Commentary

Fisher Investments Editorial Staff
Reality Check

Why Stocks Keep Rallying

By, 02/22/2017
Ratings1683.934524


Rarely do headlines blare things are okay. (Photo by DNY59/iStock.)

The political circus in Washington has kicked it up a notch lately, yet stocks in the US and globally are calmly ticking up. Skeptics say the quiet rise is a sign of investors’ complacency, presuming chaotic politics should bring chaotic markets. Yet that’s a misnomer. In our view, markets are doing what they regularly do in bull markets: Looking past political noise and sociological bluster, and focusing on a growing global economy and improving corporate earnings.

Volatility is indeed down. February 17 was the 49th straight trading day the S&P 500 moved less than 1% up or down.[i] The VIX, which measures expected market volatility (based on options prices), is currently 11.5,[ii] which is about the lowest it has been in years. The old saw says “when the VIX is high it’s time to buy,” so the low reading—using faulty opposite logic—means it’s time to sell. However, none of this says anything about investors’ actual mindset. Nor is it predictive.

Commentary

Fisher Investments Editorial Staff
Into Perspective, Investor Sentiment

Checking in on Greece

By, 02/17/2017
Ratings423.714286

Greece, known for historic landmarks, beautiful beaches and perennially contending for the Sick Man of Europe title, is back in the hot seat. If this were 2011, markets would be manic. Yet this time, while Greece’s latest bailout standoff stirred some headlines, markets are rather calm. People are getting over Greece, and once this latest episode sunsets, uncertainty should fall further. This echoes the broader theme of falling uncertainty in Europe this year, which stocks should enjoy.

When Greece gets bailouts—three since 2010—the EU and IMF dole out aid in installments, contingent on Greece fulfilling various reform and deficit conditions. When a tranche is due, the suits descend on Athens to check progress and negotiate with Greek leadership, which is usually behind the pace and loath to cut more, lest they anger the (already angry) populace. Cue a stalemate, jawboning, “Grexit” threats and a ticking clock, before they ultimately kick the can.

Past deadline days fell in mid-summer, and while it’s no different this year—Greece has a €6.3 billion payment due in July—the fireworks started earlier this round. Eurocrats want this all wrapped up soon, before the Dutch parliamentary election in March and ideally at a meeting this Monday. The EU reps want the IMF’s support, too,[i] but as usual, all sides remain far apart.

Commentary

Fisher Investments Editorial Staff
GDP

The GDP Lightning Round

By, 02/17/2017
Ratings544.240741

Get ready  GDP fans—we have a data deluge for you! Though these backward-looking numbers say nothing about future economic growth, they’re still relevant. The media’s reporting shows the prevailing sentiment towards the global economy—useful information for investors. Here are some recent GDP reports, what the media is saying and how, in our view, an investor can best make sense of it all. 

Note: All GDP figures are for Q4 unless otherwise noted.

Eurozone (19-member bloc): 0.4% q/q (second estimate), slower than preliminary estimate of 0.5% 

Commentary

Fisher Investments Editorial Staff
Others

Downgrading Sell-side Research

By, 02/16/2017
Ratings884.0625

Editor's Note: MarketMinder does NOT recommend individual securities; companies referenced herein are merely cited as examples of a broader theme we wish to highlight.

Here is a headline that may soon become endangered: “Big-Name Analyst Lowers Price Target for Widgets-R-Us, Cuts Rating to Sell.” With new regulations coming down the pike and firms increasingly questioning whether these reports are worth the cost, banks and brokerage houses are starting to slash their armies of analysts. You might think this robs investors of informative analysis, but we wouldn’t mourn the loss. While some genuinely good analysis makes the rounds now and then, a lot of it is marketing fluff, and very few reports are actionable for investors—even when the analysis is spot-on, markets usually discount them quickly.

The reports in question are what’s known as “sell-side research”—research produced by financial firms that sell securities, as opposed to “buy side,” which consists of investment managers, hedge funds and other outfits that put investors’ money to work. Buy-side firms generally do research in-house and keep it close to the vest, lest they surrender a competitive edge. Sell-side reports, however, circulate far and wide, often for free—by design.

