Research Analysis

Fisher Investments Editorial Staff
Into Perspective

Market Insights Podcast: How to Read the Modern Financial News

By, 01/19/2017

In this podcast, we talk to Content Group Manager Todd Bliman on how investors can navigate the modern financial news media.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Reality Check

There Was Never a Trump Rally to Trade

By, 01/18/2017
Ratings104.05

With Trumpmania about to reach fever pitch as the greatest reality show on Earth makes its debut—and all the attention it garners (we can’t get enough!)[i]—the financial press unsurprisingly continues to connect every market gyration to the President-elect’s actions. We documented this phenomenon on the upswing and during the holiday interregnum. Now, with stocks flattening out in the wake of a much ballyhooed Trump press conference and the inauguration nearing, the narrative has flipped. Media is atwitter with fears the Trump Rally has reached its zenith! Hold. Your. Horses. The “Trump Rally” narrative always seemed to us to far exceed what the data supported, and stocks’ latest miniscule -0.2% pullback from January 6’s all-time high to date[ii] seems like markets being markets.

Trump Isn’t Responsible...

Seeing every market move through a Trump lens is an error. Considering his election wasn’t even a glimmer in pundits’ eyes when stocks rallied from February 2016’s correction low, it seems a stretch to presume the rally continuing after the election is all about him. The flat two weeks since a record high likely isn’t a Trump phenomenon either. The rally to new highs since the election could well have occurred if Hillary Clinton won. As we said all last year, the motivating force behind last year’s rally is falling political and economic uncertainty. While there is no counterfactual, it seems highly likely markets would have rallied no matter who won, even if it were Jill Stein, Gary Johnson or Evan McMullin. Maybe it would have been bigger!

Commentary

Fisher Investments Editorial Staff
MarketMinder Minute, Personal Finance

Market Insights: A Heads-Up On Mutual Fund Tax Bills

By, 01/18/2017
Ratings74.214286

This Market Insights video explains how capital gains taxes often surprise mutual fund investors.

Commentary

Fisher Investments Editorial Staff
Developed Markets, The Global View

Foreign Opportunity

By, 01/13/2017
Ratings1004.205

With the Obama administration on its way out and the Trump administration about to begin, most investors seem fixated on the US. However, America isn’t the world, and much is happening outside our borders—a lot of it positive. Heading into 2017, many foreign economies are in much better shape than investors appreciate, setting up a bullish surprise.  

Let’s start across the Atlantic. While sentiment has warmed some, investors still struggle with old euro crisis ghosts, from a shaky Italian banking system (hello, Monte dei Paschi!) to the rise of populists in France, Germany, the Netherlands and elsewhere. These fears have created an uncertainty fog, which not only weighs on sentiment but also shrouds a little-noticed fact: The eurozone has grown for two and a half years and has been gathering steam lately.

The 19-member bloc grew 0.3% q/q (1.4% annualized) in Q3, and it wasn’t just economic powerhouse Germany (0.2%).[i] Continuing its solid run of late, Spanish GDP grew a robust 0.7% q/q while Ireland grew 4.0%. (Gross National Product, a gauge many consider more telling for the Emerald Isle as it limits the skew from multinationals domiciled there for tax purposes, also rose a stellar 3.2% q/q.) Italy climbed 0.3%, and even Greece(!) rose 0.8%. Of the eurozone’s 19 nations, 18 grew in Q3—the exception being tiny Luxembourg, which contracted by less than 0.1% q/q. Recent purchasing managers’ index (PMI) data, which measure the breadth of growth, are good too: Markit’s December eurozone composite PMI reached 54.4, its highest reading since May 2011. (Reads above 50 indicate growing firms outnumber contracting firms). PMIs for the eurozone’s four biggest economies—Germany, France, Spain and Italy—all bested 50.

Commentary

Ken Liu
Reality Check, Interest Rates

Don’t Fret Debt

By, 01/11/2017
Ratings904.35

With the Trump administration taking office in less than two weeks, folks may wonder about the US debt situation, particularly since President-elect Trump talked up fiscal stimulus on the campaign trail and will almost assuredly face a budget and/or debt ceiling debate this year. But beyond the political rhetoric, investors should take note: There is no sign US debt is at all problematic.

