Commentary

Fisher Investments Editorial Staff
Forecasting, Inconvenient Truths, Media Hype/Myths

No, Slowing Buybacks Aren’t Bearish Either

By, 05/31/2016
Ratings63.583333

Photo by Bloomberg/Getty Images.

Sentiment is a wacky thing. Last year, many fretted corporations were spending too much on stock buybacks at the expense of growth-boosting capex. (Not true.) Now, as firms have announced fewer buybacks in 2016, some worry firms aren’t buying back enough of their own shares! Yes, they fear it reflects falling demand for stocks and, paired with recent data showing investors yanking money from equity mutual funds, many fret this saps the demand for stocks—signaling a bull market in its last gasps. This has no more grounding in reality than its predecessors—the bull can keep running just fine, with or without buybacks at all-time highs.

Commentary

Fisher Investments Editorial Staff
GDP, Developed Markets

The Global Economy Is Growing at Now, Now

By, 05/26/2016
Ratings944.053192

Stocks have jumped higher to start this week, which is leaving our skeptical media grasping at straws trying to figure out what is behind the gains. Many seemingly settled early this week on Tuesday’s strong US housing data. First, we caution investors from speculating about daily market movements due to any specific piece of news[i]—markets are far too complex to pinpoint an up or down day based on a single report. But among all the datasets out there, real estate is even more limited, given its small slice of the total economy. However, for you number munchers, fret not! May has provided a bounty of growthy data to enjoy.     

First, let’s start in the good ol’ U-S-of-A. After Q1 GDP missed expectations in last month’s release, May’s news has been more upbeat. April industrial production (IP) rose 0.7% m/m, halting a two-month slide. Though mining output fell -2.3% m/m—reflecting Energy’s long-running struggles—Utilities, bolstered by cooler weather, rose 5.8% m/m after falling the prior two months. Moreover, Manufacturing rose 0.3% m/m, bouncing back from March’s -0.3% dip. Though this noisy gauge continues bouncing around, weak Mining has had an outsized impact on the headline figure. The more representative Manufacturing, which comprises nearly three quarters of IP, has steadily climbed throughout this expansion.  

Elsewhere, April retail sales rose 1.3% m/m, the biggest monthly rise in over a year. Led by auto sales (3.2% m/m), growth was pretty broad-based, with food and clothing sales both up. Even gas station sales—a longstanding weak spot due to plummeting gas prices—rose 2.2% m/m thanks to oil prices’ recent rebound. As always, we suggest investors refrain from reading too much into one monthly report, good or bad—especially since retail sales don’t include services, a large swath of overall consumer spending. However, it does counter overly dour concerns about the US consumer’s health. Finally, the April Institute for Supply Management’s Purchasing Managers’ Indexes (PMIs) for both manufacturing and non-manufacturing topped 50—50.8 and 55.7, respectively. Readings above 50 indicate growth, and more importantly, the New Orders subindexes for both gauges suggest continued expansion is likely. 

Commentary

Michael Hanson
Finance Theory

Book Review: Philosophy’s Stake in Finance

By, 05/25/2016
Ratings964.166667

Models.Behaving.Badly.: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life – Emanuel Derman

Early in Emanuel Derman’s quintessential book on financial theory, he delivers the punchline: “The longer you live, the more you become aware of life’s contradictions and the inability of reason to reconcile them.”

In the youth of serious intellectual life, for a very long time you search for “final” truths—ideas and theories to finally explain the world, and ourselves. It’s after the very long slog, decades of searching, reading thousands of books, watching ideas come and go, colliding and negating each other, seeing entirely new forms of knowledge and areas of study arise, that one arrives at something far different than the innocent objective of discovering “truth”: The contradictions of life can hold the greatest wisdom.

In this way, Derman’s short but powerful Models Behaving Badly ought to be on the reading list of every aspirant investor. It’s perhaps the best contemporary work of financial philosophy, extant.

A former physicist-cum-financier, we reviewed Derman’s first book awhile back, My Life as a Quant, to some fanfare. That book remains a laudable firsthand account of the rush to make investing like physics—deterministic, statistic and beholden to mathematical truths.

