Commentary

Fisher Investments Editorial Staff
Investor Sentiment

How Do We Know Where We Are in the Sentiment Cycle?

By, 12/14/2017
Ratings814.179012

While economic and political fundamentals are difficult to assess and forecast, even doing so with precision isn’t enough to project markets’ direction. How those factors relate to sentiment—what markets have priced in—is key. So it is crucial to have a sense of where sentiment is. Which is really hard! But it is doable, especially if you know where to look. Here are some things we think investors should—and shouldn’t!—look at to help gauge where markets are in the sentiment cycle.

The following are just a smattering of sentiment gauges we follow. While none (or a handful) in isolation tell you much, tracking several provides a good starting place. Among our go-to reports are The Conference Board’s Consumer Confidence Index, the American Association of Individual Investors’ surveys, retail fund flows, initial public offerings (IPOs), margin debt, mergers and acquisition (M&A) activity and, to an extent, valuations like P/E ratios.

Yet for most of these, headline numbers aren’t much use. People regularly say one thing and do another, and most people don’t even realize they are euphoric when they are, never mind tell a stranger over the telephone their present mood resembles how one might feel midway through a Vegas bender. But by looking at spreads between various confidence measures or spikes in the rate of change, you can glean more useful information. For instance, neither of The Conference Board’s two headline measures—the Present Situation Index and the Expectations Index—say much on their own. Expectations tend to fluctuate in a narrow range even when people are euphoric, and sentiment toward the present tends to improve as a bull market wears on. But a wide gap between the two can be telling. Margin debt also usually rises as bull markets mature, and no set level is inherently bearish. But if it spikes in a short period, that can be a sign of euphoria. As for P/Es, the level itself isn’t telling about market direction but can, if put in proper context, hint at where sentiment is. Right now, none of these indicators are flying off the charts—they are drifting higher gradually, which is consistent with warming optimism in a maturing bull market.

Commentary

Elisabeth Dellinger
Into Perspective

What Arcade Tokens Can Teach Us About ICOs

By, 12/13/2017

These aren’t a perfect metaphor for initial coin offerings, but they have a few things in common. Photo by Elisabeth Dellinger.

Once upon a time, young companies raised cash by issuing something called a “token.” Prospective customers could buy these tokens, which they could then use to purchase goods and services from the company. Customers were free to buy and sell these tokens from and to each other, presumably at prices above or below face value as the market dictated. These companies were called video arcades. I’m not aware of anyone who ever made a fortune on them.

Commentary

Fisher Investments Editorial Staff
Politics

Taking Measure of Deregulation

By, 12/13/2017
Ratings234.043478

As a reminder, our political analysis is nonpartisan and focuses exclusively on political developments’ potential market impact (or lack thereof). We favor no party, politician or ideology and believe political biases lead to investing errors.

Since the election, media have seemingly viewed market movements through a Trump lens, frequently overstating the administration’s influence on stocks in the process. One example is financial regulation. Trump, we are told, is “leading a deregulatory charge,” which the White House claims amounts to striking nearly 1,000 separate rules. This, proponents argue, is driving stocks higher—bank stocks in particular. In our view, however, the hype surrounding the Trump administration’s financial deregulation efforts doesn’t match reality. The administration’s tone is pro-business, but that is about the only material difference from past administrations.

Yes, they have done stuff, but it mostly amounts to small tweaks. The Financial Stability Oversight Council (FSOC) released insurer AIG from its “too big to fail” designation but didn’t declare insurance giants universally exempt. Congress blocked the Consumer Financial Protection Bureau’s (CFPB) attempt to ban arbitration clauses in consumer finance contracts but didn’t kill the agency. The Comptroller of the Currency started the process of (perhaps) revamping Dodd-Frank’s Volcker rule, which bans most of banks’ proprietary trading, but this will be a long effort. There is also some legislation in the works, including a House bill to roll back parts of Dodd-Frank and a bipartisan push to reduce the number of banks labeled “systemically important” and subject to tougher regulation.

Executive agencies might have more business-friendly leaders who take softer interpretations of existing laws, but they aren’t exactly tearing up the rulebook. The Department of Labor recently delayed enforcement of its fiduciary rule for brokers working with retirement accounts—potentially a precursor to full repeal, but we won’t know for a year. The SEC and Commodity Futures Trading Commission have levied fewer fines on financial firms this year, and less aggressive executive agencies could reduce businesses’ compliance burdens, but this is marginal.