Don’t take our word for it. The largest and most liquid financial markets are unconcerned about US debt. Otherwise lenders to the US would be unwilling to fund the Treasury at historically low rates. If a prospective borrower wasn’t very creditworthy, a lender would demand higher rates to compensate for the risk of not getting their money back. This is clearly not happening.

Currently, to borrow money for 10 years, the US Treasury must pay lenders about 2.4% a year.[i] While this is a full percentage point higher than the record-low 1.4% notched last July, it’s still lower than almost any point since 1962 (see Exhibit 1). Rates could rise another full percentage point and still be low by historical standards.

Commentary

Fisher Investments Editorial Staff
Personal Finance

A How-To Guide for Portfolio Review

By, 01/10/2017
Ratings1473.758503


Where to begin? With this article. Photo by Julia_Sudnitskaya, iStock.

With their champagne hangovers having worn off,[i] many investors are now turning to more serious matters: Evaluating the past year. You might be doing the same! However, perhaps you’re stuck on how to approach this task. What should you look at? What should you not focus on? Here are several tips to help frame your review as you weigh your investments for 2017 and beyond.

Assess Asset Allocation

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Reality Check

CAPE (Nothing to) Fear

By, 01/05/2017
Ratings1024.215686

Well, that didn’t take long: Mere months (and only 3.7%)[i] after the S&P 500 finally broke out of a lengthy flat stretch, pundits warn stocks have come too far, too fast, and high P/E ratios signal an overvalued market and unrealistic hopes for 2017 earnings. Many point to the Cyclically Adjusted P/E Ratio (CAPE, or Shiller P/E), which is currently at levels last seen before major crashes, as evidence trouble lurks. Yet, as is typical when valuations hit the headlines, there are several flaws in this reasoning. Some valuations can signal sentiment when they’re at extremes—which they aren’t today—but overall, they are poor predictors of stock returns. Nothing about today’s valuations suggests stocks are overvalued.

Yes, the CAPE is the highest it has been since 2007, 2000 and 1929, when major bear markets began. But coincidence doesn’t make the CAPE a valid timing tool or predictive in any way, shape or form. Conceptually, the CAPE has problems. Its denominator is the 10-year average of bizarrely inflation-adjusted[ii] earnings. That is supposed to adjust for economic cycles, but it doesn’t tell you anything about stocks’ future earnings streams, which is what you’re buying. Never mind the fact it is really, really odd to leave the economic cycle out of your projection for stocks. Moreover, the CAPE doesn’t work. Exhibit 1 shows the CAPE, its average (orange line) since 1881 and one standard deviation (yellow line) above the average, which just means 16% of observations lie above it. So although the current reading is among 16% of the most expensive “outliers,” it has been there pretty darn frequently in recent years.

Exhibit 1: No CAPEs!

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

False Fears Roundup—2016 Edition

By, 01/05/2017
Ratings773.928571

A new year has dawned, and with it a fresh list of Very Bad Things people fear will roil markets over the next 12 months. Some are new(ish), like the OECD’s warnings of a looming global property crash. Others—Chinese bonds, foreign outflows from US Treasury markets, the advent of President Trump, European populists—are retreads with a fresh twist. It rather reminds us of this time last year, when everyone was sure a crashing China, plunging oil prices, negative rates and Italian banks would derail the bull market. None did. Neither did Brexit, Trump or any of the other big fears that plagued investors as the year wore on. Every year in every bull market is packed with false fears—plausible-sounding stories that dominate news coverage and frighten investors, until reality proves them wrong or folks move on. 2016’s big fears proved false, and stocks rose past them, showing the importance of staying patient and critically assessing today’s scary headlines.[i]

