Political uncertainty is stoking fear across much of the developed world. In the US, pundits pontificate about the potential negative market impact from either a Donald Trump or Hillary Clinton presidency. Similarly, recent and upcoming votes in the eurozone’s four biggest economies—Spain, Italy, France and Germany—have contributed to an environment of fear and loathing across the Continent, causing many to miss the region’s overall fine economic results. Time and again, forecasted political “disasters” have had a limited impact on the fundamental environment in Europe. The Brexit vote increasingly appears to have had little economic impact, with the most recent data pointing to the 14th consecutive quarter of expansion in Q3. Even long-beleaguered European Financials stocks are doing better, as issues like negative interest rates and regulatory changes have failed to live up to fears. While the upcoming votes might bring minor political shifts, all appear unlikely to result in big, sweeping change. Instead, they likely push governments deeper into gridlock—an underappreciated positive—which reduces uncertainty and legislative risk.
Spain is likely headed to its third general election in a year after its fragmented parliament failed to form a government following June’s election. Prime Minister Mariano Rajoy of the center-right Popular Party (PP) was unable to win a confidence vote to form a minority government with upstart, centrist Ciudadanos. If neither Rajoy nor the opposition Socialist Party is able to form a government by Halloween, Spanish voters will return to the voting booth—potentially on Christmas Day.
Editors’ Note: Our discussion of politics is focused purely on potential market impact and is designed to be nonpartisan. Stocks don’t favor any party, and partisan ideology invites bias—dangerous in investing.
Are drug prices running rampant? After The New York Times reported on Sunday that a small private Pharmaceuticals firm, Turing Pharmaceuticals, jacked up the price of a 62-year-old drug by 5,000-ish percent, that question has sparked a media firestorm.[i] Monday, partly in reaction to the news, Democratic Presidential front-runner Hillary Clinton fueled further debate by vowing to “deal with skyrocketing out-of-pocket health costs and particularly, runaway prescription drug prices.” All week, media articles aplenty have focused on the issue and wondered whether Federal price controls are necessary to put a lid on the rise. But whatever your opinion of the sociological merits of this plan or drug prices, price controls in general have a long history of causing more harmful unintended consequences—including dinging stock prices—than any positive they may bring. That being said, pharmaceutical price controls seem unlikely to come to fruition any time soon.
For those interested in the details of Mrs. Clinton’s plan, here are the major proposals:
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
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|By Dan Davies, Medium, 09/29/2016|
MarketMinder's View: Here is a brief explanation running through a list of what-ifs surrounding Deutsche Bank’s recent sell off that illustrate why this isn’t at all likely to cause a 2008 redux. It’s a tad pointed, we’ll grant that. But it is still a valuable counterpoint to the widespread misunderstandings about what is afoot in the eurozone banking system. To this, we’d add: Fears of Deutsche Bank’s health have swirled for years and years, occasionally spiking like the present. We wonder why so many seem convinced this is a catastrophe looming now?
|By Summer Said, Benoit Faucon and Selina Williams, The Wall Street Journal, 09/29/2016|
MarketMinder's View: Shortly after we published today’s commentary (“OPEC Plays ‘Let’s Make a Deal’”), we noticed articles like this, correctly noting the rifts between OPEC members and how this could impact the viability of the deal. “A day after OPEC reached a deal to cut oil its production, cracks are showing in the accord’s foundations. Cartel member Nigeria is planning to boost, not cut, output. Libya is in the middle of reviving its exports. And a resurgent Iraq is disputing the output numbers underpinning the agreement.” All in all, it seems vastly premature to assume we’ll see a material production decline unless someone is really willing to bend when OPEC meets again in November. We wouldn’t recommend holding your breath or overweighting Energy stocks.
|By Jeffry Bartash, MarketWatch, 09/29/2016|
MarketMinder's View: We’ve said since the initial report that Q2 2016 GDP was stronger than headline numbers suggested, partially because the oil industry was a severe outlier dragging down business investment. This latest revision, as the sensible coverage in this article explains, makes that point crystal clear. “The upgrade in GDP — basically a score card for the nation’s economy — largely reflected higher investment by companies than earlier government estimates showed. Investment excluding housing actually rose 1% instead of dropping 0.9%. Even that number is worse than it looks, revised figures show. A 57% plunge in spending by energy companies coping with cheap oil was the main culprit in weak business investment. If mining and drilling are excluded, investment rose a healthy 10% in the second quarter.” Now, it’s all backward-looking and old data, but just keep this in mind when you next hear how the US economy is teetering on the brink of recession because of “slow growth.”
|By Sue Chang, MarketWatch, 09/29/2016|
MarketMinder's View: Whoa, Nelly. A whole lot of problems with this analysis. It’s fine to compare Technology’s S&P 500 sector weight today to years past, but it’s a mistake to think the average since 1990 has some sort of gravitational pull, drawing Tech’s weight back to it. Mean reversion just isn’t a market driver. Even so, consider: Tech’s weight in the 2000 bubble was almost 35%, or almost 15 percentage points above today’s levels. Is today’s 21% weight really so frothy? After all, the average weight of 15.2% since 1990 cited here is going to result from higher and lower weights over time. As for Google searches of “stock market bubble,” the statement is self-debunking. Rising searches for bubbles mean folks aren’t euphorically buying anything and everything, regardless of quality. If there were actually a bubble, you should expect such searches to vanish, not rise. Bubbles are usually characterized by a slew of low-quality IPOs hitting the market and surging sentiment overall, and they are usually fueled by folks looking back on hugely positive recent past returns and celebrating. We have none of that today, and that suggests skepticism remains. This bull market is far from sitting atop the Wall of Worry today.
Market Wrap, Wednesday, September 28, 2016
Below is a market summary as of market close Wednesday, September 28, 2016:
- Global Equities: MSCI World (+0.4%)
- US Equities: S&P 500 (+0.6%)
- UK Equities: MSCI UK (+0.6%)
- Best Country: Norway (+1.7%)
- Worst Country: Japan (-1.1%)
- Best Sector: Energy (+3.2%)
- Worst Sector: Telecommunication Services (-0.5%)
Bond Yields: 10-year US Treasury yields rose 0.01 percentage point to 1.57%.
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.