Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Investor Sentiment

And Then There Were Two

By, 04/24/2017
Ratings263.403846

French voters went to the polls Sunday, and as expected, they didn’t pick a president. They did, however, narrow the field from seven to two, resolving much of the uncertainty surrounding the contest. Markets welcomed the added clarity, opening Monday sharply higher. France’s CAC 40 soared 4.1%.[i] Germany (3.4%), Italy (4.8%), Spain (3.8%) and the rest of Europe rallied, too.[ii] Even though we still don’t know the ultimate winner, and even though anti-euro Marine Le Pen made it to the runoff, narrowing the field helps markets form probabilities and assess the likelihood of France’s next president pulling the country out of the eurozone. That clarity is enough, and it’s a microcosm of what investors should expect from eurozone stocks in what we expect to be a year of falling uncertainty.

Pre-election uncertainty weighed on French and European stocks in recent weeks—particularly as leftist candidate Jean-Luc Mélenchon surged in the polls in April, fueling fears that the final round would pit him against Le Pen, guaranteeing France’s next president would be an anti-euro outsider. Before the election, French stocks had lagged eurozone stocks most of the year, and both France and eurozone stocks slid from March 28 through the election.

Exhibit 1: French and Eurozone Stocks Pre-Election

Commentary

Todd Bliman
Into Perspective

The ‘Passive Revolution’ That Quite Simply Isn’t

By, 04/24/2017
Ratings334.469697

These days, it’s easy to find articles in financial media arguing passive investing is “rising,” to active investing’s detriment. Far harder to find: Convincing evidence this rise is happening, or that these passive investors actually exist.

Heavy readers of financial media are no doubt aware of the alleged “passive revolution” media touts as sweeping the investment world. Virtually every major financial publication has run an article—nay, a series of articles—on the subject. Most tout index products, noting what they see as the folly of active management’s attempts to beat markets, and offer seemingly convincing evidence that passive is taking over.

Why “seemingly”? Simple. Almost all the articles discussing this revolution cite the huge increase in “cheap” index exchange-traded funds (ETFs) in both number and assets under management. Exhibit 1 shows you this—plotting total net fund flows into ETFs and mutual funds (of all types) individually and combined.

Commentary

Fisher Investments Editorial Staff
Others

Investment Research Gone Wrong

By, 04/21/2017
Ratings1233.943089

To get an investment edge, you need either information others don’t see, or a better interpretation of widely available information. This is the purpose of investment research, whether in finance journals, mainstream news publications or Wall Street-focused blogs and forums. Sadly, investors turning to these sources for actionable research often find shoddy data and shaky conclusions instead. To help you separate out the noise, here are three forms of dubious investment research to watch out for.

The Tortured Data

Ever see an investment pitch declaring that the data have spoken, and such-and-such an investment strategy is a proven winner? Or why this one metric can predict market movements? The charts and statistics accompanying such claims may seem objective and ironclad, but they often suffer from what statisticians call “p-hacking”[i]—cherry-picking, slicing and dicing data until it yields a “statistically significant” result.[ii] Crunch enough numbers, chart enough trends, tweak enough equations, and you’re practically guaranteed to find some apparently rock-solid connection. But correlation without causation is a big booboo! There must be a sound, fundamental “why” behind the link, otherwise, there is no good reason the connection won’t fall apart.

Commentary

Elisabeth Dellinger
Personal Finance

Ten Roads and the Eighth Wonder of the World

By, 04/21/2017
Ratings833.656626

Pssst—here’s a secret about your tax refund: It can make you rich.

Not that I’m a fan of big refunds, mind you. If you get a fat refund, it means you gave Uncle Sam a fat, interest-free loan—instead of having use of those funds all year to invest. If you get big refunds regularly, talk to your CPA about adjusting your withholdings. But! In the meantime, if you got a refund, my first sentence stands: It can make you rich. Actually, either way can make you rich.