China

Chinese stocks crashed hard as the year began, and investors freaked as officials appeared to devalue the yuan for the second time in five months. Weak manufacturing PMIs triggered another round of “hard landing” worries. As capital controls relaxed, over half a trillion dollars flowed out, weakening the yuan and (many feared) China itself.[ii] As the year closed, some argued “mindless Chinese stimulus” was inflating a corporate bond bubble, as China’s total debt-to-GDP ratio hovered around 300%. Yet for all the chatter, China did fine. GDP growth stayed near the government’s target, most recently hitting 6.7% y/y in Q3, and monthly economic data stayed firm. The yuan’s gradual slide has been carefully managed—Chinese authorities aren’t about to risk social upheaval by permitting sudden, deep depreciation. As for the much-feared debt, which features on 2017’s “scary things” list, a good chunk of that supposedly[iii] $30 trillion in debt is bank loans. Troubled bank loans, perhaps, but the government has experience with recapitalizing banks. Corporate bonds held by private investors are a much smaller, manageable segment of the market. And whether it’s struggling manufacturers or financial firms, the government seems willing to spend portions of its $3 trillion in foreign exchange reserves on limiting or cushioning defaults. But above all else, hard landing fears have swirled since 2011. Markets are well aware, sapping surprise power.

Commentary

Fisher Investments Editorial Staff
Others

Auld Lang Syne

By, 12/30/2016
Ratings1254.48

Photo by Muenz/iStock.

As the curtain closes on a topsy-turvy 2016, we want to take a brief moment to thank all our readers for taking the time to visit our site. We know you have lots of options and limited time and we appreciate you spending even just a little bit of it with us. Hopefully, you have found something on these pages this year that made you think, laugh, critique popular narratives or perhaps—and this may be a stretch—was useful in your approach to investing.

Commentary

Fisher Investments Editorial Staff
Interest Rates

The Year in Fixed Income: A Tale of Two Halves

By, 12/29/2016
Ratings684.117647

2016 was a tale of two halves in the bond market. When uncertainty swirled early in the year, 10-year US Treasury rates fell in July to what Global Financial Data reports was the lowest since 1786. Bond prices and yields move inversely, so given the falling rates, Treasury prices surged. However, as the year progressed, uncertainty gradually fell and rates rose. This changed everything in bonds, leading to Treasury underperformance and corporate bond outperformance. Here is a look back at the year in interest rates, and a few forward-looking lessons we can draw from it.

To flash back, in early 2016 we noted 10-year Treasury yields would likely end the year little changed from the 2.24% they began at, though we expected volatility along the way. We counseled readers not to buy forecasts of four Fed hikes, particularly given the election, which incentivized inactivity on short-term rates. While the magnitude and scope of rates’ decline by July was perhaps bit bigger than we envisioned, with two trading days left, rates have rallied and are slightly up on the year. Moreover, the Fed hiked exactly once this year, after the election. That is in keeping with our expectations in January. Exhibits 1 and 2 show the year in interest rates.

Exhibit 1: Investment Grade Yields “Smiled” ...

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Reality Check

CAPE (Nothing to) Fear

By, 01/05/2017
Ratings1024.215686

Well, that didn’t take long: Mere months (and only 3.7%)[i] after the S&P 500 finally broke out of a lengthy flat stretch, pundits warn stocks have come too far, too fast, and high P/E ratios signal an overvalued market and unrealistic hopes for 2017 earnings. Many point to the Cyclically Adjusted P/E Ratio (CAPE, or Shiller P/E), which is currently at levels last seen before major crashes, as evidence trouble lurks. Yet, as is typical when valuations hit the headlines, there are several flaws in this reasoning. Some valuations can signal sentiment when they’re at extremes—which they aren’t today—but overall, they are poor predictors of stock returns. Nothing about today’s valuations suggests stocks are overvalued.

Yes, the CAPE is the highest it has been since 2007, 2000 and 1929, when major bear markets began. But coincidence doesn’t make the CAPE a valid timing tool or predictive in any way, shape or form. Conceptually, the CAPE has problems. Its denominator is the 10-year average of bizarrely inflation-adjusted[ii] earnings. That is supposed to adjust for economic cycles, but it doesn’t tell you anything about stocks’ future earnings streams, which is what you’re buying. Never mind the fact it is really, really odd to leave the economic cycle out of your projection for stocks. Moreover, the CAPE doesn’t work. Exhibit 1 shows the CAPE, its average (orange line) since 1881 and one standard deviation (yellow line) above the average, which just means 16% of observations lie above it. So although the current reading is among 16% of the most expensive “outliers,” it has been there pretty darn frequently in recent years.