Commentary

Fisher Investments Editorial Staff
Geopolitics

Seeing Through Politicians’ Spin on Brexit Phase One

By, 12/08/2017
Ratings283.964286


(Insert bad metaphor about the deal being a bridge to the next round of Brexit talks here.) Photo by Elisabeth Dellinger.

It is a truth universally acknowledged that two parties negotiating before arbitrary self-imposed deadlines will kick the can when said deadline arrives. To blatantly mix Jane Austen metaphors, you might call it good sense as well as sensibility. So naturally, one day after the US House and Senate kicked the can on a government shutdown for two weeks, the UK and EU kicked the can on Brexit. Of course, that isn’t how either side describes it. No, no, this is a major breakthrough on Brexit Phase One! Call the Queen! Alert the corgis! Pip pip! But once you see through their marketing spin and break down the deal, two things remain apparent: Not much has changed, and Brexit remains a glacial process with little to no ability to surprise markets for good or ill. We believe it is mostly a part of Britain and the EU’s long-term structural backdrop, not a reason for investors to be bearish or bullish today.

To understand how we got here, see Exhibit 1.

Commentary

Fisher Investments Editorial Staff
Currencies, Interest Rates

Looking for Safety in All the Wrong Places

By, 12/08/2017
Ratings504.52

“A risk of loss is involved with investing in stock markets.” No doubt you have seen this sentence (or ones like it) in countless disclosures at the end of financial statements and forecasts. It’s there for legal reasons, but also because it’s true—and critical to remember when making investment decisions. However, it seems few heed it. Instead, investors often seek out perceived “risk-free” assets, despite the fact no asset is “safe.” In our view, pursuing the mirage of “safe” investments can lead to behavioral errors and a portfolio that doesn’t match your long-term goals.

We blame industry jargon for much of investors’ misunderstanding. As analyst-types explain it, markets are “risk on” when investors are happy and willing to take risks, making “risk assets” like stocks zoom. But when markets are “risk off,” jittery folks are plowing into “risk-free” assets like high-quality sovereign debt (e.g., US Treasurys, UK gilts, German bunds and Japanese Government Bonds, aka JGBs),  “safe havens” like gold or sectors like Utilities and Telecom.

This might give you the impression stocks are riskier than other assets and some assets are free of risk. This, however, would be wrong. There is no such a thing as a riskless asset. A risk-off investment in allegedly risk-free safe haven assets can still lose money or relative long-term value. Yes, Treasury bonds are typically less volatile than stocks. Likewise, if you’re patient, there is minimal danger of losing principal. If you buy a US bond at issue and hold to maturity, your risk of realizing a loss is basically nil. But you likely lose purchasing power over time due to inflation.  

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, GDP

Eurozoom!

By, 12/07/2017
Ratings843.916667

A year ago, media looked at the eurozone economy skeptically. Yes, the 19-member currency bloc was growing—but what if growth stalled? Some big unknowns loomed, too. Headlines fretted over 2017 political developments and whether anti-EU populists like Geert Wilders of the Netherlands would seize power and destabilize order. Or what the ECB—allegedly responsible for growth—would do next with its monetary policy. Few experts thought the eurozone would be at the forefront of the global economic expansion. Yet on a year-over-year basis, that is exactly what happened: As of Q3 2017, the eurozone’s 2.5% growth rate leads the US (2.3%), UK (1.5%) and Japan (1.6%).[i] The data continue showing an expansion on firm footing and one that looks likely to continue for the foreseeable future—an underappreciated positive for eurozone markets.  

Eurozone GDP rose 0.6% q/q in Q3, its 18th straight positive quarter. All 11 reporting countries (as of December 5) grew, from powerhouse Germany to long-struggling Greece. While GDP is useful as a high-level economic snapshot, it also focuses on the past three months—not too meaningful for forward-looking stocks. However, more recent data like Purchasing Managers’ Indexes (PMIs) suggest the eurozone is ending 2017 on a strong note.

A quick primer: PMIs are monthly surveys tracking business activity across manufacturing and services. Purchasing managers report a spate of information like new orders, output, costs and employment, and survey compilers crunch the numbers. If the final number exceeds 50, a majority of businesses grew (and vice versa if the figure is under 50). While PMIs aren’t perfect—they are rough sketches that don’t indicate the magnitude of growth (or contraction)—they can provide a quick and timely estimate.