Commentary

Fisher Investments Editorial Staff
Reality Check

Treasurys in Demand

By, 02/16/2017
Ratings673.985075


“There can be no time, no state of things, in which Credit is not essential to a Nation.” —Alexander Hamilton, Report on a Plan for the Further Support of Public Credit, 1795. (Photo by steinphoto/iStock.)

From Brexit to Trump, 2016 was a year of change—and another big one recently came to light, when the US Treasury’s latest data showed foreign investors were net sellers of Treasury bonds for the first time in over a decade. Not only did China sell off a boodle in an effort to prop up the yuan, the UK, Japan and others reduced their holdings as well. We’re inclined to call this an “interesting observation” and move on, as US investors’ abundant delight to pick up the slack kept yields in check, proving once again that demand is multifaceted and for every seller, there is a buyer. Yet some worry this is only temporary and further reductions in foreign holdings—not just Chinese—will cause yields to spike. However, recent history has repeatedly argued otherwise. Regardless of the source, overall demand for Treasurys remains robust.

Yields Benign While Foreigners Sell

Commentary

Fisher Investments Editorial Staff
Inflation

Mathflation

By, 02/15/2017
Ratings524.605769

It’s baaaaaaaaaaaack! The US inflation rate hit 2.5% y/y in January, the fastest since 2012 and a big jump from December’s 2.1%. Much of the media coverage took the news in stride, a refreshing sign of sentiment’s continued thaw. But there was still a bit of handwringing, with some articles warning of mounting inflation pressures and others fretting the Fed is behind the curve, setting stocks up to suffer as inflation erodes future earnings. We think the more measured commentary has it right. January’s jump isn’t the sinister erosion of purchasing power—it’s just math, an aftereffect of what oil prices did early last year.

At its core, the inflation calculation is pretty simple: Divide current prices by prices a year ago, then subtract 1 and multiply by 100 to convert to percent. When people think about inflation, they tend to overemphasize current prices, while forgetting the denominator is volatile, too—and that sometimes it can have a lot more influence on the inflation rate than current prices. In the UK, for example, January’s CPI actually fell -0.5% from December, but the annual inflation rate sped to 1.8% from December’s 1.6%, because CPI was really low in January 2016. Econ nerd-types call this a distorted base effect.

The quirks behind US inflation in January aren’t quite that extreme, but there is a similar base effect at work. It’s most visible in energy prices, which were the primary force behind January’s jump. Exhibits 1 and 2 show two ways of viewing this—WTI Crude Oil Prices and the energy component of CPI, respectively. Both hit new lows in January and bottomed out in February (colored orange and light blue, respectively), making the denominator for January 2017’s year-over-year calculation very low.

Research Analysis

Fisher Investments Editorial Staff
Reality Check

Market Insights Podcast: Talking Trump and Trade

By, 02/15/2017
Ratings363.222222

In this podcast, we interview Content Analyst Elisabeth Dellinger on recent talk of protectionism, border taxes and trade.

Commentary

Michael Hanson
Trade

Trade Pacts Are Mercantilist

By, 02/15/2017
Ratings804.35

We’ve long said markets love free trade, and we’ll say it again: We’re über pro-trade. But genuine free trade and trade pacts aren’t equivalent. Over time, much of the public has bought into the notion that trade pacts are inherently bullish. They aren’t. They aren’t even essential for free trade. Why anyone believes you need the government to negotiate trade at all is something of a mystery and anachronism to me. International trade isn’t a bulk transaction between nation-states. It is the aggregation of billions of transactions, big and small, from you buying something from a foreign website to manufacturers and retailers sourcing merchandise from abroad. Genuine “free” trade would imply liberation from the machinations of governments, yet it seems headlines and pundits can only muster talk of governments negotiating (read: bickering).

Think back to classical economics, before the days when people fetishized abstract math equations as reality. One of the central issues of the time was Mercantilism: “the economic theory that trade generates wealth and is stimulated by the accumulation of profitable balances, which a government should encourage by means of protectionism.”

That last bit is what matters most for this discussion: “which a government should encourage by means of protectionism.” Ask yourself: what exactly is a trade pact, even if its intention is to promote trade? Why, it’s mercantilism! All a trade pact does is create special relationships between one country and another (or sometimes several). By definition, that favors some nations over others. Many trade pacts have loopholes for “national champions” and sensitive local industries like agriculture and auto manufacturing. Basic mercantilism. Real free trade would be an environment where all countries have a shot to do business with each other, free from government meddling and favoritism.