Commentary

Fisher Investments Editorial Staff
Commodities

There Is Nothing Inherently Special About Gold

By, 05/23/2016
Ratings623.83871

Gold has taken a breather from its 2016 rally this month, yet enthusiasm for the shiny yellow metal remains high—especially now that no lesser than George Soros has piled in. He is far from the only one. With the political uncertainty up and money pouring into gold ETFs, many believe the conditions are ripe for gold to run on and on.

But it’s all myth. Gold isn’t an inflation hedge, bulwark against low interest rates or a safe haven in troubled times. If you bought gold to hedge against inflation at pretty much any point in the 1980s or 1990s, it took years to pay off. Gold has also fallen during equity bear markets and periods of geopolitical turmoil, shattering that safety blanket myth. As an investment, gold has no special qualities. It is just a commodity, and a super volatile one. Its long-term returns trail stocks, yet its short-term returns are far more variable. Long-term gains, theoretically, are your compensation for enduring short-term ups and downs. Stocks deliver on this, but gold largely doesn’t.

Long term, gold has little utility in a diverse portfolio. Investing successfully in gold requires near-perfect market timing. As Exhibit 1 shows, gold isn’t a very viable long-term investment—with most of its positivity coming in short bursts. After one such burst in the late 1970s and early 1980, gold fell drastically and took 27 years to get back to the pre-drop high. During that span of time, the S&P 500 rose 2,861.7%, a wee bit of opportunity cost for gold holders.[i] Gold posted positive returns in 272 of 498 rolling 12-month periods since 1973, or a 54.6% frequency of positivity.[ii] Stocks rose in 398 of the same 498 rolling 12-month periods—a 79.9% frequency of positivity, crushing gold.[iii] Moreover, fully 132 of gold’s positive 12-month rolling periods came in the 11 years from 2001 – 2012. The hot streak in recent years (before the big gold bust) is probably why so many folks talk up gold these days, but recency doesn’t equal repeatability.  

Commentary

Fisher Investments Editorial Staff
MarketMinder Minute, Monetary Policy

MarketMinder Minute - Not So Negative Interest Rates

By, 05/23/2016
Ratings234.086957

This MarketMinder Minute looks at negative interest rates and what they mean for the global economy.

Commentary

Fisher Investments Editorial Staff
Behavioral Finance

Investing’s Timeless Challenge: Patience

By, 05/20/2016
Ratings1064.301887

Birthdays. Anniversaries. Graduations. Bar mitzvahs. Promotions. Eagle scout-hood. Most milestones are a cause for celebration. But this weekend investors face one that doesn’t bring much joy: Saturday officially marks one calendar year since the S&P 500 price index last hit a new high, with the gauge down -4.3% since.[i] That markets have gone a year without producing any gains is frustrating, especially when you consider a primary reason for the flattish returns is the correction in between, which added big volatility and scary headlines to the mix. That one-two punch—volatility with no real rewarding payoff—likely has many wondering what’s in it for them: whether stocks’ volatility risk is worth it. Some pundits aren’t helping either, seeing the lack of upside as a sign the bull market is petering out. But here we’d counsel caution: Both these camps of investors could be setting themselves up to make a behavioral investing error. Past market trends—up, down or sideways—are never predictive of where markets are headed. As difficult as it may be, we humbly suggest now is a time to remain patient and disciplined, as fundamentals suggest the bull market likely has further to run.

First, to get a technicality out of the way: US market returns over the last year are actually a smidge better than mere price levels suggest. Including reinvested dividends (total return), the S&P 500 breeched last May’s levels about a month ago. It’s pulled back slightly since, to sit 2.8% below its new record as we type.[ii] Which raises an interesting point: Since 1926, dividends account for a little less than a third of average annual total returns. But most financial media outlets puzzlingly focus solely on market price levels. It is hugely unlikely you can invest in stocks and not earn a dividend, so a price-only fixation is pretty unrealistic. [iii]

But either way, price or total, returns are still basically flattish—and global stocks are a bit behind US and have not set new highs, dividends or no. However, though it may not seem so, flat (point-to-point) returns—even for periods as long as a year—aren’t all that unusual in bull markets. Typically, like the current one, a bull market correction plays a role.

