|By Fisher Investments Editorial Staff, 10/11/2016|
MarketMinder’s editorial staff sits down with Fisher Investments Capital Markets Analyst Scott Botterman.
|By Fisher Investments Editorial Staff, 10/11/2016|
MarketMinder’s editorial staff sits down with Fisher Investments Capital Markets Analyst Austin Fraser.
Pundits have taken to calling the Bank of Japan’s latest policy trick—negative interest rates on central bank deposits—a Jedi Mind Trick. But BoJ Governor Haruhiko Kuroda seems to have a different pop cultural inspiration when he stated last year: “I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it.’ Yes, what we need is a positive attitude and conviction. Indeed, each time central banks have been confronted with a wide range of problems, they have overcome the problems by conceiving new solutions.”
Trouble is, in Peter Pan, flying also required magic fairy dust, and neither quantitative easing (QE) nor negative interest rates qualify. They’re more like forcing banks to walk the plank.
The BoJ’s massive QE program, now coupled with negative interest rates on new excess reserves, has pushed Japanese yields negative all the way out to 10-year maturities. Negative yields are intended to make Japanese Government Bonds (JGBs) unattractive—effectively a “tax” on savers (lenders)—promoting consumption or investment in higher yielding or riskier assets. Yet in the short term, it has done the opposite.
Stop me if you’ve heard this one: China is slowing, and that spells trouble for the world economy. I’m going to go ahead and presume the vast, vast, majority of readers are familiar: A slowdown in Chinese economic activity has been feared for years and was an enduring concern in 2015. Investor anxiety surrounding the world’s second-largest economy was widely blamed for a mid-year global equity market correction. But in an interesting twist, while China slowed, the eurozone—which many consider an economic quagmire to this day—sped. And, given the eurozone’s larger aggregate GDP, the acceleration has more than made up for a slower China in the last two years.
Fears of a seemingly unending European malaise the last several years suddenly faded this summer as China’s fast growth slowed. Facts were inconvenient— it didn’t seem to matter much that:
1. The slowing was largely government-orchestrated and has been occurring for years.
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.
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|By Ian Talley, The Wall Street Journal, 10/21/2016|
MarketMinder's View: Some people watch presidential debates for the fireworks. We watch them to see what economic misinformation the candidates spout, so we know what we need to help investors see correctly. And as always, we scrutinize both parties and candidates equally, because political bias is blinding and invites investment errors. We’re neutral, equal-opportunity correctors. So with that, we were a little confused when the titular candidate implied the US should be matching China and India’s eye-popping economic growth rates. That just isn’t realistic. “Should Americans actually be worried about the difference between them? Of course not. Contrasting the growth rate of an advanced economy to a developing nation is a misguided exercise–by definition, the two types of economies run at different speeds. … rich countries grow at a slower pace than emerging markets because the gains from industrialization diminish over time. Productivity levels accelerate for developing countries as they are able to introduce technology–such as electricity and more advanced machines–and capital injections into their economies. But for advanced economies, which have already made those leaps, productivity gains are harder to come by.”
|By Lisa Beilfuss, The Wall Street Journal, 10/21/2016|
MarketMinder's View: This piece basically encourages every error in the behavioral finance book. Folks, investing in passive products does not make you a passive investor. True passive investing, in the Eugene Fama spirit, requires buying an index fund or three to round out your desired asset allocation, then doing nothing, regardless of recent performance, market conditions or what have you. All the stuff suggested in this article is active management, just using ETFs. If you stay “on top of the markets and the events poised to move them” and trade accordingly, you are active—and subject to ill-timed trading—whether you use stocks or funds. Also not all of the ETFs discussed herein are even truly passive. Some don’t mirror a traditional, broad index. Many, particularly those “smart beta” funds championed near the end, are active as active can be. They are also often gimmicks, based on some hot trend. If someone creates an arbitrary index based on select criteria like valuations, percentage of revenues from one corner of the world or how many women sit in the board room—and then sells an ETF mirroring that index, that is active. It’s just cross-dressing.
|By Tim Wallace, The Telegraph, 10/21/2016|
MarketMinder's View: While the headline takes the blame-Canada approach, the real issue here is the Wallonian regional parliament’s refusal to back the deal. To placate anti-trade sentiment, the European Commission put the Canada/EU trade deal to all 28 EU nations to ratify. If one country says no, then no deal. Belgian law requires its regional governments to back any international agreement it signs, so Wallonia’s refusal put a stake in the agreement. For markets, it’s a disappointment, but it also isn’t a surprise, given the popular turn against free trade and the well-known difficulty of finalizing multiparty trade deals. Plus, while markets generally prefer freer trade, the absence of more free trade isn’t negative. New protectionist barriers would be more of a concern, and right now, for all the talk on that front, there is very little action, and none of the sort that threatens to snowball into a global trade war.
|By Oliver Renick and Rebecca Spalding, Bloomberg, 10/21/2016|
MarketMinder's View: This is all of very little consequence. It would be bizarre for stock buybacks to rise year in, year out. Nor does this bull market require a sequential increase. We recommend looking at the big picture instead: Is stock supply shrinking or rising? As long as buybacks and cash-based mergers outweigh IPOs and secondary offerings, stock supply is shrinking. Shrinking supply, against a backdrop of steady or rising demand, pushes prices higher. Just basic economics.
Market Wrap-Up, Thursday, October 20, 2016
Below is a market summary as of market close Thursday, October 20, 2016:
- Global Equities: MSCI World (-0.1%)
- US Equities: S&P 500 (-0.1%)
- UK Equities: MSCI UK (-0.2%)
- Best Country: Spain (+1.0%)
- Worst Country: Canada (-1.5%)
- Best Sector: Health Care (+0.2%)
- Worst Sector: Telecommunication Services (-1.0%)
Bond Yields: 10-year US Treasury yields rose 0.02 percentage point to 1.76%.
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.