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 Mehreen Khan, Financial Times, 08/24/2016|
MarketMinder's View: The eurozone’s biggest economy grew 0.4% q/q in Q2, slower than Q1’s 0.7% q/q pace but consistent with the long-running trend of choppy, modest growth. The biggest contribution to growth was exports, which rose 1.2% q/q. Consumer and government spending also contributed, adding 0.2 and 0.1 percentage points to growth, respectively, while investment detracted. Growth isn’t gangbusters, but it doesn’t need to be for markets to rise. With so many still seeing the eurozone as an economic quagmire, results only need to surpass dour expectations for stocks to rally. Amid rising money supply and bank lending, growth looks set to continue.
|By Tony Sagami, Financial Advisor Magazine, 08/24/2016|
MarketMinder's View: This piece marries flawed economic analysis with bad investment advice. First, consumers aren’t tapped out. Not only is one month’s retail sales data not telling, but if you omit the impact of falling gas prices, sales rose 0.2% in July. Second, basing investment decisions on a flawed interpretation of one month’s economic data is a recipe for error. Stocks are forward-looking, and no economic report is an actionable reason to buy, sell, hold or do anything with any stock, not just those listed here.
|By Walter Updegrave, CNNMoney, 08/24/2016|
MarketMinder's View: On the one hand, this shows how bear markets can impact investors’ psyches, driving them to sell near the bottom and miss much of the subsequent rebound. Bull markets always follow bear markets, but this is hard to believe when stocks are at their worst. On the other hand, however, it sort of falls prey to the myth that participating in a bear market early in retirement can derail your goals permanently. Not true. As long as you are patient and fully capture bull markets, riding through bear markets needn’t be devastating. Stocks’ strong long-term annualized returns include 13 bear markets since 1926. Now, while we do agree your comfort with volatility is important to consider when choosing the mix of stocks, bonds and other securities in your portfolio—if you aren’t comfy with volatility, you are less likely to stay disciplined and capture those bull markets—it shouldn’t be the sole determinant. Your long-term goals and time horizon are paramount. You can’t aim if you don’t have a target.
|By 5 Big Risks to Your Portfolio , USA Today, 08/24/2016|
MarketMinder's View: The five supposed market risks—a potential narrowing US presidential race, earlier-than-expected Fed rate hikes, oil possibly falling anew, earnings or economic growth disappointing and the fact September is right around the corner (the worst performing month for stocks on average)—aren’t fundamental, bull-market-ending risks. Some, like resurging electoral uncertainty, might induce volatility, but they might not. Short-term swings aren’t predictable. Presuming A causes B is a thought-process error. Regardless, these aren’t reasons to shun stocks now. Whoever becomes president, gridlock likely continues in Washington, which markets love. A Fed rate hike might rattle sentiment, but the real issue is whether it inverts the yield curve. As things stand now, it wouldn’t. As for oil prices, they have no meaningful correlation with stocks over reasonably long periods. They occasionally correlate highly for short bursts, as they did earlier this year, but there is no fundamental reason falling oil prices = falling stock prices. Plus, two years into the oil slump, stocks’ bull market charges on. Regarding earnings, it seems a stretch to say investors are “pricing in 14% profit growth” for next year when estimates are changing all the time. Markets digest all of this, including all the forecasts for growth to disappoint. And finally, September may be the worst month for US stocks, but it’s still slightly positive on average. A handful of bad years in the 1930s and 2008 bear the blame for its “worst month” status, and anyway calendars aren’t predictive.
Market Wrap-Up, Tuesday, August 23, 2016
Below is a market summary as of market close Tuesday, August 23, 2016:
- Global Equities: MSCI World (+0.3%)
- US Equities: S&P 500 (+0.2%)
- UK Equities: MSCI UK (+0.9)
- Best Country: Italy (+2.4%)
- Worst Country: Japan (-0.4%)
- Best Sector: Materials (+0.6%)
- Worst Sector: Utilities (+0.0%)
Bond Yields: 10-year US Treasury yields rose 0.01 percentage point to 1.55%.
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.