Commentary

Todd Bliman
Across the Atlantic, Media Hype/Myths

Brexit, and the Creative Art of Misinformation

By, 05/20/2016
Ratings564.151786

Photo by Christopher Furlong/Getty Images.

Recently, Bank of England Governor Mark Carney claimed that if British voters elect to leave the European Union in June 23’s referendum, it will risk recession.

Commentary

Fisher Investments Editorial Staff
Into Perspective, Monetary Policy

Don’t Let the Yield Curve Flatten Your Spirits

By, 05/19/2016
Ratings674.231343

In these allegedly very uncertain times, one constant remains: the perpetually dour media. Headlines fret the state of the global economy daily, cycling through a steady stream of worries. This week, a fear from the recent past—a Fed rate hike—resurfaced, as the April Fed meeting minutes drove speculation Janet Yellen and Co. will hike in June if economic data are strong enough.[i] Perhaps related to shifting expectations of a hike, short-term US Treasury yields have drifted higher lately, spurring jitters over the yield curve flattening. While we have pointed out why rate hikes aren’t inherently bearish a handful of times (ok, many, many, many times), what are investors to make of the developments surrounding the yield curve, a forward-looking indicator we frequently refer to? Though the yield curve has indeed flattened a bit in 2016, that doesn’t automatically set the US economy up for a tumble, either.  

First, a refresher: The yield curve refers to the distribution of bond yields across all maturities from one borrower. The spread is the difference between long-term and short-term rates, which also serves as a proxy for loan profitability for banks. Banks’ core business is to borrow short (e.g., deposit accounts) to fund longer-term loans (e.g., mortgages, car loans, etc.), so the more long-term rates exceed short, the more money the bank would make. Hence, a positive spread would likely encourage banks to lend to capture the profit, and more plentiful capital stimulates economic growth.

Typically speaking, yield curves are positively sloped because longer-maturity loans mean the lender is exposed to risks for longer and rationally demands higher rates to compensate. However, that isn’t always true. An inverted yield curve—when it costs more to borrow short than long—indicates something isn’t right in credit markets and that weak economic conditions may be forthcoming. A flat yield curve lies somewhere in between—banks may be a bit more hesitant to lend, given they are paid less for the risk they take, but it still wouldn’t necessarily be unprofitable to do so. The importance of the yield curve to future growth is why The Conference Board’s forward-looking Leading Economic Index (LEI) uses the interest rate spread of 10-year Treasurys less federal funds—it provides a telling sign about the upcoming economic environment. So what are folks fretting about today?     

Commentary

Fisher Investments Editorial Staff
GDP, Media Hype/Myths

Quick Hit: A Few Bullet Points to Shoot Down Lingering Eurozone Fears

By, 05/18/2016

Last week, the 19-nation eurozone reported revised Q1 2016 GDP growth, which showed growth ticked down from the preliminary estimate of 0.6% q/q (2.2% annualized) to 0.5% q/q (2.1% annualized). The media reaction, as it is with most things including the words “eurozone” and “economy,” was dour. Some bemoaned that only now had the eurozone “scraped” back to pre-crisis GDP levels. Others suggest this uptick is likely fleeting and too reliant on Germany. Others claim the eurozone crisis is just on pause. Still others remain fixated on the fact eurozone CPI was in negative territory in April, fretting a deflationary spiral looms. But a negative take on a growing eurozone is really nothing new. So let’s look at the data and assess whether there is really so much to be dour about.

Here are a few quick factoids and charts:

  • With 2.1% annualized growth in Q1, the eurozone grew faster than Japan (1.7%), the UK (1.6%) and US (0.5%).[i] Now, the eurozone posting the fastest growth rate of the four major developed economies isn’t the trend and we don’t expect it to continue, but it is worth noting.. Eurozone GDP, as noted above, has grown in 12 straight quarters and has now eclipsed pre-2008 levels.[ii]

Exhibit 1: Eurozone GDP at an All-Time High

Commentary

Fisher Investments Editorial Staff
GDP, Forecasting, Media Hype/Myths, Reality Check

The ‘Retail Recession’ Label Doesn’t Fit

By, 05/13/2016
Ratings1064.226415

It was some department stores’ turn in the Q1 2016 earnings season spotlight this week, and to say their results were weak understates the media reaction pretty dramatically. Declining sales and profits led to cries the US is in a “retail recession” and assertions the consumer is tapped out—bad signs for US growth looking forward. But we’d humbly suggest that is incorrect. A recession is a broad-based decline in economic output. This is more a story of narrow, virtually anecdotal data points and a shift in shopping habits—away from department stores and towards online and specialty retailers. Despite some retailers’ recent woes, there is ample evidence US consumers are in fine shape, and that the economy is not headed for recession anytime in the foreseeable future.