Commentary

Fisher Investments Editorial Staff
Developed Markets, Politics

Are French Politics Trumpeting Concerning Change?

By, 02/10/2017
Ratings604.116667

All right folks, we interrupt your regularly scheduled media dissection of US politics with a bulletin from overseas: French politics are now rattling investors, too.  With the presidential election about two months away, the far-right Front National’s (FN) Marine Le Pen currently leads polls while pro-euro candidates are in disarray. Her vow to take France out of the eurozone has sparked some nervousness now showing up in bond yields. The gap between 10-year French and German yields has soared in recent days, leading many to fear trouble awaits. Yet it’s fairly normal for volatility to escalate in the run-up to a widely discussed event like this—particularly one that, like the French election, fosters uncertainty. It isn’t a sign of definite approaching trouble. Often, it means stocks have more wall of worry to climb.

As Brexit and Trump taught the world, polls aren’t infallible. Le Pen currently leads a field of 10 candidates, which probably gets her through the first round on April 23, but it doesn’t guarantee her the presidency. If no candidate secures 50% of the vote, the top two finishers have a decisive run-off on May 7. This is where Le Pen—whose 144 presidential commitments include leaving the euro and holding a referendum to Frexit[i] the EU—likely hits trouble.

In local elections last year, many FN candidates sailed through round 1 as the opposition split the vote. In round 2, however, the mainstream Socialists (center-left) and Republicans (center-right) joined forces, and the FN didn’t win a single regional government. Chances are high something similar happens this time, even though Le Pen’s challengers seem disjointed. The Socialists nominated leftist Benoît Hamon, who isn’t expected to contend. Republican candidate François Fillon, a former prime minister and the early favorite, is mired in a scandal over employing his wife when he was a lawmaker. With Fillon doing damage control, independent centrist Emmanuel Macron has picked up support, but many worry his popularity is peaking too early and that the lack of a strong party apparatus behind him will hurt.

Commentary

Fisher Investments Editorial Staff
Trade

Trade Deficits Are Great for America

By, 02/10/2017
Ratings1074.17757


40% of US container traffic moves through Los Angeles’ ports; traffic we can get behind. (Photo by wpd911/iStock.)

We’ve spilled a lot of ink over the years debunking trade deficit myths, but since they don’t go away—and because trade policy is back in the news—once more unto the breach! The ever-present false fear is that trade “imbalances” are bad and unsustainable. But this completely misunderstands trade. It isn’t as if countries that export more than they import—net exporters—are stockpiling IOUs to put countries that import more—like the US—in a disadvantageous position.[i] Both are doing what’s in their best interests, i.e. trade. Besides, those IOUs are US dollars, and the only things US dollars are good for are buying US products, services, investments and paying US taxes. Countries with which the US runs a trade deficit aren’t bleeding America dry. Rather, they’re investing a ton here, supporting future growth and earnings for US firms. Everyone wins.

At its core, foreign trade is really no different from interstate commerce. No one bats an eye about free trade between Texas and California (or between any other states). If one state runs a consistent trade surplus with another state, it isn’t like the exporting state is somehow draining the economic vitality of the importing state. It’s just trading more goods and services for cash. Why? Because the net-exporter state wanted[ii] to sell more and the net-importer state wanted to buy more. That is all! No nefariousness needed or involved. Putting up trade barriers to stop these “imbalances” from occurring would just be silly.

Commentary

Fisher Investments Editorial Staff
Inflation

Mathflation

By, 02/15/2017
Ratings524.605769

It’s baaaaaaaaaaaack! The US inflation rate hit 2.5% y/y in January, the fastest since 2012 and a big jump from December’s 2.1%. Much of the media coverage took the news in stride, a refreshing sign of sentiment’s continued thaw. But there was still a bit of handwringing, with some articles warning of mounting inflation pressures and others fretting the Fed is behind the curve, setting stocks up to suffer as inflation erodes future earnings. We think the more measured commentary has it right. January’s jump isn’t the sinister erosion of purchasing power—it’s just math, an aftereffect of what oil prices did early last year.