According to the IRS, the average tax refund in 2015 was $3,120. Now, $3,120 won’t get you very far. If you live in the San Francisco Bay Area or Manhattan, it might be a month’s worth of rent or mortgage payments. It might be a down payment on a car, or several months’ car payments. If you’re hunting on the secondary market, it’s five field-level tickets for next month’s U2 gig. But don’t think of your refund in present-day terms. Think what it could become if you invest it now and don’t touch it again for 30 years. If the stock market repeats its long-term average annualized return of 10%, that $3,120 would be worth $54,442 in 2047. Assuming you get the average refund every year (you shouldn’t!) and invest it the same, in 30 years you’d have over $567,000. Even if we reduce the return to 8%, you’re talking over $384,000. Not chump change. If you adjust your withholdings, you may be able to afford boosting retirement plan contributions and enjoy similar results. (Or pay down costly debt faster and more easily.)There is a reason why Albert Einstein called compound growth the eighth wonder of the world.[i]

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Politics

May Wants to Vote in June

By, 04/19/2017
Ratings534.018868

UK Prime Minister Theresa May surprised Tuesday morning when she announced her intention to call an early general election on June 8—three years before the regularly scheduled vote—to bolster her Conservative Party government’s mandate before entering Brexit negotiations.[i] As May explained, Parliamentary divisions “risk our ability to make a success of Brexit and it will cause damaging uncertainty and instability to the country. So we need a general election and we need one now.” British markets reacted somewhat negatively, with the UK’s FTSE 100 down -2.5% Tuesday and another -0.5% Wednesday (both figures in pounds),[ii] while sterling strengthened against the dollar. Though this probably increases the noise and adds another wrinkle to the Brexit saga, the election likely isn’t a gamechanger for markets. 

May cannot unilaterally call for new elections and dissolve government because of 2011 legislation fixing parliamentary terms to five years. Hence, May had to get Parliament’s approval for the move—a two-thirds majority, no less—which she did Wednesday, in a 522 – 13 vote. There was basically no material opposition to the idea. Labour voted in favor, while the Scottish National Party (SNP) abstained.

With the vote, 650 Parliamentary seats will be up for grabs come June 8. Based on current polling, most experts see May’s Conservative Party as the overwhelming favorite in a general election, believing it will add to its current 17-seat majority. Some individual polls have the Conservatives up by more than 20 percentage points, which they translate to a 100-seat majority post-vote. Much of this reflects the weakness of the opposition: Labour is polling at its weakest levels in seven years and support for the Liberal Democrats is still in the single digits. Even the far-right UKIP has floundered. The SNP is strong in Scotland, with polls showing it has a commanding lead over Labour and the Conservatives, but that isn’t a change from the present Parliament, in which it controls 56 of Scotland’s 59 seats.

Commentary

Fisher Investments Editorial Staff
Politics, Across the Atlantic

Market Insights: 2017 European Elections

By, 04/13/2017
Ratings554.327273

This Market Insights video examines the 2017 European elections and what they might mean for the market moving forward.

Commentary

Fisher Investments Editorial Staff
Into Perspective

Lessons From Trump's Yuan U-Turn

By, 04/13/2017
Ratings1203.883333

Photo by honglouwawa/iStockPhoto.

“On day one of a Trump administration, the US Treasury Department will designate China a currency manipulator.”

Commentary

Fisher Investments Editorial Staff

Markets Don’t Discriminate Between “Hard” and “Soft” Economic Data

By, 04/10/2017
Ratings554.345455

You may have heard of big data, but what about “hard” and “soft” data? The distinction is the latest source of economic handwringing. Hard data tell you what happened. How many widgets were produced or sold (or booked for sale) for how much in this time frame and for that sector or industry. Soft data are surveys that measure emotion and businesses’ guesstimates on how things are going. But while soft data are largely soaring, hard data aren’t. Many warn this means sentiment is stretched and stocks will struggle as they’re forced to accept a reality of slower-than-expected growth, but this seems a rather hasty conclusion.