On Wednesday, Macy’s reported Q1 sales fell over -7% y/y while earnings tumbled -29% y/y. The following day, Kohl’s said Q1 year-over-year revenues fell more than expected and earnings slid -50%. The carnage continued after market close on Thursday when Nordstrom reported Q1 earnings contracted -61% y/y, badly missing estimates (though sales grew about 1%). All lowered their guidance for full 2016 results. Friday, JC Penney joined the “party,” also posting poor results.

To hear the media tell it, this is a sign consumers are materially tightening their belts. And, with consumer spending accounting for roughly 70% of US GDP, they suggest it signals a weak economy—and maybe an approaching recession. That narrative, however, is based on only a handful of companies, and is pretty darn odd when you square it up against broader economic data like, we dunno, US retail sales. April’s data happened to be reported Friday, and beat estimates with 1.3% m/m growth (3.0% y/y). And, as Exhibit 1 shows, this isn’t a new thing—retail sales are growing at a fine clip, which is especially clear when you remove the negative influence of falling gas prices by excluding gas station sales. (Which reversed in March and April.)

Commentary

Fisher Investments Editorial Staff
Behavioral Finance

Investing’s Timeless Challenge: Patience

By, 05/20/2016
Ratings1064.301887

Birthdays. Anniversaries. Graduations. Bar mitzvahs. Promotions. Eagle scout-hood. Most milestones are a cause for celebration. But this weekend investors face one that doesn’t bring much joy: Saturday officially marks one calendar year since the S&P 500 price index last hit a new high, with the gauge down -4.3% since.[i] That markets have gone a year without producing any gains is frustrating, especially when you consider a primary reason for the flattish returns is the correction in between, which added big volatility and scary headlines to the mix. That one-two punch—volatility with no real rewarding payoff—likely has many wondering what’s in it for them: whether stocks’ volatility risk is worth it. Some pundits aren’t helping either, seeing the lack of upside as a sign the bull market is petering out. But here we’d counsel caution: Both these camps of investors could be setting themselves up to make a behavioral investing error. Past market trends—up, down or sideways—are never predictive of where markets are headed. As difficult as it may be, we humbly suggest now is a time to remain patient and disciplined, as fundamentals suggest the bull market likely has further to run.

First, to get a technicality out of the way: US market returns over the last year are actually a smidge better than mere price levels suggest. Including reinvested dividends (total return), the S&P 500 breeched last May’s levels about a month ago. It’s pulled back slightly since, to sit 2.8% below its new record as we type.[ii] Which raises an interesting point: Since 1926, dividends account for a little less than a third of average annual total returns. But most financial media outlets puzzlingly focus solely on market price levels. It is hugely unlikely you can invest in stocks and not earn a dividend, so a price-only fixation is pretty unrealistic. [iii]

But either way, price or total, returns are still basically flattish—and global stocks are a bit behind US and have not set new highs, dividends or no. However, though it may not seem so, flat (point-to-point) returns—even for periods as long as a year—aren’t all that unusual in bull markets. Typically, like the current one, a bull market correction plays a role.

Commentary

Todd Bliman
Across the Atlantic, Media Hype/Myths

Brexit, and the Creative Art of Misinformation

By, 05/20/2016
Ratings564.151786

Photo by Christopher Furlong/Getty Images.

Recently, Bank of England Governor Mark Carney claimed that if British voters elect to leave the European Union in June 23’s referendum, it will risk recession.

