Commentary

Fisher Investments Editorial Staff
Commodities

Thoughts on the Oil Bounce

By, 09/01/2015

Oil prices jumped for a third straight day on Monday, capping a 22.7% rise in WTI crude since 8/26.[i] Headlines cited two developments to explain Monday’s jump: OPEC’s claim that it “stands ready to talk to all other producers” about maybe doing something to achieve “fair and reasonable” prices and a downward revision to the US Energy Information Administration’s estimate of year-to-date US output. Read past these soundbites, however, and it doesn’t appear anything has materially changed. We suspect oil’s rise is another dead cat bounce[ii], not the start of a sustained rebound, keeping Energy firms pressured for the foreseeable future.

Over the past few months, investors have seized on any chatter about an emergency OPEC meeting to address weak oil prices as a harbinger of production cuts. Monday’s missive—in the introduction to OPEC’s August bulletin—did not address any such meeting, and OPEC remains slated to meet next on December 4. Nor did the statement contain any hints about OPEC cutting output, and it seems beyond speculative to translate any part of it as “will slash production to reduce the global supply glut.” Here is the salient passage (boldface ours):

“As the Organization has stressed on numerous occasions, it stands ready to talk to all other producers. But this has to be on a level playing field. OPEC will protect its own interests. As developing countries, its Members, whose economies rely heavily on this one precious resource, can ill afford to do otherwise. Cooperation is and will always remain the key to oil’s future and that is why dialogue among the main stakeholders is so important going forward. There is no quick fix, but if there is a willingness to face the oil industry’s challenges together, then the prospects for the future have to be a lot better than what everyone involved in the industry has been experiencing over the past nine months or so. Only time will tell.”

Commentary

Fisher Investments Editorial Staff
Corporate Earnings, Media Hype/Myths

Parsing Profits

By, 08/31/2015
Ratings234.695652

Recession. In economics, it refers to a sustained period (commonly measured as two straight quarters or more) of reduced output, commerce and a general widespread malaise. Thankfully, this isn’t the case right now in most of the world, but some suggest we’re in a different kind of recession—a “profits recession,” in which a period of mildly lower US corporate profits allegedly bodes poorly for stocks. As evidence, they point to falling S&P 500 earnings in Q2 and expectations for another drop in Q3—widely known information at this point, and largely baked into stock prices. Moreover, these seemingly dreary numbers have some key mitigating factors, and the overall profit picture is better than most presume. Corporate America should continue providing fundamental support for stocks.

With 490 S&P 500 companies reporting, aggregate Q2 earnings growth is estimated at -0.7% y/y. But Energy firms’ -55.4% year-over-year drop bears most of the blame. All other sectors except Industrials enjoyed rising profits, and excluding Energy, aggregate Q2 earnings growth rises to 5.9% y/y. Some also fret the second straight quarter of falling revenues, the first such slide since 2009. Scary! But this also stems from Energy firms, whose sales fell -31.8% y/y. Factoring out that whopping drop, and aggregate S&P 500 Q2 revenues jump from a -3.4% drop to 1.5% y/y growth. We aren’t in an earnings or revenues recession. We’re in an Energy recession, which isn’t a recession. (See Exhibit 1)

Exhibit 1: S&P 500 Q2 Earnings and Revenue Year-Over-Year Growth

Commentary

Fisher Investments Editorial Staff
Behavioral Finance, Market Risks, Market Cycles

Dry Powder Doesn’t Pay

By, 08/31/2015
Ratings284.035714

For nearly two years, pundits argued a correction was overdue and investors should keep powder dry to wait for a better buying opportunity. That theoretical opportunity technically arrived Monday and Tuesday, when world stocks and the S&P 500 officially entered correction territory, falling more than -10% from their most recent peak. After the Dow plunged 1,000 points in Monday’s opening minutes, a rush to trade caused outages at a couple big online trading platforms. Yet anecdotal evidence suggests more folks were clamoring to sell than buy, illustrating a valuable lesson: Waiting for stocks to go on sale might sound like a winning tactic, but it is exceedingly difficult to execute in the heat of the moment, when emotional instincts will likely work against you.