While the hard vs. soft data debate seems esoteric, it is stirring a lot of handwringing in economic circles. Soft surveys like purchasing managers’ indexes (PMI) and consumer sentiment usually come out before hard data and help form analysts’ expectations for the latter. Hence, when ISM’s manufacturing PMI zoomed to 56.0 in January and 57.7 in February—and non-manufacturing hit 56.5 and 57.6 in those months, respectively—folks cheered and expectations rose.[i] PMIs over 50 indicate expansion, and those readings were far above 50. But hard data, on the surface, didn’t keep pace. Industrial production (IP) fell -0.1% m/m in January and was flat in February.[ii] Retail sales rose 0.6% m/m in January but cooled to 0.1% in February.[iii] Broader consumer spending, adjusted for inflation, fell -0.2% m/m in January and -0.1% in February.[iv] Sad!

Stocks do move on the gap between reality and expectations, but not every hard data point must beat forecasts, and markets care more about the entire economic landscape. Hard and soft data alike paint that picture, and it is currently one of fundamentally sound economic growth. Different indicators show different magnitudes, but directionally they mostly match. Moreover, it shouldn’t be breaking news that PMIs don’t match harder data. They measure how many firms grew, but not by how much. Strong PMIs mean widespread growth, but you can’t translate that to a specific magnitude. Q1’s PMIs merely tell you first quarter growth was probably positive, which stocks already know. (Exhibit 1) Forward-looking stocks move on long before GDP figures come out.

Commentary

Fisher Investments Editorial Staff
Investor Sentiment

Investing in a Maturing Bull Market

By, 04/07/2017
Ratings2514.013944

Is owning—or buying—stocks now a sucker’s move? Headlines, predictably, differ. Some argue Q1’s rally rested on a shaky foundation of overexcited retail investors, while the “smart money” wisely shied away from too-high valuations—a sign of stocks breathing their last. Others recommend piling into stocks now to capture lofty returns as euphoria takes hold. Who’s right? We’re bullish and think stocks will have a great year, but the right way to view this debate isn’t to pick a side. Rather, it’s to let your long-term financial goals determine how you invest, not a near-term forecast of the bull’s lifespan. If you need long-term growth, stocks should feature heavily in your portfolio by default, and you should veer only if you are darned sure a bear market has begun.  

We don’t think that time is now. Many cite rising price-to-earnings (P/E) ratios to argue a bear is approaching. One recent report listed 20 different S&P 500 valuation metrics, most well above historical averages. While we quibble with how many are constructed, the basic point they loosely illustrate is accurate—sentiment is warming. That is normal during maturing bull markets and nothing to fear. 

But we have nothing nice to say about gauges of retail investor enthusiasm, which supposedly show Low-Information Joes and Janes are the sole buyers—a traditional contrarian indicator of peaking markets. Nonsense! The one cited here merely shows inflows into SPY—an S&P 500 ETF—which just happens to be the most heavily traded security in the world, popular with individuals and professionals and institutions. Another popular supposed indicator—stocks’ rising share of total household assets, as reported by the Fed—is a function of market movement, not investor behavior. If you start with 70% stocks/30% bonds, and stocks outperform bonds, they will gain a larger share of your portfolio even if you don’t make a single trade. Besides, “dumb” and “smart” money are fictions. No one has cornered the market on poor investment decisions—not institutional investors, corporate insiders or retail investors.

Commentary

Fisher Investments Editorial Staff
Reality Check

Things Happen

By, 04/07/2017
Ratings1084.194445

Within the last 24 hours, the Senate used the so-called nuclear option to end potential filibusters of presidential appointments. The US military fired 59 cruise missiles at an air base in Syria, responding to a chemical attack that killed dozens of Syrian civilians earlier this week. A stolen truck plowed into a Swedish department store, killing and injuring several, in what the prime minister called a likely terrorist act. Yet despite the chaos and uncertainty, stocks aren’t plunging. As we write, the S&P 500 is bouncing mostly sideways on Friday morning, after a slightly positive Thursday. Not to read too much into short-term volatility (or a lack thereof), but we think this is a timely reminder: Stocks are unperturbed by apparent turmoil. 