Commentary

Fisher Investments Editorial Staff
Into Perspective, Monetary Policy

Don’t Let the Yield Curve Flatten Your Spirits

By, 05/19/2016
Ratings674.231343

In these allegedly very uncertain times, one constant remains: the perpetually dour media. Headlines fret the state of the global economy daily, cycling through a steady stream of worries. This week, a fear from the recent past—a Fed rate hike—resurfaced, as the April Fed meeting minutes drove speculation Janet Yellen and Co. will hike in June if economic data are strong enough.[i] Perhaps related to shifting expectations of a hike, short-term US Treasury yields have drifted higher lately, spurring jitters over the yield curve flattening. While we have pointed out why rate hikes aren’t inherently bearish a handful of times (ok, many, many, many times), what are investors to make of the developments surrounding the yield curve, a forward-looking indicator we frequently refer to? Though the yield curve has indeed flattened a bit in 2016, that doesn’t automatically set the US economy up for a tumble, either.  

First, a refresher: The yield curve refers to the distribution of bond yields across all maturities from one borrower. The spread is the difference between long-term and short-term rates, which also serves as a proxy for loan profitability for banks. Banks’ core business is to borrow short (e.g., deposit accounts) to fund longer-term loans (e.g., mortgages, car loans, etc.), so the more long-term rates exceed short, the more money the bank would make. Hence, a positive spread would likely encourage banks to lend to capture the profit, and more plentiful capital stimulates economic growth.

Typically speaking, yield curves are positively sloped because longer-maturity loans mean the lender is exposed to risks for longer and rationally demands higher rates to compensate. However, that isn’t always true. An inverted yield curve—when it costs more to borrow short than long—indicates something isn’t right in credit markets and that weak economic conditions may be forthcoming. A flat yield curve lies somewhere in between—banks may be a bit more hesitant to lend, given they are paid less for the risk they take, but it still wouldn’t necessarily be unprofitable to do so. The importance of the yield curve to future growth is why The Conference Board’s forward-looking Leading Economic Index (LEI) uses the interest rate spread of 10-year Treasurys less federal funds—it provides a telling sign about the upcoming economic environment. So what are folks fretting about today?     

Commentary

Fisher Investments Editorial Staff
GDP, Media Hype/Myths

Quick Hit: A Few Bullet Points to Shoot Down Lingering Eurozone Fears

By, 05/18/2016

Last week, the 19-nation eurozone reported revised Q1 2016 GDP growth, which showed growth ticked down from the preliminary estimate of 0.6% q/q (2.2% annualized) to 0.5% q/q (2.1% annualized). The media reaction, as it is with most things including the words “eurozone” and “economy,” was dour. Some bemoaned that only now had the eurozone “scraped” back to pre-crisis GDP levels. Others suggest this uptick is likely fleeting and too reliant on Germany. Others claim the eurozone crisis is just on pause. Still others remain fixated on the fact eurozone CPI was in negative territory in April, fretting a deflationary spiral looms. But a negative take on a growing eurozone is really nothing new. So let’s look at the data and assess whether there is really so much to be dour about.

Here are a few quick factoids and charts:

  • With 2.1% annualized growth in Q1, the eurozone grew faster than Japan (1.7%), the UK (1.6%) and US (0.5%).[i] Now, the eurozone posting the fastest growth rate of the four major developed economies isn’t the trend and we don’t expect it to continue, but it is worth noting.. Eurozone GDP, as noted above, has grown in 12 straight quarters and has now eclipsed pre-2008 levels.[ii]

Exhibit 1: Eurozone GDP at an All-Time High

Commentary

Fisher Investments Editorial Staff
GDP, Forecasting, Media Hype/Myths, Reality Check

The ‘Retail Recession’ Label Doesn’t Fit

By, 05/13/2016
Ratings1064.226415

It was some department stores’ turn in the Q1 2016 earnings season spotlight this week, and to say their results were weak understates the media reaction pretty dramatically. Declining sales and profits led to cries the US is in a “retail recession” and assertions the consumer is tapped out—bad signs for US growth looking forward. But we’d humbly suggest that is incorrect. A recession is a broad-based decline in economic output. This is more a story of narrow, virtually anecdotal data points and a shift in shopping habits—away from department stores and towards online and specialty retailers. Despite some retailers’ recent woes, there is ample evidence US consumers are in fine shape, and that the economy is not headed for recession anytime in the foreseeable future.