Unlike the last time global markets corrected (in 2012), many seasoned analysts and observers have come forth and proclaimed stocks are on sale right now. But still, even with waiting for one and with analyst counsel, it seems investors overall just don’t react to a 10% discount at the NYSE the way they would at Bullock’s or Woolworths. Consumers love low prices. So in theory, investors with idle cash should welcome stock market declines. But instead of lining up for door-busters, many flee. They don’t see it as a temporary discount. Recency bias, presently fed by 2008 recollections, makes folks extrapolate the recent past forward, believing even worse times are ahead. For all the sage “stay cool” advice out there, many analyses of recent activity explore whether this is September 2008 or October 1987 all over again. Some claim China’s selloff is a financial crisis in the offing and warn markets can go far lower. Others noted stocks still aren’t cheap. Even where the verdict was inconclusive, the tenor and ghosts raised would have lured investors to some very fearful places. And with fear comes fear of more losses, something humans are hard-wired to feel much more acutely than gains. Thus the drop turns into a classic “fight or flight” moment, and for many, flight (or paralysis) wins. Hence, the paradox: The very sale many investors said they wanted arrived, but it still doesn’t appear they wanted in.

This behavioral pattern is fairly typical of corrections. Fear and stock prices are negatively correlated. The further stocks fall, the more fears rise, turning it into a missed opportunity. Consider the scary stories circulating as this bull market’s five prior corrections bottomed. The first ended on 2/8/2010, one day after former Fed head Alan Greenspan told “Meet the Press” stocks’ quick drop was “more than a warning sign.” Employment was still plunging, and most feared a double-dip recession. Greece was reeling, fueling fears it would take down the euro and maybe the world. Greece was also the word on 7/5/2010, the second correction’s final day. Double-dip fears persisted as UK unemployment soared. In the US, analysts warned the charts resembled the Great Depression.

Commentary

Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths

Stocks Don’t Need More QE

By, 08/28/2015
Ratings584.008621

In light of recent market volatility, some have suggested not only delaying a Fed rate hike—but bringing back quantitative easing (QE)! The logic? Stocks rose during QE and are now officially flat since it ended, thus markets must need a monetary drip feed—and the central bank should consider bringing it back. This is a case of correlation without causation, in our view. We believe QE is actually an economic depressant, not the stimulant many claim, and resurrecting it would probably do more harm than good.

While it’s true QE coincided with great returns, many drivers (economic, political and sentiment) move markets—not just monetary policy. One theory posits that by lowering long-term interest rates—and squashing yields—QE drove investors from bonds to stocks. Another says the Fed’s funny money went into stocks directly, propping up the bull. We see a couple issues with these hypotheses. The first misunderstands why folks hold fixed income. Most investors generally own stocks for long-term growth purposes and bonds to lessen short-term volatility and provide cash flow (there are exceptions, of course, but overall and on average, this is how investors operate). Most bond investors likely won’t jump to an entirely different (and more volatile) asset class if Treasurys yield next to nothing—they would likely just seek a higher-yielding fixed income security (e.g., corporate bonds). Fund flows since Bernanke introduced QE in November 2008 show equity inflows have trailed bond inflows throughout this bull market. (Exhibit 1)

Exhibit 1: Monthly Net New Cash Flows for Equity and Bond Mutual Funds

Commentary

Monte Stern
Into Perspective

Income and Wealth Distribution: Overlooked Basics

By, 08/28/2015
Ratings184.25

(Editors’ Note: Income inequality remains a hot topic, and many wonder how efforts to combat it might impact the economy and markets. We’ve written occasionally on why such efforts would be a solution in search of a problem: Most studies on income distribution fail to account for demographics, taxes and other mitigating factors. Our guest columnist, Monte Stern, has conducted significant research on this topic, and we think his insightful findings present an unusual and fascinating way to think about income distribution—a view you typically won’t get from most major outlets, which we’ve found forsake nuance for sensationalism and soundbites.

For all the bluster in Washington and on the campaign trail, as you’ll see from Mr. Stern’s analysis, very little needs to be done about income distribution from an economic perspective. Hence, that our gridlocked government is unlikely to advance legislation targeting this issue any time soon is actually quite ok for markets. Yet governments of all political stripes have a long history of advancing popular legislation, regardless of the actual economics underpinning it. (See the Tariff Act of 1930, for just one famous example.) If every politician had access to universally correct economic thinking, it still wouldn’t mean they would act on it—an important reason why we believe politics can be a key driver for markets.

As always, MarketMinder endorses no political views and favors no political party. We don’t believe you can analyze markets and economics through a biased lens. The views below are the opinion of the author, not Fisher Investments or the MarketMinder editorial staff. We simply enjoyed the analysis and thought you would, too.)