Commentary

Fisher Investments Editorial Staff
Politics, Reality Check

A Week Without Washington Wouldn’t Wreck Stocks

By, 12/07/2017
Ratings304.366667

On the prospects for averting a government shutdown December 8, President Donald Trump last week tweeted, “I don’t see a deal!” Although this may sound ominous, going without government for a while isn’t inherently bad for the economy or stocks.

Stocks faced government shutdown prospects in April and September. Both times Congress agreed on (bipartisan!) short-term funding fixes—aka continuing resolutions—and markets moved on. September’s three-month can kick also included a temporary lift of the Treasury’s borrowing limit, so debt-ceiling drama also features this time around (that deadline looms on December 15). House Minority Leader Nancy Pelosi and Senate Minority Leader Chuck Schumer were scheduled to talk with Trump last week, but after Trump’s aforementioned tweet, they declined to meet.[i] Now, with beltway theatrics seemingly worked out of everyone’s system, they’ve decided to discuss matters Thursday. Can they hammer out a deal? What should investors expect? The Congressional choose-your-own adventure has a few options—kicking the can again (as short as a two-week stopgap),[ii] actually passing a budget[iii] or shutting down the government.[iv]

In the event of a shutdown, essential personnel report for duty. Unless you’re visiting a National Park, you probably wouldn’t notice. Active-duty military would still report, although their paychecks may be delayed. Patients would still receive treatments at the National Institutes of Health, but no new clinical trials would begin. Animals at the National Zoo would still be fed, but the park—and all Smithsonian museums—would close. NASA’s Mission Control in Houston would stay open, keeping the space station aloft, and you’d still get the weather from the National Weather Service. Federal air-traffic controllers would remain on the job, as would airport screeners. The State Department would continue processing visas and passport applications, since they’re paid for by fees,[v] and embassies and consulates would remain open for American citizens. The Postal Service, which has separate funding, would run as usual.

Commentary

Timothy Schluter
Corporate Earnings, US Economy

Rational Optimism About Big Tech

By, 12/04/2017
Ratings1504.186666

After a multi-year stretch of almost uninterrupted outperformance, some investors are growing worried the Technology sector is partying like it’s 1999. Is this the second Tech bubble in recent memory, they wonder? As evidence, many point to lofty valuations, noting a few are at late 1990s-ish levels. But in my view, the evidence supporting Tech bubble 2.0 concerns misses the mark, as it relies mostly on valuations. Valuations just aren’t predictive and ignore important context.

As we’ve previously written (here, here and here), valuations alone tell you very little about returns over the next 12 or even 24 months. Cheap stocks can get cheaper; pricey ones can get pricier. As a result, you simply can’t judge a bubble on valuations alone. Consider: Was the Energy sector in a bubble in 2015 and early 2016? Those who remember the time—when Energy stocks were swooning and sentiment was in the tank—would surely say no. But if you define bubbles by super-high P/Es alone, you miss that context. You see, P/Es were soaring as Energy companies’ earnings (P/Es’ denominator) plummeted due to falling oil prices. Another example: Was the S&P 500 frothy in early 2009? That may seem ridiculous, but valuations were stratospheric by many measures due to the 2008 financial crisis’s earnings erosion. Widely used valuation metrics are just one measure that may describe sentiment. But you also have to dig in and actually analyze the components. Then, put them in broader context.

When put into such a broader context, even the basic claim of extremely high Tech valuations similar to the late 1990’s Tech bubble appears flawed. Select valuations such as Tech price-to-sales ratios may be elevated relative to history. But is that necessarily irrational? Consider: Tech margins are generating higher earnings growth for investors. Actually, Tech boasts the highest gross profit margins of all sectors (Exhibit 1)—a key differentiator from Tech in the late 1990s, when investors were clamoring for unprofitable firms with little more than a vague business plan. In the last 20 years, the net profit margin of the S&P 500 Technology sector has more than doubled, as high-profit margin Internet and software firms have rapidly surpassed lower-margin hardware firms as the dominant Tech industry group. Today, the sector is comprised of some of the most profitable companies on the planet. It stands to reason investors are willing to pay up for this—particularly in the late stages of a bull market, where rising valuations are perfectly normal and reasonable!

