Market liquidity is usually a pretty banal subject, garnering little attention. But in the last year, it has gone from being a dry afterthought to being the subject of frequent articles claiming it’s a major concern, particularly in the bond markets. So much so, that Bloomberg’s Matt Levine had a running section of his daily link wrap titled, “People Are Worried About Bond Market Liquidity” for months and rarely ran low on articles to share. It is now bigger news when there aren’t “People Worried About Bond Market Liquidity!” So what is market liquidity, and are the recent fears justified—or overblown?
Market liquidity refers to how easily an asset can be bought or sold without dramatically impacting the price or incurring large costs. It’s a defining feature separating asset classes, a key consideration for investors. Some financial assets, like listed stocks, are easy to buy or sell with little price impact and small commissions—they’re “liquid.” Conversely, commercial real estate takes time to sell and likely includes high commissions and significant negotiations—it is “illiquid.” For most investors, particularly those with potential cash flow needs, liquidity is an important facet of any investment strategy.
Bonds are among the more liquid investments available for investors, though liquidity varies among different types. Treasurys, among the deepest markets in the world, are highly liquid. Corporates and municipals are less so, and some fancier debt is actually quite illiquid.
Flags fly in front of the Parthenon in Athens. Photo by Bloomberg/Getty Images.
After five years of Greek crisis, two defaults and going-on three bailouts, many still fear a contagion across the eurozone. While default and “Grexit” risk persist, the risk of a contagion has fallen significantly over the last few years. The eurozone economy is improving, foreign banks hold less Greek debt, bank deposits aren’t fleeing other peripheral nations, and euroskeptic parties poll well behind traditional parties across the eurozone. Greece’s problems are contained and shouldn’t put the broader eurozone at risk.
|By Fisher Investments Editorial Staff, 03/27/2015|
In Friday’s third revision to Q4 US GDP growth, one thing that seemed to catch a few eyeballs was a drop in US Corporate Profits[i], which some hyperbolically labeled “the worst news.” Others claim a “profit recession”—whatever that means—looms. But here is the thing: A down quarter for corporate profits is not unusual amid a bull market. Here are two charts to illustrate the point. The first shows the Bureau of Economic Analysis’ measure of corporate profits excluding depreciation. The second includes depreciation. The gray bars indicate bear markets and the blue dots denote a negative quarter of profits in a bull market. As you can see, such dips aren’t exactly rare and occur at random points throughout a bull market and expansion.
Exhibit 1: US Corporate Profits After Tax Without Inventory Valuation and Capital Cost Adjustment
Thursday marked the beginning three days of voting across the 28 EU nations in the first European Parliamentary (EP) elections since 2009. Also, the first pan-EU elections since the eurozone’s debt crisis and 18-month long recession that ended in mid-2013. When the polls close, voters are expected to add more euroskeptics—members of parties favoring less federalism and, in some cases, leaving the euro. With euro jitters still lingering in the background, some suspect this will rekindle breakup fears anew. However, polls suggest euroskeptics gain some ground but fail to shift power away from more traditional European political parties. The movement toward a more integrated Europe likely continues and, with it, support for the common currency likely remains strong. Should polls hold true, the biggest influence I believe the euroskeptics may have is pressuring the pro-euro groups on economic policy.
European Union Government
European Council: Heads of each EU member state with no formal legislative power. The Council defines general EU political directions (and addresses crises).
European Commission (EC): Executive body of the EU, consisting of a President (elected by the European Parliament) and 27 commissioners selected by the European Council and the EU President. They are responsible for proposing legislation, implementing decisions and addressing day-to-day EU operations.
European Parliament (EP): Directly elected legislative body of the European Union (five-year terms). The EP is an approval body. They do not initiate legislation, instead voting on and amending European Commission proposals. The EP directly elects the European Commission President and confirms the European Commission after its formation.