Commentary

Fisher Investments Editorial Staff
US Economy

How to Tell False Hope From Rational Optimism

By, 08/27/2015
Ratings1184.055085

Investors got some relief Wednesday as the S&P 500 rallied 3.9%, snapping a painful string of declines.[i] Only time will tell whether the correction has turned or another leg down lurks, but if nothing else, the big day provides a good reminder: Stocks move fast, up as well as down, underscoring the importance of staying patient at times like this—particularly when the longer-term outlook for markets remains positive. We believe it does, but not for many of the reasons you might have seen in the financial media this week. Several outlets based their optimism on backward-looking or misinterpreted indicators, like employment or consumer confidence. We don’t want to rain on anyone’s parade, but in our view, these aren’t reasons to be bullish, and overemphasizing them can lead you to a precarious place when this bull market’s end does finally arrive. Again, we think the economic outlook remains strong, but it’s important to discern between false hopes and rational optimism about actual, forward-looking fundamentals.

In the US, pundits seized on consumer confidence (up to a seven-month high in August), July’s rising home sales, rising wages and low unemployment. UK pundits cited Q2’s GDP reacceleration, rising bonuses outside the financial sector, a retail confidence survey and evidence of an August hiring uptick. All good news! But all are either backward-looking (coincident at best) or anecdotal. None predict the economy’s future, in America, Britain or anywhere else.

Let’s take them one by one, starting with employment—the ultimate late-lagging indicator. Conventional wisdom often says hiring boosts consumption, which boosts hiring, creating a virtuous cycle of growth. But the data disprove it. The last recession bottomed in June 2009. GDP resumed growing the next quarter. Yet payrolls continued falling through February 2010. Hiring also continued after the economy peaked in Q4 2007. Some claim an America near “full employment” must be in the driver’s seat, but we were basically at full employment when the last two bear markets began. In the Tech bubble, stocks peaked in March 2000, when US unemployment was 4%. (It fell to 3.8% the next month, setting up a “slope of hope” for investors to buy into.) In October 2007, when the last bear market began, unemployment was at 4.7%, also lower than today’s 5.3%. Growth drives hiring. Hiring doesn’t drive growth.

Commentary

Fisher Investments Editorial Staff
Into Perspective, Emerging Markets

Corporate America’s View of China

By, 08/26/2015
Ratings994.378788

China continues to preoccupy the financial media, with many casting all the economic growth figures in doubt. We have long been skeptical of the precision of Chinese data, and it seems fair to say transparency is lacking—particularly when you consider the occasional mismatch between national and regional numbers. So it was noteworthy that amid yesterday’s panic-driven volatility, one major American executive sent an email to a well-known market analyst stating that their China business was doing a-ok. (Read The New York Times’ coverage of that here.) Additionally, aircraft giant Boeing announced Tuesday its forecast for Chinese jet demand growth is unchanged, even after the volatility. Now, this is a long-term forecast, but the affirmation is interesting nonetheless. This all gave us an idea: While it is rather opaque, China is a very big economy and key cog in the global supply chain. So one way you may get some real insight into China is to study the commentary of US firms transacting in China—you can benefit from their actual experience.

Below is a collection of commentary from all Russell 3000 firms reporting earnings in the last week that have materially discussed China. We’ve omitted ones where the commentary doesn’t provide anything substantive. The conclusion we reach from reviewing these snippets jives with what we’ve long written: Chinese growth is slowing, but little has changed recently relative to the three-year trend.

These quotations, all derived from FactSet’s CallStreet tool, are a compilation of the most directly China-related remarks made by executives during earnings conference calls in the last week. They are unedited by us, except for highlighting and the occasional bolding, so you can see what we believe are particular points of emphasis. It is possible we unintentionally missed some firms’ remarks or a transcript was not available as of this writing. And we aren’t arguing this is hugely scientific. Our intent here is simple: To give you a largely unfiltered snapshot of Corporate America’s take on China without media speculation or angle. Enjoy.

Commentary

Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths

Reflections on Corrections and China

By, 08/25/2015
Ratings1204.329167

Global markets’ selloff continued Monday, and by day’s end, the MCSI World Index, S&P 500 and many other indexes were officially in correction territory, down -10% or more from their prior peak. The rout started in China, where local stocks fell -8.5% for the day, wiping out all year-to-date gains.[i] As fear grew, the selloff traversed the world, hitting the eurozone (-5.4%), UK (-2.7%) and finally the US (-3.9%).[ii] It is impossible for any human, technical indicator or algorithm to know where stocks will go immediately from here. They could rebound Tuesday, they could bounce around sideways, or they could tumble more—short-term moves are always impossible to predict (or time). But this volatility does look like a classic correction panic, with nothing new or surprising that markets haven’t already fretted for a long time. In our view, this is not a time to sell. We believe this is a time to take a deep breath, stay cool and hang on tight so you don’t miss the rebound, whenever it occurs.