On Wednesday, Macy’s reported Q1 sales fell over -7% y/y while earnings tumbled -29% y/y. The following day, Kohl’s said Q1 year-over-year revenues fell more than expected and earnings slid -50%. The carnage continued after market close on Thursday when Nordstrom reported Q1 earnings contracted -61% y/y, badly missing estimates (though sales grew about 1%). All lowered their guidance for full 2016 results. Friday, JC Penney joined the “party,” also posting poor results.

To hear the media tell it, this is a sign consumers are materially tightening their belts. And, with consumer spending accounting for roughly 70% of US GDP, they suggest it signals a weak economy—and maybe an approaching recession. That narrative, however, is based on only a handful of companies, and is pretty darn odd when you square it up against broader economic data like, we dunno, US retail sales. April’s data happened to be reported Friday, and beat estimates with 1.3% m/m growth (3.0% y/y). And, as Exhibit 1 shows, this isn’t a new thing—retail sales are growing at a fine clip, which is especially clear when you remove the negative influence of falling gas prices by excluding gas station sales. (Which reversed in March and April.)

Commentary

Fisher Investments Editorial Staff
Politics, Inconvenient Truths, Media Hype/Myths

History Shows Election Nerves Don’t Stress Stocks

By, 05/13/2016
Ratings574.342105

Are US politics going to make this a cruel summer for stocks? Speculation about November’s US presidential election has ramped up now that some uncertainty has faded. Donald Trump is the presumptive GOP nominee and Hillary Clinton holds a commanding delegate lead on the Democratic side. Pundits are doing pundit-y things,[i] from postulating about hypothetical matchups to speculating about what the potential winner will do once in office. There is also lots of chatter about what the near-term market impact will be, with some arguing that the closer we get to the election, the greater uncertainty will be—roiling stocks. However, this is largely backward. History shows stocks don’t usually stumble as elections near. Instead, uncertainty falls as the election approaches and markets gain more insight on both candidates, getting used to the idea of either as president. Falling uncertainty is often a bullish force as the election nears. That doesn’t mean stocks are certain to do great this summer and autumn—we don’t make short-term forecasts—but it is powerful evidence they shouldn’t automatically suffer.

The “pre-election = volatility” crowd believes the campaign trail’s noise will raise uncertainty and fear about what either candidate will do once in office. However, this presumes markets will automatically hate everything candidates say—a sign of bias. While a ton of pundits analyze and speculate about what politicians say, these takes are opinions, not facts. And in an election year, political opinions bombard folks from every direction—the TV, the Internet, the newspaper and in regular day-to-day conversation.

Investors may be forgiven if they find themselves overwhelmed by all the noise, but the notion stocks are similarly unnerved isn’t quite right. While in the ultra-short term, talk can stoke volatility, the sheer volume of political noise also means basically every political opinion and take gets priced in. One person’s political feelings are unlikely to be radically unique or surprising—and surprises move markets. Moreover, everything discussed on the campaign trail for Democrats and Republicans alike is part of markets’ discovery process, which clears up question marks about the candidates. Stocks hate uncertainty above all else, and every little nugget about what Candidate X argues or Candidate Y focuses on chips away at that uncertainty.  

Research Analysis

Pete Michel
Into Perspective

Why Bond Market Liquidity Fears Don’t Hold Much Water

By, 09/22/2015
Ratings933.956989

Market liquidity is usually a pretty banal subject, garnering little attention. But in the last year,  it has gone from being a dry afterthought to being the subject of frequent articles claiming it’s a major concern, particularly in the bond markets. So much so, that Bloomberg’s Matt Levine had a running section of his daily link wrap titled, “People Are Worried About Bond Market Liquidity” for months and rarely ran low on articles to share. It is now bigger news when there aren’t “People Worried About Bond Market Liquidity!” So what is market liquidity, and are the recent fears justified—or overblown?

Market liquidity refers to how easily an asset can be bought or sold without dramatically impacting the price or incurring large costs. It’s a defining feature separating asset classes, a key consideration for investors. Some financial assets, like listed stocks, are easy to buy or sell with little price impact and small commissions—they’re “liquid.” Conversely, commercial real estate takes time to sell and likely includes high commissions and significant negotiations—it is “illiquid.” For most investors, particularly those with potential cash flow needs, liquidity is an important facet of any investment strategy.