Armed conflict and terrorism are dreadful and tragic for those impacted directly. They destroy innocent lives and property, and our hearts are with those affected by this week’s events. However, time and again, history has shown these localized events don’t sink stocks. Sometimes they trigger volatility, sometimes they don’t. But only major, global, prolonged conflict has ever caused a bear market. In 1938, the Nazis’ annexation of Czech territory forced markets to start pricing in World War II, truncating a nascent bull market. Decades earlier, using spotty Dow data, there is strong evidence World War I’s onset also caused a bear market. Those are the only two examples in history where stocks have clearly and forcefully responded to conflict, and rightfully so: Stocks ultimately care about future corporate profitability, and when war destroys (or stops or redirects) huge swaths of the global economy, it is fair to expect profits to slide. A lot. But if the conflict isn’t global—and instead centered in a small region that doesn’t contribute much to total global output or demand—then logically, there is no reason for it to cause a bear market. Terrible as it is for the immediate area, for companies globally, it probably isn’t a factor. Hence, when there is strife in the world, and you wonder whether it’s going to sink stocks, the best question to ask is always: Will this turn into World War III? The answer today is: Probably not. Some have speculated the attack could draw the ire of countries that have backed Assad, like Russia or Iran, and broaden the conflict, but that’s wild speculation at this point.

As for the “nuclear option,” where Senate Republicans changed the chamber’s rules in order to facilitate the confirmation of Supreme Court Justice Neil Gorsuch, we doubt it has much impact on political market drivers in America. Part of our optimism for stocks this year rests on our anticipation of gridlock, which reduces legislative risk by preventing or watering down radical proposals. The less Congress can change the laws or rules of commerce, the easier it is for businesses to plan and invest, and the more investors are willing to take risk. While the nuclear option does grease the wheels in the Senate a bit, it doesn’t end gridlock. For one, Thursday’s change applies only to Supreme Court appointments. The nuclear option for lower court and cabinet appointments was eliminated in 2013 by the then-majority Democratic Senate. Two, the Republican Party itself is divided, with a large contingent of budget hawks and #NeverTrumpers quite willing to defy party whips and the Trump administration. They have already blocked big legislation during Trump’s term, and they probably won’t stop. Irrespective of rule changes, intraparty gridlock is a force to be reckoned with and an underappreciated positive for stocks.

Commentary

Fisher Investments Editorial Staff
Politics, Across the Atlantic

Market Insights: 2017 European Elections

By, 04/13/2017
Ratings554.327273

This Market Insights video examines the 2017 European elections and what they might mean for the market moving forward.

Commentary

Fisher Investments Editorial Staff
Into Perspective

Lessons From Trump's Yuan U-Turn

By, 04/13/2017
Ratings1203.883333

Photo by honglouwawa/iStockPhoto.

“On day one of a Trump administration, the US Treasury Department will designate China a currency manipulator.”

Commentary

Fisher Investments Editorial Staff

Markets Don’t Discriminate Between “Hard” and “Soft” Economic Data

By, 04/10/2017
Ratings554.345455

You may have heard of big data, but what about “hard” and “soft” data? The distinction is the latest source of economic handwringing. Hard data tell you what happened. How many widgets were produced or sold (or booked for sale) for how much in this time frame and for that sector or industry. Soft data are surveys that measure emotion and businesses’ guesstimates on how things are going. But while soft data are largely soaring, hard data aren’t. Many warn this means sentiment is stretched and stocks will struggle as they’re forced to accept a reality of slower-than-expected growth, but this seems a rather hasty conclusion.