Corrections—short, sharp, sentiment-driven drops of -10% or worse—are uncomfortable and scary, but they are normal in bull markets. With the MSCI World Index down -12.2% since May 21 as of Monday’s close, we now have the sixth correction of this bull market (Exhibit 1). Corrections are emotionally difficult to sit through, but they usually end as suddenly as they begin, and the recoveries are often swift and strong. Enduring these gyrations is the price we pay for bull markets’ strong long-term returns. If you’re investing for long-term growth, riding these ups and downs is likely necessary to reach your goals.

Exhibit 1: MSCI World Index Corrections During This Bull Market

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

Navigating a Choppy Stock Market

By, 08/24/2015
Ratings1114.144144

Keep calm and carry on.

No, we won’t offer any cutesy memes featuring those words and a crown, but that is nevertheless our advice amid a volatile stretch pushing US and global stocks near correction territory. (A correction is a short, sharp, sentiment-driven drop exceeding -10%.) US stocks fell -5.2% Thursday and Friday combined. Global stocks fell slightly less, -4.3%.[i] From their highs, US and global stocks finished last week down -7.2% and -8.5%, respectively. And, Monday morning, stocks opened sharply lower before bouncing. At one point, the S&P 500 Index (price level—not including dividends) registered the first correction since 2012, then bounced back above the threshold.[ii] Whether the S&P or world stocks finish below -10% from their prior peaks or not remains to be seen, but however you measure it, these past few days haven’t been terribly pretty and seem to have unleashed a good solid dose of fear. However, this move has the sharpness, speed and fear-inducing characteristics that typify corrections—not the greedy buy-the-dips, ignore-the-negatives sentiment common when bears begin.

Our next piece of advice: Turn off the financial media.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Market Cycles

Are Recession Rescuers Tapped Out?

By, 08/21/2015
Ratings963.895833

Will the US have the necessary firepower to defend against the next economic crisis? Many have doubts, suggesting policymakers face a “persistent munitions shortage,[i] hamstringing them when the next recession comes. How can the Fed cut interest rates when they’re already near zero? How can they do more quantitative easing (QE) when their balance sheet already has $4.5 trillion? How can Congress pass fiscal stimulus when they’re so gridlocked? How can we even afford it, when debt is at 81% of GDP? Who will rescue us? On the one hand, this says a lot about sentiment: Investors remain preoccupied with fiscal and monetary policy, forgetting business cycles turn naturally and economies can grow organically, without external lifelines—that’s bullish today. But it also makes some pretty big, off-base assumptions about the role and necessity of stimulus when times get tough, needlessly sowing fear.

Fiscal and monetary stimulus can help at a recession’s nadir, when liquidity tightens and demand could use a jump start, but it’s a stretch to say economies need government intervention to return to growth. We reckon the obsession with the Fed and feds comes from the massive wall of fiscal and monetary stimulus enacted in early 2009, which perhaps helped the economic recovery begin faster than it otherwise might have. Chopping interest rates down to zero in December 2008, when interbank lending was all but nonexistent, arguably boosted liquidity and helped credit unfreeze. So did the first round of QE, launched in January 2009, which massively boosted not just bank reserves, but the quantity of money in circulation (unlike successive QE rounds, which largely remained on bank balance sheets). At that time, the financial system had all but stopped, and the Fed helped things get moving again. And Congress’s 2009 American Recovery and Reinvestment Act (ARRA) aimed to create new jobs through fiscal spending. While we can debate how effectively the money was spent, getting money to circulate through a recovering economy is a positive, even if it takes a few spends to find its best use. If demand isn’t coming from the private sector, public spending can help fill the void until households and businesses rediscover their animal spirits.