Bonds are among the more liquid investments available for investors, though liquidity varies among different types. Treasurys, among the deepest markets in the world, are highly liquid. Corporates and municipals are less so, and some fancier debt is actually quite illiquid.

Research Analysis

Scott Botterman
Into Perspective

Greek Contagion Risk Is Minimal

By, 08/11/2015
Ratings274.703704

Flags fly in front of the Parthenon in Athens. Photo by Bloomberg/Getty Images.

After five years of Greek crisis, two defaults and going-on three bailouts, many still fear a contagion across the eurozone. While default and “Grexit” risk persist, the risk of a contagion has fallen significantly over the last few years. The eurozone economy is improving, foreign banks hold less Greek debt, bank deposits aren’t fleeing other peripheral nations, and euroskeptic parties poll well behind traditional parties across the eurozone.  Greece’s problems are contained and shouldn’t put the broader eurozone at risk.

Research Analysis

Fisher Investments Editorial Staff
Reality Check

Quick Hit: ‘Corporate Profits Recession’ and Stocks—There Is No ‘There!’ There

By, 03/27/2015
Ratings364.069445

In Friday’s third revision to Q4 US GDP growth, one thing that seemed to catch a few eyeballs was a drop in US Corporate Profits[i], which some hyperbolically labeled “the worst news.” Others claim a “profit recession”—whatever that means—looms. But here is the thing: A down quarter for corporate profits is not unusual amid a bull market. Here are two charts to illustrate the point. The first shows the Bureau of Economic Analysis’ measure of corporate profits excluding depreciation. The second includes depreciation. The gray bars indicate bear markets and the blue dots denote a negative quarter of profits in a bull market. As you can see, such dips aren’t exactly rare and occur at random points throughout a bull market and expansion.   

Exhibit 1: US Corporate Profits After Tax Without Inventory Valuation and Capital Cost Adjustment

Research Analysis

Scott Botterman
Into Perspective

European Parliament Elections—Setting Expectations

By, 05/23/2014
Ratings493.295918

Thursday marked the beginning three days of voting across the 28 EU nations in the first European Parliamentary (EP) elections since 2009. Also, the first pan-EU elections since the eurozone’s debt crisis and 18-month long recession that ended in mid-2013. When the polls close, voters are expected to add more euroskeptics—members of parties favoring less federalism and, in some cases, leaving the euro. With euro jitters still lingering in the background, some suspect this will rekindle breakup fears anew. However, polls suggest euroskeptics gain some ground but fail to shift power away from more traditional European political parties. The movement toward a more integrated Europe likely continues and, with it, support for the common currency likely remains strong. Should polls hold true, the biggest influence I believe the euroskeptics may have is pressuring the pro-euro groups on economic policy.

European Union Government

  • European Council: Heads of each EU member state with no formal legislative power. The Council defines general EU political directions (and addresses crises).
  • European Commission (EC): Executive body of the EU, consisting of a President (elected by the European Parliament) and 27 commissioners selected by the European Council and the EU President. They are responsible for proposing legislation, implementing decisions and addressing day-to-day EU operations.
  • European Parliament (EP): Directly elected legislative body of the European Union (five-year terms). The EP is an approval body. They do not initiate legislation, instead voting on and amending European Commission proposals. The EP directly elects the European Commission President and confirms the European Commission after its formation.

There will be slight structural differences in Parliament, regardless of the voting. Between 2009’s election and this year’s, the EU ratified the Lisbon Treaty, altering the structure of the body, modestly reducing the influence of larger nations like Germany. The EP will consist of 751 seats, 15 fewer than before. Representation will still be based on population, but with certain caveats. The Lisbon Treaty caps each member state at a maximum of 96 and mandates a minimum of six seats to all. This will automatically reduce Germany’s standing from the present Parliament and slightly boost the power of small EU nations. However, national distribution isn’t really at issue in the race. It’s much more about pro-euro versus euroskeptic.

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What We're Reading

By , The 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 , The Washington Post, 05/27/2016

MarketMinder's View: Saving to put your kids through college? Here’s some news you can use!

By , 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 , 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.

Global Market Update

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.