There will be slight structural differences in Parliament, regardless of the voting. Between 2009’s election and this year’s, the EU ratified the Lisbon Treaty, altering the structure of the body, modestly reducing the influence of larger nations like Germany. The EP will consist of 751 seats, 15 fewer than before. Representation will still be based on population, but with certain caveats. The Lisbon Treaty caps each member state at a maximum of 96 and mandates a minimum of six seats to all. This will automatically reduce Germany’s standing from the present Parliament and slightly boost the power of small EU nations. However, national distribution isn’t really at issue in the race. It’s much more about pro-euro versus euroskeptic.
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|By Nelson D. Schwartz, The New York Times, 05/27/2016|
MarketMinder's View: Q1 GDP growth was revised up from 0.5% (seasonally adjusted annual rate) to 0.8%, as private investment and trade detracted less than initially estimated (exports fell less, while imports flipped from slight growth to slight contraction). None of this matters much for stocks, which look forward, not backward. But there are plenty of reasons to believe growth should continue and perhaps even accelerate, as The Conference Board’s Leading Economic Index is breaking out of a recent (short) soft patch and bank lending and money supply are growing nicely. Plus, there is ample evidence Q1’s slowdown is more of a seasonal, statistical quirk than a sign of creeping weakness. Even with a revision to the seasonal adjustment process last year, Q1 remains noticeably slower than the rest of the year: “In 11 of the last 15 years, a listless January, February and March period was followed by a sudden snapback in economic expansion in the next quarter, a trend [economist Diane] Swonk said could not be explained by ‘polar vortexes and other one-off factors.’”
|By Michelle Singletary, The Washington Post, 05/27/2016|
MarketMinder's View: Saving to put your kids through college? Here’s some news you can use!
|By Joe Rennison, Financial Times, 05/27/2016|
MarketMinder's View: This is a largely meaningless statistic. If the S&P 500 can rise in May despite seven consecutive weeks of equity fund outflows, guess what, fund flows don’t drive returns. Nor do outflows mean investors are necessarily cutting equity exposure. Fund flow data ignores the counterfactual—in other words, they don’t tell you what people did with the money. Maybe folks sold funds and bought individual stocks! Plus, every share sold is by definition bought. So, maybe folks sold fund shares, fund managers sold stocks, and other humans bought those stocks. Fund flows are an extremely squishy indicator of sentiment, and that is about it.
|By Robert Samuelson, The Washington Post, 05/27/2016|
MarketMinder's View: Most of this is sociology, but supposed wage stagnation is a hot (and frequently misperceived) economic topic, and this brings a stonking huge dose of good sense to the debate. “A new study from the Federal Reserve Bank of San Francisco suggests just that. It concludes that widely cited figures showing stagnation are mostly a statistical fluke. Workers continuously employed in full-time jobs received wage increases higher than inflation from 2002 to 2015. Last year, the gain was a 3.5 percent increase after inflation, up from 1.2 percent in 2010. Typically, the median wage -- the wage exactly in the middle of all wages -- is cited as evidence of stagnation. Indeed, the Fed study confirms this. Median wage increases have fluctuated around 2 percent, unadjusted for inflation. But the median wage is misleading, the report argues, because it's heavily driven by demographic changes: an influx of young and part-time workers whose relatively low wages drag down the median; and the retirement of baby boom workers whose relatively higher pay no longer lifts up the median.” Hear, hear, and can we all please stop citing median household income as evidence of anything, please? Any statistic that pits a college kid making minimum wage during a gap year against her high-earning parents (both of them!) just doesn’t hold much water.
Market Wrap-Up, Friday, May 27, 2016
Below is a market summary as of market close Friday, May 27, 2016:
- Global Equities: MSCI World (+0.2%)
- US Equities: S&P 500 (+0.4%)
- UK Equities: MSCI UK (-0.4%)
- Best Country: Singapore (+1.0%)
- Worst Country: Norway (-1.3%)
- Best Sector: Information Technology (+0.6%)
- Worst Sector: Materials (-0.4%)
Bond Yields: 10-year US Treasury yields rose 0.02 percentage point to 1.85%.
Editors' Note: Tracking Stock and Bond Indexes
Source: Factset. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.