But all of these, at best, merely accelerated the inevitable recovery. Cycles always turn. Buyers return to financial markets, smelling an opportunity to make a killing when there is blood in the streets. An appetite for risk-taking returns, too—banks feel it and resume lending. Businesses that overcorrected during the downturn, slashing production and inventories, have to raise output to meet even the most modest demand uptick. ARRA, for all its hundreds of billions, didn’t touch vast swaths of the private economy—yet demand returned. A lack of aid doesn’t result in perpetual recession: See the eurozone, which exited recession in Q2 2013. At that point, the ECB had its main deposit rate at zero for a year already, Southern European banks were still deleveraging, and QE was a pipe dream. The 19-member bloc didn’t implement a big fiscal stimulus program to goose growth, either. Indeed, weaker peripheral countries—see Spain and Ireland—actually imposed fiscal contractions. Yet today, they’re now among the eurozone’s top-performing economies. Even Greece resumed growing, without a drop of new public investment. Many called on Germany to put its budget surplus to work and boost public investment to import more from the periphery, but Angela Merkel demurred. Southern Europe grew anyway. Would fiscal stimulus have helped the periphery? Possibly! But these countries clawed their way back without it.

Commentary

Fisher Investments Editorial Staff
US Economy

How to Tell False Hope From Rational Optimism

By, 08/27/2015
Ratings1184.055085

Investors got some relief Wednesday as the S&P 500 rallied 3.9%, snapping a painful string of declines.[i] Only time will tell whether the correction has turned or another leg down lurks, but if nothing else, the big day provides a good reminder: Stocks move fast, up as well as down, underscoring the importance of staying patient at times like this—particularly when the longer-term outlook for markets remains positive. We believe it does, but not for many of the reasons you might have seen in the financial media this week. Several outlets based their optimism on backward-looking or misinterpreted indicators, like employment or consumer confidence. We don’t want to rain on anyone’s parade, but in our view, these aren’t reasons to be bullish, and overemphasizing them can lead you to a precarious place when this bull market’s end does finally arrive. Again, we think the economic outlook remains strong, but it’s important to discern between false hopes and rational optimism about actual, forward-looking fundamentals.

In the US, pundits seized on consumer confidence (up to a seven-month high in August), July’s rising home sales, rising wages and low unemployment. UK pundits cited Q2’s GDP reacceleration, rising bonuses outside the financial sector, a retail confidence survey and evidence of an August hiring uptick. All good news! But all are either backward-looking (coincident at best) or anecdotal. None predict the economy’s future, in America, Britain or anywhere else.

Let’s take them one by one, starting with employment—the ultimate late-lagging indicator. Conventional wisdom often says hiring boosts consumption, which boosts hiring, creating a virtuous cycle of growth. But the data disprove it. The last recession bottomed in June 2009. GDP resumed growing the next quarter. Yet payrolls continued falling through February 2010. Hiring also continued after the economy peaked in Q4 2007. Some claim an America near “full employment” must be in the driver’s seat, but we were basically at full employment when the last two bear markets began. In the Tech bubble, stocks peaked in March 2000, when US unemployment was 4%. (It fell to 3.8% the next month, setting up a “slope of hope” for investors to buy into.) In October 2007, when the last bear market began, unemployment was at 4.7%, also lower than today’s 5.3%. Growth drives hiring. Hiring doesn’t drive growth.

Commentary

Fisher Investments Editorial Staff
Into Perspective, Emerging Markets

Corporate America’s View of China

By, 08/26/2015
Ratings994.378788

China continues to preoccupy the financial media, with many casting all the economic growth figures in doubt. We have long been skeptical of the precision of Chinese data, and it seems fair to say transparency is lacking—particularly when you consider the occasional mismatch between national and regional numbers. So it was noteworthy that amid yesterday’s panic-driven volatility, one major American executive sent an email to a well-known market analyst stating that their China business was doing a-ok. (Read The New York Times’ coverage of that here.) Additionally, aircraft giant Boeing announced Tuesday its forecast for Chinese jet demand growth is unchanged, even after the volatility. Now, this is a long-term forecast, but the affirmation is interesting nonetheless. This all gave us an idea: While it is rather opaque, China is a very big economy and key cog in the global supply chain. So one way you may get some real insight into China is to study the commentary of US firms transacting in China—you can benefit from their actual experience.

Below is a collection of commentary from all Russell 3000 firms reporting earnings in the last week that have materially discussed China. We’ve omitted ones where the commentary doesn’t provide anything substantive. The conclusion we reach from reviewing these snippets jives with what we’ve long written: Chinese growth is slowing, but little has changed recently relative to the three-year trend.

These quotations, all derived from FactSet’s CallStreet tool, are a compilation of the most directly China-related remarks made by executives during earnings conference calls in the last week. They are unedited by us, except for highlighting and the occasional bolding, so you can see what we believe are particular points of emphasis. It is possible we unintentionally missed some firms’ remarks or a transcript was not available as of this writing. And we aren’t arguing this is hugely scientific. Our intent here is simple: To give you a largely unfiltered snapshot of Corporate America’s take on China without media speculation or angle. Enjoy.