Commentary

Elisabeth Dellinger
Commodities

You Might Be Near a Crypto-Top If …

By, 11/28/2017
Ratings1734.156069

For decorative purposes only. Photo by Elisabeth Dellinger.

Holy booming bitcoin, Batman! As the cryptocurrency flirts with $10,000 (that’s ¥1 million if you’re in Japan), we bring you the latest bubble chatter. No, we aren’t calling a peak—we aren’t market timers or commodity forecasters (or cryptocommodity forecasters). But it sure seems like we’re seeing a modern version of Joe Kennedy’s infamous “shoeshine boys” and Hetty Green’s “good-looking bankers.” So, in proper Jeff Foxworthy style, here are all the latest signs that bitcoin, while perhaps not peaking, is sheer speculation at this point.

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Developed Markets, US Economy

Hidden Earnings at Home and Abroad

By, 11/28/2017
Ratings584.577586

While many wonder how tax cut proposals, Brexit chatter, Mifid, Trump tweets and Fed-head appointments might affect stocks, a key market driver remains healthy: earnings. As Q3 earnings season winds down, corporate earnings remain strong. But headlines focused on lower overall growth rates so far might have you thinking otherwise—with 98% of S&P 500 firms reporting as of 11/27, FactSet estimates Q3 earnings grew 6.3% y/y.[i] The slowdown from Q2’s 10.2% gets all the ink, but under the hood, we think reality is better than appreciated.

As in recent years, one industry skewed earnings—but with a twist. For the last couple years, the Energy sector distorted data. Dramatic oil price swings skewed sector earnings yuuugely. First, plunging oil depressed profits in 2015 – 2016. Then it flipped when oil prices and Energy firms’ earnings stabilized. Profits weren’t enormous, but growth rates flew thanks to meager comparison points from the prior year. But that impact is waning now. This time, the insurance industry is making a healthy reality harder to see. Hurricane-related losses drove a -63% y/y decline in earnings for the group.[ii] Omit insurance, and expected Q3 earnings growth improves to 9.0% y/y as of 11/27.[iii] But even with the distortions, earnings largely beat expectations. At Q3’s end, analysts expected earnings to grow 3.1% y/y.[iv] The current growth rate is more than double that, and it is due to sales, not cost-cuts. Revenues—up 5.8% y/y as of 11/27—are generally beating expectations.[v]

A similar story has unfolded in Europe, where earnings also slowed after rip-roaring growth in 2017’s first half. Hurricanes are to blame there, too. FactSet estimates a -57% y/y loss for the industry in Q3, depressing their estimate of headline earnings growth to 7.0% y/y.[vi] Exclude insurance, and estimated MSCI EMU earnings growth improves to 17.2% y/y.[vii] As in the US, one-off losses in one area are obscuring underlying strength. Most sectors—and even most other Financials—fared well. For example, bank earnings jumped 29.7% y/y.[viii] For the most part, earnings are strong and the outlook is optimistic.

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, GDP

Eurozoom!

By, 12/07/2017
Ratings843.916667

A year ago, media looked at the eurozone economy skeptically. Yes, the 19-member currency bloc was growing—but what if growth stalled? Some big unknowns loomed, too. Headlines fretted over 2017 political developments and whether anti-EU populists like Geert Wilders of the Netherlands would seize power and destabilize order. Or what the ECB—allegedly responsible for growth—would do next with its monetary policy. Few experts thought the eurozone would be at the forefront of the global economic expansion. Yet on a year-over-year basis, that is exactly what happened: As of Q3 2017, the eurozone’s 2.5% growth rate leads the US (2.3%), UK (1.5%) and Japan (1.6%).[i] The data continue showing an expansion on firm footing and one that looks likely to continue for the foreseeable future—an underappreciated positive for eurozone markets.  

Eurozone GDP rose 0.6% q/q in Q3, its 18th straight positive quarter. All 11 reporting countries (as of December 5) grew, from powerhouse Germany to long-struggling Greece. While GDP is useful as a high-level economic snapshot, it also focuses on the past three months—not too meaningful for forward-looking stocks. However, more recent data like Purchasing Managers’ Indexes (PMIs) suggest the eurozone is ending 2017 on a strong note.