Exhibit 1: No CAPEs!

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

False Fears Roundup—2016 Edition

By, 01/05/2017
Ratings773.928571

A new year has dawned, and with it a fresh list of Very Bad Things people fear will roil markets over the next 12 months. Some are new(ish), like the OECD’s warnings of a looming global property crash. Others—Chinese bonds, foreign outflows from US Treasury markets, the advent of President Trump, European populists—are retreads with a fresh twist. It rather reminds us of this time last year, when everyone was sure a crashing China, plunging oil prices, negative rates and Italian banks would derail the bull market. None did. Neither did Brexit, Trump or any of the other big fears that plagued investors as the year wore on. Every year in every bull market is packed with false fears—plausible-sounding stories that dominate news coverage and frighten investors, until reality proves them wrong or folks move on. 2016’s big fears proved false, and stocks rose past them, showing the importance of staying patient and critically assessing today’s scary headlines.[i]

China

Chinese stocks crashed hard as the year began, and investors freaked as officials appeared to devalue the yuan for the second time in five months. Weak manufacturing PMIs triggered another round of “hard landing” worries. As capital controls relaxed, over half a trillion dollars flowed out, weakening the yuan and (many feared) China itself.[ii] As the year closed, some argued “mindless Chinese stimulus” was inflating a corporate bond bubble, as China’s total debt-to-GDP ratio hovered around 300%. Yet for all the chatter, China did fine. GDP growth stayed near the government’s target, most recently hitting 6.7% y/y in Q3, and monthly economic data stayed firm. The yuan’s gradual slide has been carefully managed—Chinese authorities aren’t about to risk social upheaval by permitting sudden, deep depreciation. As for the much-feared debt, which features on 2017’s “scary things” list, a good chunk of that supposedly[iii] $30 trillion in debt is bank loans. Troubled bank loans, perhaps, but the government has experience with recapitalizing banks. Corporate bonds held by private investors are a much smaller, manageable segment of the market. And whether it’s struggling manufacturers or financial firms, the government seems willing to spend portions of its $3 trillion in foreign exchange reserves on limiting or cushioning defaults. But above all else, hard landing fears have swirled since 2011. Markets are well aware, sapping surprise power.

Commentary

Fisher Investments Editorial Staff
Others

Auld Lang Syne

By, 12/30/2016
Ratings1254.48

Photo by Muenz/iStock.

As the curtain closes on a topsy-turvy 2016, we want to take a brief moment to thank all our readers for taking the time to visit our site. We know you have lots of options and limited time and we appreciate you spending even just a little bit of it with us. Hopefully, you have found something on these pages this year that made you think, laugh, critique popular narratives or perhaps—and this may be a stretch—was useful in your approach to investing.

Commentary

Fisher Investments Editorial Staff
Interest Rates

The Year in Fixed Income: A Tale of Two Halves

By, 12/29/2016
Ratings684.117647

2016 was a tale of two halves in the bond market. When uncertainty swirled early in the year, 10-year US Treasury rates fell in July to what Global Financial Data reports was the lowest since 1786. Bond prices and yields move inversely, so given the falling rates, Treasury prices surged. However, as the year progressed, uncertainty gradually fell and rates rose. This changed everything in bonds, leading to Treasury underperformance and corporate bond outperformance. Here is a look back at the year in interest rates, and a few forward-looking lessons we can draw from it.

To flash back, in early 2016 we noted 10-year Treasury yields would likely end the year little changed from the 2.24% they began at, though we expected volatility along the way. We counseled readers not to buy forecasts of four Fed hikes, particularly given the election, which incentivized inactivity on short-term rates. While the magnitude and scope of rates’ decline by July was perhaps bit bigger than we envisioned, with two trading days left, rates have rallied and are slightly up on the year. Moreover, the Fed hiked exactly once this year, after the election. That is in keeping with our expectations in January. Exhibits 1 and 2 show the year in interest rates.