While the hard vs. soft data debate seems esoteric, it is stirring a lot of handwringing in economic circles. Soft surveys like purchasing managers’ indexes (PMI) and consumer sentiment usually come out before hard data and help form analysts’ expectations for the latter. Hence, when ISM’s manufacturing PMI zoomed to 56.0 in January and 57.7 in February—and non-manufacturing hit 56.5 and 57.6 in those months, respectively—folks cheered and expectations rose.[i] PMIs over 50 indicate expansion, and those readings were far above 50. But hard data, on the surface, didn’t keep pace. Industrial production (IP) fell -0.1% m/m in January and was flat in February.[ii] Retail sales rose 0.6% m/m in January but cooled to 0.1% in February.[iii] Broader consumer spending, adjusted for inflation, fell -0.2% m/m in January and -0.1% in February.[iv] Sad!

Stocks do move on the gap between reality and expectations, but not every hard data point must beat forecasts, and markets care more about the entire economic landscape. Hard and soft data alike paint that picture, and it is currently one of fundamentally sound economic growth. Different indicators show different magnitudes, but directionally they mostly match. Moreover, it shouldn’t be breaking news that PMIs don’t match harder data. They measure how many firms grew, but not by how much. Strong PMIs mean widespread growth, but you can’t translate that to a specific magnitude. Q1’s PMIs merely tell you first quarter growth was probably positive, which stocks already know. (Exhibit 1) Forward-looking stocks move on long before GDP figures come out.

Commentary

Fisher Investments Editorial Staff
Investor Sentiment

Investing in a Maturing Bull Market

By, 04/07/2017
Ratings2514.013944

Is owning—or buying—stocks now a sucker’s move? Headlines, predictably, differ. Some argue Q1’s rally rested on a shaky foundation of overexcited retail investors, while the “smart money” wisely shied away from too-high valuations—a sign of stocks breathing their last. Others recommend piling into stocks now to capture lofty returns as euphoria takes hold. Who’s right? We’re bullish and think stocks will have a great year, but the right way to view this debate isn’t to pick a side. Rather, it’s to let your long-term financial goals determine how you invest, not a near-term forecast of the bull’s lifespan. If you need long-term growth, stocks should feature heavily in your portfolio by default, and you should veer only if you are darned sure a bear market has begun.  

We don’t think that time is now. Many cite rising price-to-earnings (P/E) ratios to argue a bear is approaching. One recent report listed 20 different S&P 500 valuation metrics, most well above historical averages. While we quibble with how many are constructed, the basic point they loosely illustrate is accurate—sentiment is warming. That is normal during maturing bull markets and nothing to fear. 

But we have nothing nice to say about gauges of retail investor enthusiasm, which supposedly show Low-Information Joes and Janes are the sole buyers—a traditional contrarian indicator of peaking markets. Nonsense! The one cited here merely shows inflows into SPY—an S&P 500 ETF—which just happens to be the most heavily traded security in the world, popular with individuals and professionals and institutions. Another popular supposed indicator—stocks’ rising share of total household assets, as reported by the Fed—is a function of market movement, not investor behavior. If you start with 70% stocks/30% bonds, and stocks outperform bonds, they will gain a larger share of your portfolio even if you don’t make a single trade. Besides, “dumb” and “smart” money are fictions. No one has cornered the market on poor investment decisions—not institutional investors, corporate insiders or retail investors.

Commentary

Fisher Investments Editorial Staff
Reality Check

Things Happen

By, 04/07/2017
Ratings1084.194445

Within the last 24 hours, the Senate used the so-called nuclear option to end potential filibusters of presidential appointments. The US military fired 59 cruise missiles at an air base in Syria, responding to a chemical attack that killed dozens of Syrian civilians earlier this week. A stolen truck plowed into a Swedish department store, killing and injuring several, in what the prime minister called a likely terrorist act. Yet despite the chaos and uncertainty, stocks aren’t plunging. As we write, the S&P 500 is bouncing mostly sideways on Friday morning, after a slightly positive Thursday. Not to read too much into short-term volatility (or a lack thereof), but we think this is a timely reminder: Stocks are unperturbed by apparent turmoil. 