A quick primer: PMIs are monthly surveys tracking business activity across manufacturing and services. Purchasing managers report a spate of information like new orders, output, costs and employment, and survey compilers crunch the numbers. If the final number exceeds 50, a majority of businesses grew (and vice versa if the figure is under 50). While PMIs aren’t perfect—they are rough sketches that don’t indicate the magnitude of growth (or contraction)—they can provide a quick and timely estimate.

Commentary

Fisher Investments Editorial Staff
Politics, Reality Check

A Week Without Washington Wouldn’t Wreck Stocks

By, 12/07/2017
Ratings304.366667

On the prospects for averting a government shutdown December 8, President Donald Trump last week tweeted, “I don’t see a deal!” Although this may sound ominous, going without government for a while isn’t inherently bad for the economy or stocks.

Stocks faced government shutdown prospects in April and September. Both times Congress agreed on (bipartisan!) short-term funding fixes—aka continuing resolutions—and markets moved on. September’s three-month can kick also included a temporary lift of the Treasury’s borrowing limit, so debt-ceiling drama also features this time around (that deadline looms on December 15). House Minority Leader Nancy Pelosi and Senate Minority Leader Chuck Schumer were scheduled to talk with Trump last week, but after Trump’s aforementioned tweet, they declined to meet.[i] Now, with beltway theatrics seemingly worked out of everyone’s system, they’ve decided to discuss matters Thursday. Can they hammer out a deal? What should investors expect? The Congressional choose-your-own adventure has a few options—kicking the can again (as short as a two-week stopgap),[ii] actually passing a budget[iii] or shutting down the government.[iv]

In the event of a shutdown, essential personnel report for duty. Unless you’re visiting a National Park, you probably wouldn’t notice. Active-duty military would still report, although their paychecks may be delayed. Patients would still receive treatments at the National Institutes of Health, but no new clinical trials would begin. Animals at the National Zoo would still be fed, but the park—and all Smithsonian museums—would close. NASA’s Mission Control in Houston would stay open, keeping the space station aloft, and you’d still get the weather from the National Weather Service. Federal air-traffic controllers would remain on the job, as would airport screeners. The State Department would continue processing visas and passport applications, since they’re paid for by fees,[v] and embassies and consulates would remain open for American citizens. The Postal Service, which has separate funding, would run as usual.

Commentary

Timothy Schluter
Corporate Earnings, US Economy

Rational Optimism About Big Tech

By, 12/04/2017
Ratings1504.186666

After a multi-year stretch of almost uninterrupted outperformance, some investors are growing worried the Technology sector is partying like it’s 1999. Is this the second Tech bubble in recent memory, they wonder? As evidence, many point to lofty valuations, noting a few are at late 1990s-ish levels. But in my view, the evidence supporting Tech bubble 2.0 concerns misses the mark, as it relies mostly on valuations. Valuations just aren’t predictive and ignore important context.

As we’ve previously written (here, here and here), valuations alone tell you very little about returns over the next 12 or even 24 months. Cheap stocks can get cheaper; pricey ones can get pricier. As a result, you simply can’t judge a bubble on valuations alone. Consider: Was the Energy sector in a bubble in 2015 and early 2016? Those who remember the time—when Energy stocks were swooning and sentiment was in the tank—would surely say no. But if you define bubbles by super-high P/Es alone, you miss that context. You see, P/Es were soaring as Energy companies’ earnings (P/Es’ denominator) plummeted due to falling oil prices. Another example: Was the S&P 500 frothy in early 2009? That may seem ridiculous, but valuations were stratospheric by many measures due to the 2008 financial crisis’s earnings erosion. Widely used valuation metrics are just one measure that may describe sentiment. But you also have to dig in and actually analyze the components. Then, put them in broader context.

When put into such a broader context, even the basic claim of extremely high Tech valuations similar to the late 1990’s Tech bubble appears flawed. Select valuations such as Tech price-to-sales ratios may be elevated relative to history. But is that necessarily irrational? Consider: Tech margins are generating higher earnings growth for investors. Actually, Tech boasts the highest gross profit margins of all sectors (Exhibit 1)—a key differentiator from Tech in the late 1990s, when investors were clamoring for unprofitable firms with little more than a vague business plan. In the last 20 years, the net profit margin of the S&P 500 Technology sector has more than doubled, as high-profit margin Internet and software firms have rapidly surpassed lower-margin hardware firms as the dominant Tech industry group. Today, the sector is comprised of some of the most profitable companies on the planet. It stands to reason investors are willing to pay up for this—particularly in the late stages of a bull market, where rising valuations are perfectly normal and reasonable!