Exhibit 1: Investment Grade Yields “Smiled” ...

Commentary

Fisher Investments Editorial Staff
Across the Atlantic

The Ghost of a Banking Crisis Past Visits Italy

By, 12/28/2016
Ratings364.291667

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.

The world’s oldest bank is at the center of what media presents as the world’s newest financial scare—Monte dei Paschi di Siena, a venerable Italian institution known for its rich history and faring poorly on stress tests. Last Wednesday, the bank failed to raise private funds to plug a €5 billion (~$5.2 billion) shortfall (since grown to €8.8 billion) and Italy increased its public borrowing limit to €20 billion to prepare potential rescues for Monte dei Paschi and, potentially, others. This perpetuates a long-running meme that shaky (maybe contagious!) Italian banks could sink the eurozone economy. The issue may finally be coming to a head—and as uncertainty falls and false fears fade, sentiment (and stocks) should get a lift.

Despite new headlines, these issues are old—ancient history, from a market perspective. From 2009 – 2012, most eurozone members faced and dealt with bank weakness, but Italy didn’t. Ireland initially capitalized its banks directly, sending deficits skyward and leading to a 2010 EU/IMF/ECB bailout. (Today, Ireland is growing nicely.) In 2009, Spain created the Fund for Orderly Bank Restructuring (FROB)—a bailout fund—and used it to resolve failing institutions and oversee bank mergers (mostly among troubled cajas).[i] In 2012, Spain tapped the European Stability Mechanism (ESM)—the eurozone’s permanent bailout fund—in a very special non-bailout bailout,[ii] using €100 billion to recapitalize its banks. Like Ireland, it has recovered well.

Commentary

Fisher Investments Editorial Staff
Emerging Markets, Media Hype/Myths

The Return of a Chinese Ghost Story

By, 12/27/2016
Ratings464.206522

China fears kicked off 2016, and after the relative quiet[i] following the tumultuous start, some old ghosts have returned. This time, Chinese bond markets are grabbing headlines, spurring questions about potential financial system stresses. In our view, this is the latest in a litany of overstated fears about China—there is little sign the most recent feared problems are a real risk to the world’s second-largest economy.  

When the Fed hiked rates on December 15, sovereign debt yields rose globally—yet China got special attention after its 10-year bond yield hit a 16-month high of 3.4%. Rising government and corporate bond yields mean higher borrowing costs, which amplified fears over Chinese corporate debt. Toss in angst over wealth management products (WMP)—which some fear banks use to speculate on bond prices—and this adds another dimension of risk if things turn south.

If you feel like you’ve heard this before, your thoughts aren’t betraying you:  Headlines about Chinese bonds and WMPs have popped up before, related to that oft-feared, though never-seen, economic “hard landing.” Worries about Chinese debt in general have been commonplace since 2011. WMP concerns? Those were so 2013. It isn’t just debt and financial products, either. Questions about Chinese property arise constantly: 2009, 2011, 2014 and even today. Manufacturing had its times in the headlines, and there is even a Chinese auto bubble feared ready to pop! We aren’t outright dismissing these stories as non-issues. They reflect a still-developing nation where the government, rather than the market, determines winners and losers—creating bloat and excess in certain sectors. However, these issues alone haven’t derailed China’s economy yet. Nothing about the country’s economic prospects have radically changed, so we find it unlikely the same issues trigger problems now

Research Analysis

Scott Botterman
Into Perspective, Reality Check

Italian Referendum

By, 11/30/2016
Ratings554.036364

In a year where populism has swept the ballot box, is Italy next? On December 4, the country will hold a referendum on whether to reform the size, powers and appointment process for Parliament’s upper house, the Senate. If the referendum is approved, the Senate’s powers would be greatly curtailed and size reduced. It would shrink from 315 members to 100, the government would no longer have to win a Senate confidence vote, fewer measures would require Senate approval and senators would be appointed by Italy’s Regional Councils instead of directly elected. If passed, it would foster government stability and make it easier to pass badly needed reforms. But if it fails, many fear it will destabilize Italy’s pro-euro government, potentially propelling anti-euro populists to power and raising the risk of a domino effect across the eurozone. In our view, however, fears of broader market impact are likely overstated.