Armed conflict and terrorism are dreadful and tragic for those impacted directly. They destroy innocent lives and property, and our hearts are with those affected by this week’s events. However, time and again, history has shown these localized events don’t sink stocks. Sometimes they trigger volatility, sometimes they don’t. But only major, global, prolonged conflict has ever caused a bear market. In 1938, the Nazis’ annexation of Czech territory forced markets to start pricing in World War II, truncating a nascent bull market. Decades earlier, using spotty Dow data, there is strong evidence World War I’s onset also caused a bear market. Those are the only two examples in history where stocks have clearly and forcefully responded to conflict, and rightfully so: Stocks ultimately care about future corporate profitability, and when war destroys (or stops or redirects) huge swaths of the global economy, it is fair to expect profits to slide. A lot. But if the conflict isn’t global—and instead centered in a small region that doesn’t contribute much to total global output or demand—then logically, there is no reason for it to cause a bear market. Terrible as it is for the immediate area, for companies globally, it probably isn’t a factor. Hence, when there is strife in the world, and you wonder whether it’s going to sink stocks, the best question to ask is always: Will this turn into World War III? The answer today is: Probably not. Some have speculated the attack could draw the ire of countries that have backed Assad, like Russia or Iran, and broaden the conflict, but that’s wild speculation at this point.

As for the “nuclear option,” where Senate Republicans changed the chamber’s rules in order to facilitate the confirmation of Supreme Court Justice Neil Gorsuch, we doubt it has much impact on political market drivers in America. Part of our optimism for stocks this year rests on our anticipation of gridlock, which reduces legislative risk by preventing or watering down radical proposals. The less Congress can change the laws or rules of commerce, the easier it is for businesses to plan and invest, and the more investors are willing to take risk. While the nuclear option does grease the wheels in the Senate a bit, it doesn’t end gridlock. For one, Thursday’s change applies only to Supreme Court appointments. The nuclear option for lower court and cabinet appointments was eliminated in 2013 by the then-majority Democratic Senate. Two, the Republican Party itself is divided, with a large contingent of budget hawks and #NeverTrumpers quite willing to defy party whips and the Trump administration. They have already blocked big legislation during Trump’s term, and they probably won’t stop. Irrespective of rule changes, intraparty gridlock is a force to be reckoned with and an underappreciated positive for stocks.

Commentary

Fisher Investments Editorial Staff
Forecasting

Quick Hit: Falling Auto Sales Don’t Foretell Crashes

By, 04/07/2017
Ratings574.105263

You can’t gauge stocks’ direction based on the number of deals made in the showroom. Photo by leventince/iStockPhoto.

The latest indicator media would like you to believe magically signals trouble for the bull market is a three-month-long dip in US auto sales. The theory says such big-ticket purchases are uniquely forward-looking, as it requires strong confidence to make such a large commitment. Confidence is good, so falling sales signaling falling confidence would be bad. Perhaps the theory is true, but if so, someone forgot to tell markets. History shows auto sales do not predict turning points for stocks.

Research Analysis

Fisher Investments Editorial Staff
Into Perspective

MarketMinder Podcast: November 2016 – Assessing Global Macro Drivers

By, 12/12/2016
Ratings74.357143

MarketMinder’s editorial staff sits down with Fisher Investments Capital Markets Analyst Brad Pyles. (Recorded 11/17/2016)

Research Analysis

Fisher Investments Editorial Staff
Into Perspective

MarketMinder Podcast: November 2016 – Energy Update

By, 12/12/2016
Ratings113.545455

MarketMinder’s editorial staff sits down with Fisher Investments Capital Markets Analyst Brad Rotolo. (Recorded 11/3/2016)