At its core, the inflation calculation is pretty simple: Divide current prices by prices a year ago, then subtract 1 and multiply by 100 to convert to percent. When people think about inflation, they tend to overemphasize current prices, while forgetting the denominator is volatile, too—and that sometimes it can have a lot more influence on the inflation rate than current prices. In the UK, for example, January’s CPI actually fell -0.5% from December, but the annual inflation rate sped to 1.8% from December’s 1.6%, because CPI was really low in January 2016. Econ nerd-types call this a distorted base effect.

The quirks behind US inflation in January aren’t quite that extreme, but there is a similar base effect at work. It’s most visible in energy prices, which were the primary force behind January’s jump. Exhibits 1 and 2 show two ways of viewing this—WTI Crude Oil Prices and the energy component of CPI, respectively. Both hit new lows in January and bottomed out in February (colored orange and light blue, respectively), making the denominator for January 2017’s year-over-year calculation very low.

Commentary

Michael Hanson
Trade

Trade Pacts Are Mercantilist

By, 02/15/2017
Ratings804.35

We’ve long said markets love free trade, and we’ll say it again: We’re über pro-trade. But genuine free trade and trade pacts aren’t equivalent. Over time, much of the public has bought into the notion that trade pacts are inherently bullish. They aren’t. They aren’t even essential for free trade. Why anyone believes you need the government to negotiate trade at all is something of a mystery and anachronism to me. International trade isn’t a bulk transaction between nation-states. It is the aggregation of billions of transactions, big and small, from you buying something from a foreign website to manufacturers and retailers sourcing merchandise from abroad. Genuine “free” trade would imply liberation from the machinations of governments, yet it seems headlines and pundits can only muster talk of governments negotiating (read: bickering).

Think back to classical economics, before the days when people fetishized abstract math equations as reality. One of the central issues of the time was Mercantilism: “the economic theory that trade generates wealth and is stimulated by the accumulation of profitable balances, which a government should encourage by means of protectionism.”

That last bit is what matters most for this discussion: “which a government should encourage by means of protectionism.” Ask yourself: what exactly is a trade pact, even if its intention is to promote trade? Why, it’s mercantilism! All a trade pact does is create special relationships between one country and another (or sometimes several). By definition, that favors some nations over others. Many trade pacts have loopholes for “national champions” and sensitive local industries like agriculture and auto manufacturing. Basic mercantilism. Real free trade would be an environment where all countries have a shot to do business with each other, free from government meddling and favoritism.

Commentary

Fisher Investments Editorial Staff
Developed Markets, Politics

Are French Politics Trumpeting Concerning Change?

By, 02/10/2017
Ratings604.116667

All right folks, we interrupt your regularly scheduled media dissection of US politics with a bulletin from overseas: French politics are now rattling investors, too.  With the presidential election about two months away, the far-right Front National’s (FN) Marine Le Pen currently leads polls while pro-euro candidates are in disarray. Her vow to take France out of the eurozone has sparked some nervousness now showing up in bond yields. The gap between 10-year French and German yields has soared in recent days, leading many to fear trouble awaits. Yet it’s fairly normal for volatility to escalate in the run-up to a widely discussed event like this—particularly one that, like the French election, fosters uncertainty. It isn’t a sign of definite approaching trouble. Often, it means stocks have more wall of worry to climb.

As Brexit and Trump taught the world, polls aren’t infallible. Le Pen currently leads a field of 10 candidates, which probably gets her through the first round on April 23, but it doesn’t guarantee her the presidency. If no candidate secures 50% of the vote, the top two finishers have a decisive run-off on May 7. This is where Le Pen—whose 144 presidential commitments include leaving the euro and holding a referendum to Frexit[i] the EU—likely hits trouble.

In local elections last year, many FN candidates sailed through round 1 as the opposition split the vote. In round 2, however, the mainstream Socialists (center-left) and Republicans (center-right) joined forces, and the FN didn’t win a single regional government. Chances are high something similar happens this time, even though Le Pen’s challengers seem disjointed. The Socialists nominated leftist Benoît Hamon, who isn’t expected to contend. Republican candidate François Fillon, a former prime minister and the early favorite, is mired in a scandal over employing his wife when he was a lawmaker. With Fillon doing damage control, independent centrist Emmanuel Macron has picked up support, but many worry his popularity is peaking too early and that the lack of a strong party apparatus behind him will hurt.