Commentary

Elisabeth Dellinger
Commodities

You Might Be Near a Crypto-Top If …

By, 11/28/2017
Ratings1734.156069

For decorative purposes only. Photo by Elisabeth Dellinger.

Holy booming bitcoin, Batman! As the cryptocurrency flirts with $10,000 (that’s ¥1 million if you’re in Japan), we bring you the latest bubble chatter. No, we aren’t calling a peak—we aren’t market timers or commodity forecasters (or cryptocommodity forecasters). But it sure seems like we’re seeing a modern version of Joe Kennedy’s infamous “shoeshine boys” and Hetty Green’s “good-looking bankers.” So, in proper Jeff Foxworthy style, here are all the latest signs that bitcoin, while perhaps not peaking, is sheer speculation at this point.

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Developed Markets, US Economy

Hidden Earnings at Home and Abroad

By, 11/28/2017
Ratings584.577586

While many wonder how tax cut proposals, Brexit chatter, Mifid, Trump tweets and Fed-head appointments might affect stocks, a key market driver remains healthy: earnings. As Q3 earnings season winds down, corporate earnings remain strong. But headlines focused on lower overall growth rates so far might have you thinking otherwise—with 98% of S&P 500 firms reporting as of 11/27, FactSet estimates Q3 earnings grew 6.3% y/y.[i] The slowdown from Q2’s 10.2% gets all the ink, but under the hood, we think reality is better than appreciated.

As in recent years, one industry skewed earnings—but with a twist. For the last couple years, the Energy sector distorted data. Dramatic oil price swings skewed sector earnings yuuugely. First, plunging oil depressed profits in 2015 – 2016. Then it flipped when oil prices and Energy firms’ earnings stabilized. Profits weren’t enormous, but growth rates flew thanks to meager comparison points from the prior year. But that impact is waning now. This time, the insurance industry is making a healthy reality harder to see. Hurricane-related losses drove a -63% y/y decline in earnings for the group.[ii] Omit insurance, and expected Q3 earnings growth improves to 9.0% y/y as of 11/27.[iii] But even with the distortions, earnings largely beat expectations. At Q3’s end, analysts expected earnings to grow 3.1% y/y.[iv] The current growth rate is more than double that, and it is due to sales, not cost-cuts. Revenues—up 5.8% y/y as of 11/27—are generally beating expectations.[v]

A similar story has unfolded in Europe, where earnings also slowed after rip-roaring growth in 2017’s first half. Hurricanes are to blame there, too. FactSet estimates a -57% y/y loss for the industry in Q3, depressing their estimate of headline earnings growth to 7.0% y/y.[vi] Exclude insurance, and estimated MSCI EMU earnings growth improves to 17.2% y/y.[vii] As in the US, one-off losses in one area are obscuring underlying strength. Most sectors—and even most other Financials—fared well. For example, bank earnings jumped 29.7% y/y.[viii] For the most part, earnings are strong and the outlook is optimistic.

Commentary

Fisher Investments Editorial Staff
Monetary Policy, Media Hype/Myths

The Curious and Fallacious Case of the All-Powerful Fed

By, 11/28/2017
Ratings404.325

Did you hear? Some experts believe the Fed looks vulnerable and unprepared to deal with the next crisis, so it should update its policy toolkit.[i] With new Fed head Jerome Hayden Powell waiting in the wings (and outgoing Chair Janet Yellen departing the central bank when he takes over), the time may seem ripe for change. In our view, though, this is yet another example of the folly of seeing monetary policy as an all-powerful tool that directly and immediately impacts the economy. Investors shouldn’t overstate what the Fed can and can’t do. 

Folks within and outside the Fed have different ideas about how to “improve” monetary policy to meet today’s needs. Some have argued for raising the Fed’s target inflation rate above 2% while others, like San Francisco Fed President John Williams, have suggested “price level targeting” (meaning the Fed will keep short-term rates low until CPI or PCE reaches a place policymakers deem appropriate). Some financial market experts claim the Fed needs to revamp its “forward guidance” communication and become less predictable in order to remove market complacency.[ii] While some of these ideas are well-intentioned, they also seem to be overcomplicating matters. We don’t think it’s necessarily a bad thing for the Fed to target inflation—pursuing price stability is a fine aim for a central bank—but obsessing over the level isn’t necessary. A specific CPI or PCE level doesn’t determine when things go from good to bad. Not only that, the Fed’s existing targets and framework are arbitrary to begin with.