Commentary

Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths

Reflections on Corrections and China

By, 08/25/2015
Ratings1204.329167

Global markets’ selloff continued Monday, and by day’s end, the MCSI World Index, S&P 500 and many other indexes were officially in correction territory, down -10% or more from their prior peak. The rout started in China, where local stocks fell -8.5% for the day, wiping out all year-to-date gains.[i] As fear grew, the selloff traversed the world, hitting the eurozone (-5.4%), UK (-2.7%) and finally the US (-3.9%).[ii] It is impossible for any human, technical indicator or algorithm to know where stocks will go immediately from here. They could rebound Tuesday, they could bounce around sideways, or they could tumble more—short-term moves are always impossible to predict (or time). But this volatility does look like a classic correction panic, with nothing new or surprising that markets haven’t already fretted for a long time. In our view, this is not a time to sell. We believe this is a time to take a deep breath, stay cool and hang on tight so you don’t miss the rebound, whenever it occurs.

Corrections—short, sharp, sentiment-driven drops of -10% or worse—are uncomfortable and scary, but they are normal in bull markets. With the MSCI World Index down -12.2% since May 21 as of Monday’s close, we now have the sixth correction of this bull market (Exhibit 1). Corrections are emotionally difficult to sit through, but they usually end as suddenly as they begin, and the recoveries are often swift and strong. Enduring these gyrations is the price we pay for bull markets’ strong long-term returns. If you’re investing for long-term growth, riding these ups and downs is likely necessary to reach your goals.

Exhibit 1: MSCI World Index Corrections During This Bull Market

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

Navigating a Choppy Stock Market

By, 08/24/2015
Ratings1114.144144

Keep calm and carry on.

No, we won’t offer any cutesy memes featuring those words and a crown, but that is nevertheless our advice amid a volatile stretch pushing US and global stocks near correction territory. (A correction is a short, sharp, sentiment-driven drop exceeding -10%.) US stocks fell -5.2% Thursday and Friday combined. Global stocks fell slightly less, -4.3%.[i] From their highs, US and global stocks finished last week down -7.2% and -8.5%, respectively. And, Monday morning, stocks opened sharply lower before bouncing. At one point, the S&P 500 Index (price level—not including dividends) registered the first correction since 2012, then bounced back above the threshold.[ii] Whether the S&P or world stocks finish below -10% from their prior peaks or not remains to be seen, but however you measure it, these past few days haven’t been terribly pretty and seem to have unleashed a good solid dose of fear. However, this move has the sharpness, speed and fear-inducing characteristics that typify corrections—not the greedy buy-the-dips, ignore-the-negatives sentiment common when bears begin.

Our next piece of advice: Turn off the financial media.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Market Cycles

Are Recession Rescuers Tapped Out?

By, 08/21/2015
Ratings963.895833

Will the US have the necessary firepower to defend against the next economic crisis? Many have doubts, suggesting policymakers face a “persistent munitions shortage,[i] hamstringing them when the next recession comes. How can the Fed cut interest rates when they’re already near zero? How can they do more quantitative easing (QE) when their balance sheet already has $4.5 trillion? How can Congress pass fiscal stimulus when they’re so gridlocked? How can we even afford it, when debt is at 81% of GDP? Who will rescue us? On the one hand, this says a lot about sentiment: Investors remain preoccupied with fiscal and monetary policy, forgetting business cycles turn naturally and economies can grow organically, without external lifelines—that’s bullish today. But it also makes some pretty big, off-base assumptions about the role and necessity of stimulus when times get tough, needlessly sowing fear.

Fiscal and monetary stimulus can help at a recession’s nadir, when liquidity tightens and demand could use a jump start, but it’s a stretch to say economies need government intervention to return to growth. We reckon the obsession with the Fed and feds comes from the massive wall of fiscal and monetary stimulus enacted in early 2009, which perhaps helped the economic recovery begin faster than it otherwise might have. Chopping interest rates down to zero in December 2008, when interbank lending was all but nonexistent, arguably boosted liquidity and helped credit unfreeze. So did the first round of QE, launched in January 2009, which massively boosted not just bank reserves, but the quantity of money in circulation (unlike successive QE rounds, which largely remained on bank balance sheets). At that time, the financial system had all but stopped, and the Fed helped things get moving again. And Congress’s 2009 American Recovery and Reinvestment Act (ARRA) aimed to create new jobs through fiscal spending. While we can debate how effectively the money was spent, getting money to circulate through a recovering economy is a positive, even if it takes a few spends to find its best use. If demand isn’t coming from the private sector, public spending can help fill the void until households and businesses rediscover their animal spirits.