Prime Minister Matteo Renzi proposed the referendum to mitigate the Senate’s ability to block legislation and increase the Italian government’s stability, through elimination of one confidence vote. However, he also indicated his government will step down if the referendum is defeated. Opposition parties, such as the Five Star Movement (M5S), are against the referendum, as they believe it gives too much control to the Prime Minister. Many believe a Renzi resignation could give M5S an opening to enter the national government.

Italy doesn’t allow the publication of polls 15 days prior to an election or referendum, but the last polls indicated the “No” vote was ahead by about three points. PredictIt, a betting website similar to the late, great InTrade, puts the odds of the “No” vote prevailing at ~80%. But as US elections and the Brexit vote showed, polling and prediction have been unreliable lately. The considerable number of undecided voters (~20%) also suggests any poll isn’t conclusive.

Research Analysis

Pete Michel
Into Perspective

Should Bond Holders Expect Poor Long-Term Returns?

By, 11/11/2016

A few months ago, 10-year Treasury yields hit an all-time low of 1.36%, as investors piled into Treasury bonds in the wake of the Brexit vote.[i] Since then, Donald Trump’s win and expectations for higher inflation have sent yields up 70 basis points (0.70%).[ii] As rates have risen, so have fears about the end of the alleged 35-year bond bull market—and the possibility of a bond bear market, should rates climb higher. Since bond prices and interest rates move inversely, many seemingly fret higher rates mean bonds are doomed to poor long-term returns—arguing bondholders should ditch them post-haste. In our view, this overlooks important nuances suggesting the case for investors who need fixed income exposure hasn’t changed.  

First, let’s look at the last 35-ish years of yields—that long-term bond bull. Fast-rising inflation and aggressive Fed rate hikes pushed 10-year yields to 15.84% in 1981. But after the Volcker Fed put inflation in check, rates began a secular move downward to recent lows. However, this wasn’t a straight line down.

As Exhibit 1 shows, bond yields went through several cycles where yields increased. Since 10-year US Treasury yields peaked in September 1981, rolling 12-month yields rose 35% of the time.[iii] Even if yields do experience a long-term climb, odds are investors will see plenty of periods where yields fall. Having an actively managed fixed income strategy can help take advantage of these opportunities.  

Research Analysis

Brad Rotolo
Reality Check

Energy Still Isn’t a Fit

By, 10/28/2016
Ratings573.973684

With oil up from its most recent low, many see a prime opportunity in Energy stocks. However, despite oil’s nascent rebound, the bigger picture hasn’t changed. The primary headwind facing Energy is an oil oversupply, which puts downward pressure on prices. Even if prices don’t plunge anew, this force still impacts the sector’s future profits. For investors, the question isn’t, “how much have prices risen recently?” Rather, it’s, “are there any meaningful supply constraints that will alleviate pressured profits?” All evidence today suggests there aren’t, making it premature to load up on Energy stocks.

Demand growth likely remains steady, as it has since 2012, but supply probably won’t abate any time soon. Domestic producers are quick to bring supply back online at the first signs of price strength. As seen in Exhibit 1, US producers have responded to stronger oil prices by putting rigs back to work, with a narrow lag time of only three months. In many shale regions, new wells are profitable with oil at $40 a barrel, according to estimates by ConocoPhillips. Indeed, the abundance of US supplies—accessible at ever-lower costs—led ExxonMobil CEO Rex Tillerson to refer to domestic shale as a source of “enormous spare capacity,” which has visibly changed the industry. That quick producer response and abundant supply dampens the likelihood oil prices significantly rise over the next 12-18 months.

Exhibit 1: Rig Count Response to Oil Prices

Research Analysis

Fisher Investments Editorial Staff
Into Perspective

MarketMinder Podcast - Brexit and a European Update

By, 10/11/2016
Ratings193.657895

MarketMinder’s editorial staff sits down with Fisher Investments Capital Markets Analyst Scott Botterman.

