2016 soccer tournament, terrorism and labor strikes the primary reasons French growth came to a halt, as this piece suggests? We don’t think it’s quite that straightforward. While all three factors could have pulled forward/dampened growth, don’t lose sight of the bigger picture. France has grown in fits and starts throughout this global expansion, and flat quarters are common: five in the past three years. Despite this drag, France hasn’t knocked broader eurozone growth, as the 19-member bloc has grown for 13 straight quarters.

Global Market Update

Market Wrap-Up, Thursday, August 25, 2016

Below is a market summary as of market close Thursday, August 25, 2016:

  • Global Equities: MSCI World (-0.2%)
  • US Equities: S&P 500 (-0.1%)
  • UK Equities: MSCI UK (-0.8%)
  • Best Country: Ireland (+0.7%)
  • Worst Country: UK (-0.8%)
  • Best Sector: Utilities (+0.1%)
  • Worst Sector: Health Care (-0.9%)

Bond Yields: 10-year US Treasury yields rose 0.02 percentage point to 1.58%.

 

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.