Research Analysis

Austin Fraser
Into Perspective

A Political Update From Korea

By, 12/08/2016
Ratings404.0875

From Brexit and Trump to Italy, Brazil and the Philippines, 2016 has been a year of political upheaval and theatrics. And it isn’t over yet. South Korean President Park Geun-hye is embroiled in an influence peddling scandal that has outraged the country and likely numbered her days in office. She has offered to step down from office in April 2017—10 months before her term is slated to end—but lawmakers in the National Assembly instead introduced an impeachment bill, which gets a vote Friday December 9. While Park’s political fall looks inevitable, Korea’s political issues needn’t derail its other positive drivers. For global investors, whether or not you own any Emerging Markets stocks, this is another lesson in the importance of thinking long-term and not getting hung up on short-term events.

The movement against Park appears more about her actions (which you can read all about here), not a broader distaste with the government or the state of society. After decades of chaebol (Korea’s huge, family-run mega conglomerates/corporate fiefdoms) dominating political decisions and the economy, corruption has emerged as the societal cause du jour (see this summer’s draconian corruption bill), and Park appears a victim of the times. The scandal also coincides with some economic softness, as a slowdown in global trade hit export-oriented businesses hard. In response, the country’s largest sectors—which account for a fifth of GDP and employ nearly 15% of the workforce—have undergone significant corporate restructuring. More recently, scandals at several chaebol only further weighed on sentiment.

South Korea has also faced some geopolitical uncertainty in recent months. Besides long-running issues with North Korea, which has made progress in its nuclear program, new tensions with China have arisen as South Korea recently deployed an advanced US missile system. In addition, Donald Trump’s victory made many call into question the future of Asia’s trade relationship with the US given his campaign rhetoric and dismissal of the Trans-Pacific Partnership. There is also a potential domestic political headwind, as the legislature’s opposition party favors tax hikes, with eight different proposals put in the supplementary budget bills. With one of the world’s stronger fiscal positions (40% debt to GDP), such a move makes little economic sense, but the negative fallout is likely short term. 

Research Analysis

Brad Rotolo
Reality Check

What Does OPEC’s Production Cut Mean for Oil?

By, 12/01/2016
Ratings694.086957


There’s more where that came from. Photo by yodiyim/Getty Images.

At long last, the Organization of the Petroleum Exporting Countries (OPEC) reached an agreement to cut production on Wednesday. While details are scarce, comments from oil ministers indicate the group will cut oil production to 32.5 million barrels per day (Mbpd), from recent levels of 33.5 Mbpd. Despite the hype, however, the change is basically window-dressing. It probably won’t much alter global supply or improve the outlook for Energy firms. Their earnings are tied to oil prices, which likely remain lackluster for the foreseeable future (albeit with short-term volatility).

This is OPEC’s first official action of this sort since oil began crashing in 2014. OPEC surprised markets that November by declining to cut production, as had been widely expected at the time. Oil supplies were growing briskly, primarily due to new output from US shale production, which got a boost from developments like horizontal drilling and hydraulic fracturing. The resulting oversupply led to the last two years of oil weakness. With Wednesday’s agreement to cut production, OPEC is arguably moving back to its traditional role of attempting to target a price range for oil.

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What We're Reading

By , Foundation for Economic Education, 04/24/2017

MarketMinder's View: If you’re having a bad case of the Mondays—and we sympathize—this piece offers a good reminder of how far living standards have risen over the past 100 years. Indeed, even simple things we take for granted today (e.g., air conditioning and heating, quick cross-continental travel and even dental care) were fantasies for many people living a century ago. We have no doubt that free people and free markets will continue innovating and building upon the advances of today, and we’re excited to see how much better life will be in next 10, 20 and 50 years. For investors, owning stocks is the best way for your portfolio to benefit from all these advances!    