Consider that annual 2% inflation target. Part of the Fed’s congressional statutory mandate is maintaining “stable prices,” but that doesn’t specify what the “right” amount of inflation is. Rather, the FOMC formalized a 2% inflation target in 2012 because they determined that to be “most consistent over the longer run with the Federal Reserve’s statutory mandate.” Yet there is nothing magical about 2% in and of itself. Inflation has mostly lagged 2% since 2012, but that hasn’t stopped the US economy from expanding. Plus, going back several years before the Fed formalized its target rate, inflation was as high as 3.8% in 2005—right in the middle of another economic expansion.

Research Analysis

Christo Barker
Into Perspective, Debt

Is China Experiencing the World's Biggest Credit Bubble?

By, 09/05/2017
Ratings794.126582

China credit bubble concerns are one of the oldest, most recycled false fears of today’s bull market. Bubble-warning headlines from seven years ago could run today with minimal changes. However, despite numerous examples of Chinese credit not being properly allocated—a side effect of the government’s centralized control—no bubble has burst yet. Unless a massive negative surprise creates a wallop or euphoria creeps back into markets, the likelihood a Chinese credit bubble pops and roils the economy—with ill effects spreading globally—in the immediate future is low, in my view.

To understand why Chinese credit bubble fears are overwrought, investors must first understand some critical differences between how credit works in China’s centralized, government-steered economy and a typical free market economy (like the US). China’s Communist Party exhibits heavy control over economic areas like capital flows, currency strength, interest rates and money supply. This desire for control—particularly over money supply—means China relies on banks to provide the majority of credit access (67% compared to 17% in the US[i]). In comparison, entities in the US have more options thanks to America’s deep, robust capital markets (e.g., bond, asset-backed security, short-term commercial paper and repo markets).

While bank-driven credit gives the government more control over money supply, Chinese banks must make loans that capital markets would typically underwrite in the US. For example, Chinese banks make lots of loans to the government, but in the US, the federal government can issue Treasurys while states and cities float muni bonds. Also in the US, mortgage and asset-backed securities comprise a nearly $11 trillion market—in China, this secondary market doesn’t exist. China’s bank dependency inflates the size of those institutions’ balance sheets, making them look scary and bubblicious. However, aggregating the total outstanding credit—the sum of all debt from capital markets and loans—for China and the US gives a better apples-to-apples comparison. When scaled to GDP, China’s total outstanding credit is actually lower than the US’s. (Exhibit 1)

Research Analysis

Fisher Investments Editorial Staff

Market Insights Podcast: North Korea Update – August 2017

By, 08/30/2017
Ratings263.769231

In this podcast, Communications Group Manager Naj Srinivas speaks with Content Analyst and MarketMinder Editor Elisabeth Dellinger about recent tensions between the US and North Korea and our current outlook.

Time stamps:

Research Analysis

Fisher Investments Editorial Staff
Into Perspective

Market Insights Podcast Emerging Markets Update-June 2017

By, 06/23/2017
Ratings273.925926

In this podcast, Communications Group Manager Naj Srinivas speaks with Research Analyst Scott Botterman about recent developments within Emerging Markets and our current outlook.

0:50 – MSCI announces Chinese A shares to be included in Emerging Markets index

Research Analysis

Christo Barker
Into Perspective

Victory to En Marche!