Commentary

Fisher Investments Editorial Staff
Trade

Trade Deficits Are Great for America

By, 02/10/2017
Ratings1074.17757


40% of US container traffic moves through Los Angeles’ ports; traffic we can get behind. (Photo by wpd911/iStock.)

We’ve spilled a lot of ink over the years debunking trade deficit myths, but since they don’t go away—and because trade policy is back in the news—once more unto the breach! The ever-present false fear is that trade “imbalances” are bad and unsustainable. But this completely misunderstands trade. It isn’t as if countries that export more than they import—net exporters—are stockpiling IOUs to put countries that import more—like the US—in a disadvantageous position.[i] Both are doing what’s in their best interests, i.e. trade. Besides, those IOUs are US dollars, and the only things US dollars are good for are buying US products, services, investments and paying US taxes. Countries with which the US runs a trade deficit aren’t bleeding America dry. Rather, they’re investing a ton here, supporting future growth and earnings for US firms. Everyone wins.

At its core, foreign trade is really no different from interstate commerce. No one bats an eye about free trade between Texas and California (or between any other states). If one state runs a consistent trade surplus with another state, it isn’t like the exporting state is somehow draining the economic vitality of the importing state. It’s just trading more goods and services for cash. Why? Because the net-exporter state wanted[ii] to sell more and the net-importer state wanted to buy more. That is all! No nefariousness needed or involved. Putting up trade barriers to stop these “imbalances” from occurring would just be silly.

Commentary

Fisher Investments Editorial Staff
GDP

Meanwhile, in Non-Politics …

By, 02/08/2017
Ratings924.201087

Have you heard the one about how global politics are going topsy turvy, creating massive uncertainty for stocks? So did we. Yet after all the Executive Orders, tweets, polls and scandals, markets finished last week up a smidge, looking past the noise—and, based on all the data that have come out these last couple weeks—at a growing global economy. Yes, while headlines dwelled on sociology, plenty of good economic news flew under the radar, providing a timely reminder that investors shouldn’t overemphasize presidential politics as a market driver. Hence, we present a brief tour of recent data you may have missed.

US

Q4 GDP expanded 1.9% annualized, down from Q3’s 3.5% and missing expectations for 2.2%. Growth is growth, and Q4 happened to be the second-fastest growth of the year, but the miss caused many to look for clouds in the silver lining. They found it in exports, which fell -4.3%, causing pundits to fear the strong dollar is finally taking a toll. Dig a bit deeper, however, and exports’ plunge amounts to a hill of beans … soybeans, that is. Soybean exports surged in Q3, as poor weather wrecked harvests in South America, artificially inflating Q3 GDP. That normalized in Q4, creating some drag.

Commentary

Fisher Investments Editorial Staff
Personal Finance, Into Perspective

What Dividends Don’t Deliver

By, 02/07/2017
Ratings1103.763636

Editor's Note: MarketMinder does NOT recommend individual securities; companies referenced herein are merely cited as examples of a broader theme we wish to highlight.

All right dear MarketMinder reader, true or false: Stocks with high dividend yields are safer than regular common stocks. If you answered true, read on. If you answered false, you are correct, but still, read on so you can confirm why you were right. We frequently hear and read about investors who seek dividend stocks solely because of their yield. They seem “safer” because you seemingly get the best of both worlds: the stock’s growth plus a payment back to you. However, this is a derivation of the capital preservation and growth myth, which unfortunately doesn’t exist.[i] Neither, in the investment world, does true “safety.” There is nothing magical about stocks with high dividends—believing they are a “safer” option can be a damaging mistake.

The myth behind high-dividend stocks’ “safety” is alluring. A dividend can feel like a buffer against daily market volatility, for even if stocks are flat or drop a bit, you still receive the dividend. If the stock goes up, it may feel like a bonus. Moreover, dividends are seemingly logical candidates to provide cash flow. So why not load up on them?