By , Washington Post, 04/24/2017

MarketMinder's View: To answer the titular question, “real” but with a caveat: We would remove “Trump” and replace it with “Global.” But there is a lot more wrong with this article than its assertion that stocks’ rally is a product of Trump cheer. For one, it ignores that in the MSCI World All Country World Index (ACWI), US returns trail 18 other countries since November 8, 2016, including Poland, Australia and even Greece(!) (FactSet, as of 4/21/2017. Returns in local currencies)—stocks in Poland, Australia and Greece aren’t rallying on Trump excitement. There is also a big framing issue in this passage: “On Election Day, Nov. 8, the Dow Jones Industrial Average closed at 18,332.74, not much different from a year earlier. By March 1, the Dow hit 21,115.55, a gain of 15 percent.” See, that implies markets were flat for a year, then soared after Trump on. In reality, they V-ed. November 2015 was the middle of a correction that began the prior May. Stocks fell until February 11, 2016, then rallied. By November 8, world stocks were already up 17.1% off that low (Also FactSet, as of 4/24/2017, MSCI World Index returns with net dividends from 2/11/2016 – 11/8/2016). What people call the Trump Rally is just an extension of that global rally—itself an extension of the global bull market that began on 3/9/2009. Finally, the wealth effect discussed at the article’s end is a myth. Consumer spending depends on disposable income, not stocks. If the wealth effect were real, US consumer spending would have fallen from Q3 2015 through Q1 2016—in reality, it rose all three quarters. For more, see our 3/23/2017 commentary, “Are Stocks Headed Into Foreign Territory?     

By , Bloomberg, 04/24/2017

MarketMinder's View: Pollsters have taken a lot of grief recently, especially after some big misses like the 2015 UK General Election, last year’s Brexit referendum and the US presidential election. So we would be remiss if we didn’t acknowledge they were pretty spot-on here (and with the Dutch parliamentary elections in March). Independent centrist Emmanuel Macron—technically an outsider candidate, though he served as outgoing President François Hollande’s economy minister—and far-right, anti-euro Front National candidate Marine Le Pen were the clear poll leaders over the past couple weeks, and they won the most votes: Macron took 23.9% of the vote while Le Pen won 21.4%. Republican François Fillon won third, far-left Jean-Luc Mélenchon’s late surge still left him in fourth, and the Socialist Party’s Benoît Hamon was fifth at just 6.4%. Now Macron and Le Pen will contest a runoff on May 7, and early projections put Macron as a heavy favorite (though things can move a lot in politics over two weeks). As “experts” debate what this all means for the global order, markets likely see this as yet another bit of falling uncertainty taking place in Europe this year—a good reason to be bullish, in our view.

By , Bloomberg, 04/24/2017

MarketMinder's View: This is a long-winded way of saying that the first round of the French presidential election resulted in further falling political uncertainty in Europe, with more to come soon. However, though the most extreme, uncertain outcome (Le Pen vs. Mélenchon) has been avoided, this piece raises two more questions: uncertainty surrounding a potential Macron presidency, as his lack of an established party infrastructure means June’s parliamentary elections favor the traditional Republican and Socialist parties, as well as the possibility of potential unknowns arising. However, the former simply means gridlock persists—fine for French and European markets in general, as it reduces legislative uncertainty—while the latter is always true. Sure, it’s possible some unknown arises and changes things, but that’s kind of how life works. Successful investors act on what’s probable, not possible.   

Global Market Update

Market Wrap-Up, Friday, April 21, 2017

Below is a market summary as of market close Friday, April 21, 2017:

  • Global Equities: MSCI World (-0.2%)
  • US Equities: S&P 500 (-0.3%)
  • UK Equities: MSCI UK (-0.6%)
  • Best Country: Japan (+1.1%)
  • Worst Country: Denmark (-1.5%)
  • Best Sector: Utilities (+0.4%)
  • Worst Sector: Telecommunications Services (-0.9%)

Bond Yields: 10-year US Treasury yields rose 0.02 percentage point to 2.25%.

 

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.