By, 06/19/2017
Ratings104.15

The fourth and final round of French national elections concluded over the weekend, clearing a major milestone in the year of falling political uncertainty. President Emmanuel Macron’s centrist La République En Marche! party and its ally, the Democratic Movement (MoDem), gained a clear majority in the National Assembly after winning 61% of the seats (350 of 577) in the second round of the French parliamentary election. (Exhibit 1)

At a surface level, this result technically reduces political gridlock in France. However, the En Marche party is itself an exercise in gridlock, as it is essentially a blend of center-left and center-right politicians. It includes lawmakers that defected from both of the traditional Socialist and Republican Parties. A centrist coalition likely pursues more moderate policies aimed at incremental change rather than broad, sweeping legislation with the potential to really shock markets. For example, the party’s primary policies likely include reforming labor laws, cutting corporate taxes, reducing a bloated civil sector and promoting entrepreneurship. Yet none of the proposals unveiled thus far appear terribly radical. Labor market reforms, for example, appear to dance around third rails like France’s 35-hour workweek. Plus, En Marche is also just over a year old, and over half of its National Assembly members haven’t held any political office before. How well these political novices work with the old guard—and how well the center-right and center-left can agree on policy details—will be worth monitoring, but intraparty gridlock likely creates additional hurdles to legislation.

While one could argue French gridlock could dash hopes for big pro-business reforms, potentially setting up stocks for disappointment, Macron’s relatively watered-down agenda is already widely known. Moreover, having less potential for radical legislation means less chance for new laws to create winners and losers, which reduces one source of risk for markets.  

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What We're Reading

By , The Wall Street Journal, 12/15/2017

MarketMinder's View: A couple things about this piece: One, we think it overrates President Donald Trump’s actions on trade by fixating on rhetoric. Investors should focus on actual policy accomplishments, not rhetoric. Two, this is perhaps one of the best (albeit lengthy) articles we’ve come across documenting the history of US trade policy and obliterating the notion trade deficits—particularly bilateral trade deficits—are at all significant. A snippet: “The focus on the trade balance in trade negotiations is misguided. Trade is not like a ledger, where imports are the cost and exports are the benefit, and trade surpluses and deficits do not indicate that one country is ‘winning’ and the other ‘losing.’ The trade deficit is driven by macroeconomic factors, not by trade barriers or trade agreements. The U.S. faced a battery of high trade barriers in the 1950s, when its own market was largely open, and yet it ran trade surpluses. The trade deficit fell sharply in the wake of the financial crisis in 2008, even though neither the U.S. nor other countries significantly changed their policies regarding imports.”

By , The Wall Street Journal, 12/15/2017

MarketMinder's View: Yuuuuuup. This article is a good dissection of equity-indexed (fixed-indexed) annuities, which are often aggressively marketed as a means to get stock market-like returns without downside risk. That. Is. False. These products usually feature return caps and calculations that limit upside significantly. As one guy quoted in here puts it, “‘Fixed indexed annuities are not an alternative way of investing in stocks.’ … ‘They have completely different risk and reward components. They are an alternative to other fixed-dollar investments, such as certificates of deposit or Treasury bills.’”

By , Financial Times, 12/15/2017

MarketMinder's View: This is just an estimate of the potential impact of Brexit on London’s huge financial district, and it is built on speculation. However, it is interesting to see this analysis of actual bank job announcements and compare it to the feared “tens of thousands of jobs” some hyperbolically claimed would move to the continent the day after Brexit went final. This should be a reminder that all the estimates of Brexit impact today are really just guesses—which could be close or not. For investors, it should also be a reminder to approach such speculation skeptically.

By , MarketWatch, 12/15/2017

MarketMinder's View: The title here is disconnected from the piece, which doesn’t argue a flattening yield curve is a recession red flag. It argues an inverted yield curve is a recession red flag, which is correct. And it goes on to note that if the yield curve inverts (short rates top long) with some staying power, how it got there wouldn’t much matter, which we also think is accurate. Whether inversion happens because global bond buyers push long rates far down, inflation expectations crater or the Fed hikes short rates up massively isn’t all that relevant. Inversion significantly harms banks’ loan profits—and would likely cause credit markets to dry up, harming economic growth. But as this notes, the yield curve isn’t presently inverted, nor is it that a great timing tool. Ultimately, this is a sensible piece with a bizarre title.

Global Market Update

Market Wrap-Up, Thursday, December 14, 2017

Below is a market summary as of market close on Thursday, December 14, 2017:

  • Global Equities: MSCI World (-0.3%)
  • US Equities: S&P 500 (-0.4%)
  • UK Equities: MSCI UK (-0.2%)
  • Best Country: Israel (+1.6%)
  • Worst Country: Portugal (-0.9%)
  • Best Sector: Consumer Discretionary (+0.2%)
  • Worst Sector: Health Care (-0.8%)

Bond Yields: 10-year US Treasury yields were unchanged at 2.35%.

 

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.