Research Analysis

Fisher Investments Editorial Staff
Into Perspective

MarketMinder Podcast: November 2016 – Energy Update

By, 12/12/2016
Ratings113.545455

MarketMinder’s editorial staff sits down with Fisher Investments Capital Markets Analyst Brad Rotolo. (Recorded 11/3/2016)

Research Analysis

Austin Fraser
Into Perspective

A Political Update From Korea

By, 12/08/2016
Ratings404.0875

From Brexit and Trump to Italy, Brazil and the Philippines, 2016 has been a year of political upheaval and theatrics. And it isn’t over yet. South Korean President Park Geun-hye is embroiled in an influence peddling scandal that has outraged the country and likely numbered her days in office. She has offered to step down from office in April 2017—10 months before her term is slated to end—but lawmakers in the National Assembly instead introduced an impeachment bill, which gets a vote Friday December 9. While Park’s political fall looks inevitable, Korea’s political issues needn’t derail its other positive drivers. For global investors, whether or not you own any Emerging Markets stocks, this is another lesson in the importance of thinking long-term and not getting hung up on short-term events.

The movement against Park appears more about her actions (which you can read all about here), not a broader distaste with the government or the state of society. After decades of chaebol (Korea’s huge, family-run mega conglomerates/corporate fiefdoms) dominating political decisions and the economy, corruption has emerged as the societal cause du jour (see this summer’s draconian corruption bill), and Park appears a victim of the times. The scandal also coincides with some economic softness, as a slowdown in global trade hit export-oriented businesses hard. In response, the country’s largest sectors—which account for a fifth of GDP and employ nearly 15% of the workforce—have undergone significant corporate restructuring. More recently, scandals at several chaebol only further weighed on sentiment.

South Korea has also faced some geopolitical uncertainty in recent months. Besides long-running issues with North Korea, which has made progress in its nuclear program, new tensions with China have arisen as South Korea recently deployed an advanced US missile system. In addition, Donald Trump’s victory made many call into question the future of Asia’s trade relationship with the US given his campaign rhetoric and dismissal of the Trans-Pacific Partnership. There is also a potential domestic political headwind, as the legislature’s opposition party favors tax hikes, with eight different proposals put in the supplementary budget bills. With one of the world’s stronger fiscal positions (40% debt to GDP), such a move makes little economic sense, but the negative fallout is likely short term. 

Research Analysis

Brad Rotolo
Reality Check

What Does OPEC’s Production Cut Mean for Oil?

By, 12/01/2016
Ratings694.086957


There’s more where that came from. Photo by yodiyim/Getty Images.

At long last, the Organization of the Petroleum Exporting Countries (OPEC) reached an agreement to cut production on Wednesday. While details are scarce, comments from oil ministers indicate the group will cut oil production to 32.5 million barrels per day (Mbpd), from recent levels of 33.5 Mbpd. Despite the hype, however, the change is basically window-dressing. It probably won’t much alter global supply or improve the outlook for Energy firms. Their earnings are tied to oil prices, which likely remain lackluster for the foreseeable future (albeit with short-term volatility).

This is OPEC’s first official action of this sort since oil began crashing in 2014. OPEC surprised markets that November by declining to cut production, as had been widely expected at the time. Oil supplies were growing briskly, primarily due to new output from US shale production, which got a boost from developments like horizontal drilling and hydraulic fracturing. The resulting oversupply led to the last two years of oil weakness. With Wednesday’s agreement to cut production, OPEC is arguably moving back to its traditional role of attempting to target a price range for oil.

Research Analysis

Scott Botterman
Into Perspective, Reality Check

Italian Referendum

By, 11/30/2016
Ratings554.036364

In a year where populism has swept the ballot box, is Italy next? On December 4, the country will hold a referendum on whether to reform the size, powers and appointment process for Parliament’s upper house, the Senate. If the referendum is approved, the Senate’s powers would be greatly curtailed and size reduced. It would shrink from 315 members to 100, the government would no longer have to win a Senate confidence vote, fewer measures would require Senate approval and senators would be appointed by Italy’s Regional Councils instead of directly elected. If passed, it would foster government stability and make it easier to pass badly needed reforms. But if it fails, many fear it will destabilize Italy’s pro-euro government, potentially propelling anti-euro populists to power and raising the risk of a domino effect across the eurozone. In our view, however, fears of broader market impact are likely overstated.

Prime Minister Matteo Renzi proposed the referendum to mitigate the Senate’s ability to block legislation and increase the Italian government’s stability, through elimination of one confidence vote. However, he also indicated his government will step down if the referendum is defeated. Opposition parties, such as the Five Star Movement (M5S), are against the referendum, as they believe it gives too much control to the Prime Minister. Many believe a Renzi resignation could give M5S an opening to enter the national government.

