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 Morgan Housel, The Collaborative Fund, 09/23/2016|
MarketMinder's View: Here is a delightful antidote to worries about secular stagnation and the end of innovation. Most people think technological advancement is all about some big-bang invention, like the PC or Internet. But like growth, innovation compounds over time, and small gains add up to a much better world: “Growth follows the same exponential road of compound interest. One person sticks their neck out and does X. The next generation starts with X and says “I can do X + 1.” The next starts with X+1 and shoots for X+1+1, and so on. These are often tiny improvements. But, as compound interest teaches us, tiny improvements built upon a base that’s generations in the making can add up to something remarkable. This all may seem obvious. But a lot of pessimism about the future comes from being incredulous that today’s generation is producing, say, another Bill Gates, Henry Ford, or Tony Hawk. This misses a critical point: We now get to use all of those people’s discoveries as a starting point, a foundation to build off of. Never underestimate the power of someone armed with the accumulated trial and error of every genius who came before them.”
|By Barry Ritholtz, Bloomberg, 09/23/2016|
MarketMinder's View: What was that titular trade? Letting fees, not investment process, drive their investment management hiring decisions. After alumni and donors complained about “too high” compensation for the Harvard endowment’s investment managers, who happened to be delivering stellar returns that all of academia (nevermind the investing world) envied, the powers that be sacked that high-earning management team and replaced them with cheaper talent that built a portfolio “festooned with expensive private equity, hedge funds and commodities holdings.”* The result is (ironically) a fee-laden, perpetually underperforming pile of illiquidity. Folks, fees matter, but they aren’t the only or most important consideration when selecting an investment manager. Nor is historical performance. How any manager generated their returns is paramount. The past doesn’t predict the future, but you can at least assess whether a process is sound, which generally increases its likelihood of future success. In other words, you have to take a holistic approach, evaluating qualitative as well as quantitative factors. (*We could have paraphrased this easily, but we so enjoyed the use of “festooned” that we felt we would have done you, dear reader, a disservice if we didn’t highlight it.)
|By Jason Zweig, The Wall Street Journal, 09/23/2016|
MarketMinder's View: Required reading for anyone who has ever read, been forwarded, or been tempted to read an investment newsletter boasting how you can earn sensational returns if you pay them money to show you this One Weird, Simple Trick. They are nearly always peddling slop or fraud, and it is very easy to spot the signs if you put on your skeptic’s hat and do about two and a half minutes of independent Googling. Yet so few readers bother. How come? “Robert Cialdini, a social psychologist at Arizona State University and author of the new book ‘Pre-Suasion,’ is an expert on how people convince others to trust them. ‘The mindset that you put people into when they encounter your material,’ he says, ‘leads them to prioritize their attention and behave in ways that are consistent with that focus.’ In other words, a consistent message can elbow your skepticism aside; clever marketing can administer a kind of investing lobotomy, numbing you to the most obvious warning signs.”
|By Jeremy Warner, The Telegraph, 09/23/2016|
MarketMinder's View: Indeed, it does. How great will it be when DUIs and texting-while-driving accidents are a thing of the past? Think how much better off society will be! There will probably be scores of good investment opportunities along the way, too, as new firms arise to provide and service self-driving cars, while others compete for all the spare cash consumers gain from not paying a boodle on car maintenance over time if we do indeed shift to a “sharing” model in the long run. This is all very cool and, as the article notes, a crushing counterargument against “those who still cling pessimistically to a Malthusian view of history, believing our ever-growing appetite for energy and other apparently dwindling supplies of natural resource to be an unsustainable catastrophe in the making.” The potential for technology to improve quality of life here is vast, But also, it’s very far off, and speculative. Stocks usually don’t look more than 30 months out, making it too early for investors to be able to handicap the potential winners and losers today. Keep an eye out, and celebrate the amazing potential, but be patient with your portfolio.
Market Wrap-Up, Thursday, September 22, 2016
Below is a market summary as of market close Thursday, September 22, 2016:
- Global Equities: MSCI World (+1.1%)
- US Equities: S&P 500 (+0.7%)
- UK Equities: MSCI UK (+2.2%)
- Best Country: Norway (+4.0%)
- Worst Country: Japan (-0.1%)
- Best Sector: Materials (+1.7%)
- Worst Sector: Information Technology (+0.7%)
Bond Yields: 10-year US Treasury yields fell 0.03 percentage point to 1.62%.
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.