But all of these, at best, merely accelerated the inevitable recovery. Cycles always turn. Buyers return to financial markets, smelling an opportunity to make a killing when there is blood in the streets. An appetite for risk-taking returns, too—banks feel it and resume lending. Businesses that overcorrected during the downturn, slashing production and inventories, have to raise output to meet even the most modest demand uptick. ARRA, for all its hundreds of billions, didn’t touch vast swaths of the private economy—yet demand returned. A lack of aid doesn’t result in perpetual recession: See the eurozone, which exited recession in Q2 2013. At that point, the ECB had its main deposit rate at zero for a year already, Southern European banks were still deleveraging, and QE was a pipe dream. The 19-member bloc didn’t implement a big fiscal stimulus program to goose growth, either. Indeed, weaker peripheral countries—see Spain and Ireland—actually imposed fiscal contractions. Yet today, they’re now among the eurozone’s top-performing economies. Even Greece resumed growing, without a drop of new public investment. Many called on Germany to put its budget surplus to work and boost public investment to import more from the periphery, but Angela Merkel demurred. Southern Europe grew anyway. Would fiscal stimulus have helped the periphery? Possibly! But these countries clawed their way back without it.

Commentary

Fisher Investments Editorial Staff
Into Perspective, Politics

Greece Is Having a Good Week

By, 08/20/2015
Ratings174.588235

German Chancellor Angela Merkel and her Vice Chancellor were presumably not giggling over Greek portmanteaus during the German Parliament’s debate on Greece’s bailout Wednesday. Photo by Adam Berry/Getty Images.

Well, don’t look now, but Greece finalized its bailout Wednesday, when Germany’s parliament ratified the deal and the Dutch government defeated an attempt to block it. Eurozone finance ministers gave it one last rubberstamp, and a tidy sum of €23 billion—the first tranche of an €86 billion loan—is on its way to Athens, which will use the money to repay the ECB and IMF, clear government arrears and recapitalize banks. Elsewhere in this Greek week, bank deposits began trickling back in, capital controls eased a tad, and the government (sort of) privatized 14 airports, another key step to meeting bailout terms. So things are going well! For now, that is. We, like most of the world, would love it to be all quiet on the Grecian front, giving markets a break from perpetual crisis mentality.[i] But we aren’t quite there yet, as there are a few speedbumps ahead, any of which could cause another flare-up and perhaps roil investors a bit.

Research Analysis

Elisabeth Dellinger
Quantitative Easing

Happy Birthday, QE

By, 12/02/2013
Ratings633.976191

Five years ago, on Black Friday 2008, quantitative easing (QE) was born. In its quest to battle the deflationary effects of the financial panic, the Fed launched the “extraordinary” policy of buying long-term assets from banks. In exchange, the Fed credited banks’ reserve accounts, believing the banks would lend off these reserves many times over—a big money supply increase to boost growth.

To date, through multiple rounds of (now infinite) QE, the monetary base (M0) has swelled by nearly $3 trillion. Yet this economic expansion has been the slowest in post-war history.

Exhibit 1: Cumulative GDP Growth

Research Analysis

Akash Patel
Into Perspective

Heating Up—A Look at UK Housing

By, 11/27/2013
Ratings124.041667

Is the UK housing market overheating, or is it merely the latest example of froth fears that are detached from reality?

Recent home price data and the UK’s Help to Buy scheme’s early expansion already have some UK politicians and business leaders wondering—some going as far as calling for the Bank of England to cap rising home prices. Taking a deeper look, however, I see a different story: Rapid housing price gains have been concentrated in London. Restricting overall UK housing with more legislation likely won’t fix that, and it probably won’t help spread London’s gains to UK housing elsewhere. More importantly, the fact UK housing gains aren’t widespread tells me a nationwide bubble neither exists nor is particularly probable—even with an expanded Help to Buy program.