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What We're Reading

By , Bloomberg, 01/18/2017

MarketMinder's View: By the numbers: “Prices were up 2.1 percent from a year earlier, the most since June 2014. ... The core CPI measure increased 2.2 percent from December 2015, after rising 2.1 percent in the prior 12-month period.” Don’t get caught up in the breathless takes on inflation being over 2%; December’s levels are still benign. After the large Energy price drop in 2015, headline inflation dipped well below “core” inflation (excluding food and Energy). With oil’s recovery in 2016, headline inflation has simply moved back to the core rate but is still below where it’s been for most of the last 50 years. Core CPI, meanwhile, spent all of 2016 bouncing between 2.1% y/y and 2.4%. There is no sharp acceleration here.

By , The New York Times, 01/18/2017

MarketMinder's View: This spills an awful lot of pixels for what amounts to a -0.4% pullback in the S&P 500 since January 6. It seems based on the weird premise that returns from November 8 through then were a product of irrational euphoria, as investors were overlooking myriad political risks, and since then investors have started properly assessing the situation. That is an odd claim to make, considering markets discount widely known information, and every financial publication we read has been trumpeting these alleged risks since November 9. Markets don’t move in straight lines, and pauses (and pullbacks) are normal. Given fundamentals haven’t noticeably shifted in recent weeks, we’re inclined to chalk this up as markets being markets. Consider the risks, as this article lists: 1) a rising dollar; 2) trade wars; 3) Trump not delivering on his promises of infrastructure spending and tax cuts. First, the dollar has no correlation with stocks—stocks and the economy have done fine alongside a stronger and weaker dollar. Trade wars could be a concern, if protectionist campaign rhetoric translated to protectionist policies, but presidents have a long history of being reborn as free traders once in office. Watch what politicians do, not what they say. And as for Trump delivering stimulus or tax cuts, we don’t see evidence the economy or consumers need that help. Stimulus accomplishes little when used during economic expansions (it’s best used at the depths of recession), and history shows tax cuts/hikes have little to no bearing on global markets. As for pundits also being upset by “global shocks that could unnerve the markets ... driven by the growth of populist political movements, across Europe in particular [where] higher volatility would kick in as central banks cease intervening so aggressively in markets,” populists are far from, um, popular in Europe and not close to winning elections. And if the ECB or any central bank stops intervening, well, thank goodness as that would allow the yield curve to steepen. That’s good, not bad.

By , The New York Times, 01/18/2017

MarketMinder's View: Have cake and drink your milkshake! Texas is not only big, it is deep: “The Permian, in production for almost a century, is so bounteous that it fueled the Allied forces battling Germany and Japan during World War II. [After a period of decline,] companies found multiple layers of shale — six to eight oil-rich zones, one on top of the other, like a layer cake — that offer companies the opportunity to drill through multiple reservoirs on the same real estate.” OPEC nations say it’ll be a while before American oil production recovers, but with break-even prices in the basin as low as $40 a barrel and market prices above $50, they can probably pump a lot more than most presume.

By , Reuters, 01/18/2017

MarketMinder's View: So a lot of the “surge” was weather-related as a warm November that sapped electricity and gas usage gave way to a chilly December, bringing the Utilities subcomponent up 6.6% for the month. More interesting in our view is looking away from Utilities, toward manufacturing and mining production and broadening out the timeframe to Q4: “Overall manufacturing output rose at an annual rate of 0.7 percent in the fourth quarter while the index for mining surged 11.9 percent in the quarter.” This corroborates evidence that US manufacturing remains a modest economic tailwind, while the Energy industry might have ceased being a drag.

Global Market Update

Market Wrap-Up, Wednesday, January 18, 2017

Below is a market summary as of market close Wednesday, January 18, 2017:

  • Global Equities: MSCI World (+0.2%)
  • US Equities: S&P 500 (+0.2%)
  • UK Equities: MSCI UK (+0.0%)
  • Best Country: Hong Kong (+1.0%)
  • Worst Country: Singapore (-0.6%)
  • Best Sector: Materials (+0.5%)
  • Worst Sector: Telecommunication Services (-0.4%)

Bond Yields: 10-year US Treasury yields rose 0.11 percentage point to  2.43%.

 

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.