Italy doesn’t allow the publication of polls 15 days prior to an election or referendum, but the last polls indicated the “No” vote was ahead by about three points. PredictIt, a betting website similar to the late, great InTrade, puts the odds of the “No” vote prevailing at ~80%. But as US elections and the Brexit vote showed, polling and prediction have been unreliable lately. The considerable number of undecided voters (~20%) also suggests any poll isn’t conclusive.

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What We're Reading

By , The Wall Street Journal, 02/24/2017

MarketMinder's View: “Lost in the speculation about the Trump administration’s expected business-friendly policies were better-than-expected corporate earnings. With most S&P 500 companies having posted results for the final three months of 2016, it is confirmed that the biggest U.S. companies have started a new growth streak. More good news is expected in coming quarters, too. Fourth-quarter earnings are expected to log an increase of 4.6% from the same period a year ago, according to FactSet. That would mark the second consecutive quarter of year-over-year growth.” Yep. This is all strong, fundamental support for stocks. Though, that support’s continuation doesn’t depend on fiscal stimulus and corporate tax reform. Actually, the House’s present tax ideas seem to create more losers than anything, and markets might be better off without them. As for valuations, a forward P/E of 17.6 doesn’t mean trouble. Valuations aren’t predictive. Spiking valuations can indicate extreme sentiment shifts, but that isn’t evident in P/Es’ extremely gradual drift higher.

By , The Telegraph, 02/24/2017

MarketMinder's View: That force, supposedly, is an epic leadership shift from growth stocks to value stocks, and it is based solely on relative valuations and a strong belief in mean reversion. Trouble is, mean reversion is not a market driver, and averages do not exert gravitational force. You must have a strong, fundamental thesis to believe value stocks will outperform growth, and we don’t see one. Value usually does best just after a bear market, when they’ve been hammered so hard that earnings expectations are super easy to beat. Late in a cycle, after profits have recovered, value stocks have a hard time maintaining strong earnings growth, and investors’ preference shifts to growth stocks with more sustainable profits. Considering we’re eight years into a bull market, we’re at the time when growth shines bright. Value will have its day in the sun, but it probably comes after the next bear, when you probably want to own it the least because it appears to be hemorrhaging uncontrollably.

By , The New York Times, 02/24/2017

MarketMinder's View: We really hoped the headline was a joke and the article would be all about how economies don’t have ceilings and “potential GDP” is an academic construct with no set definition and no practical use in the real world. Alas, this ticked only the “potential GDP is squishy” box, then spent a lot of time trying to figure out whether the US had reached its growth limit for this cycle. In addition to falling prey to the ceiling myth, it also erred by focusing on labor as the sole input to growth. But it isn’t, and hiring doesn’t drive expansion. Economies have three basic inputs: labor, technology and capital. Even if labor were maxed out (it isn’t), it wouldn’t really matter as long as capital were flowing freely (it is) and technology were bringing efficiency gains (it is).

By , Bloomberg, 02/24/2017

MarketMinder's View: We regularly encounter commentary boasting that cannabis is America’s next great cash crop and a once-in-a-lifetime opportunity for investors to get in on the ground floor. We’ve always found that argument pretty hazy, and this regulatory tug of war is a big reason why. It’s also a big reason the fledgling industry can’t really access bank financing, necessary for broad expansion. We’d hate to see investors get too high on this only to see their portfolio go up in smoke. (Also we sort of have a theory that if the stuff is ever legalized federally, Big Tobacco will morph into Big Pot and take the industry over. Economies of scale and whatnot. But that isn’t an investment recommendation, just a far-fetched hypothesis.)

Global Market Update

Market Wrap-Up, Thursday, February 23, 2017

Below is a market summary as of market close Thursday, February 23, 2017:

  • Global Equities: MSCI World (+0.2%)
  • US Equities: S&P 500 (+0.5%)
  • UK Equities: MSCI UK (+0.7%)
  • Best Country: New Zealand (+1.9%)
  • Worst Country: Ireland (-0.9%)
  • Best Sector: Telecommunication Services (+0.8%)
  • Worst Sector: Materials (-0.4%)

Bond Yields: 10-year US Treasury yields fell 0.04 percentage point to 2.38%.

 

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.