While UK housing started slowly improving after Help to Buy began in April, the program has only been lightly used in the early going—suggesting the housing recovery is coming from strengthening underlying fundamentals and isn’t purely scheme-driven. In Help to Buy’s first phase, the government promised to lend up to 20% of a home’s value at rock bottom rates (interest free for five years, 1.75% interest after) to buyers with a 5% down payment—providing up to £3.5 billion in total loans. Only first-home buyers (of any income strata) seeking newly built houses valued at £600k or less could participate. The Treasury began a second (earlier-than-expected) iteration in October, in which it guarantees 20% of the total loan to lenders, instead of lending directly to the buyer. The program was also expanded another £12 billion for buyers purchasing any home (new or not).

Research Analysis

Fisher Investments Research Staff

MLPs and Your Portfolio

By, 11/26/2013
Ratings833.885542

With interest rates on everything from savings accounts to junk bonds at or near generational lows, many income-seeking investors are looking for creative or, to some, exotic means of generating cash flow. Some are turning to a relatively little-known type of security—master limited partnerships (MLPs). MLPs may attract investors for a number of reasons: their high dividend yields and tax incentives, to name a couple. But, like all investments, MLPs have pros and cons, which are crucial to understand if you’re considering investing in them.

MLPs were created in the 1980s by a Congress hoping to generate more interest in energy infrastructure investment. The aim was to create a security with limited partnership-like tax benefits, but publicly traded—bringing more liquidity and fewer restrictions and thus, ideally, more investors. Currently, only select types of companies are allowed to form MLPs—primarily in energy transportation (e.g., oil pipelines and similar energy infrastructure).

To mitigate their tax liability, MLPs distribute 90% of their profits to their investors—or unit holders—through periodic income distributions, much like dividend payments. And, because there is no initial loss of capital to taxes, MLPs can offer relatively high yields, usually around 6-7%. Unit holders receive a tax benefit, too: Much of the dividend payment is treated as a return of capital—how much is determined by the distributable cash flow (DCF) from the MLP’s underlying venture (e.g., the oil pipeline).

Research Analysis

Elisabeth Dellinger
Reality Check

Inside Indian Taper Terror

By, 11/08/2013
Ratings174.294117

When the Fed kept quantitative easing (QE) in place last week, US investors weren’t the only ones (wrongly) breathing a sigh of relief. Taper terror is fully global! In Emerging Markets (EM), many believe QE tapering will cause foreign capital to retreat. Some EM currencies took it on the chin as taper talk swirled over the summer, and many believe this is evidence of their vulnerability—with India the prime example as its rupee fell over 20% against the dollar at one point. Yet while taper jitters perhaps contributed to the volatility, evidence suggests India’s troubles are tied more to long-running structural issues and seemingly erratic monetary policy—and suggests EM taper fears are as false as their US counterparts.

The claim QE is propping up asset prices implies there is some sort of overinflated disconnect between Emerging Markets assets and fundamentals—a mini-bubble. Yet this is far removed from reality—not what you’d expect if QE were a significant positive driver. Additionally, the thesis assumes money from rounds two, three and infinity of QE has flooded into the developing world—and flows more with each round of monthly Fed bond purchases. As Exhibit 1 shows, however, foreign EM equity inflows were strongest in 2009 as investors reversed their 2008 panic-driven retreat. Flows eased off during 2010 and have been rather weak—and often negative—since 2011.

Exhibit 1: Emerging Markets Foreign Equity Inflows

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What We're Reading

By , CNN Money, 08/31/2015

MarketMinder's View: We agree with a couple of tidbits here. For example, we also see recent negative volatility as a correction—not the beginning of a bear market. Also, while stocks stabilized a bit late last week, more volatility could lie ahead—equities can be quite bumpy in the short term, and calling the bottom of a correction is futile, in our view. However, we disagree with the fearful take on the month of September, fed-funds target rate hikes and earnings data. The first two are pure mythology—it is a mere coincidence stocks perform worst (on average) in September, not anything predictive. Fed funds target rate hikes have no history of derailing bull markets, whether they come in September or not. And three, the earnings data cited here are skewed by the Energy sector. Strip out the big, widely known drop in Energy earnings tied to cheap oil and the -0.7% y/y Q2 figure becomes +5.9%. As for the expectations of a -4.1% y/y Q3, you should note that analysts projected very similar figures at this point in Q1 and Q2. They were wrong because they overstated the negative effect of the stronger dollar on revenues and understated the positive effect on costs. For more, see today’s cover story, “Parsing Profits.”        

By , MarketWatch, 08/31/2015

MarketMinder's View: Now, depending on how you interpret this table of interpretations, you may conclude the Fed will hike rates in September, later this year or even next year. However, we strongly recommend against projecting what the Fed will do based on words, words, words alone. As this piece admits, “Some have spoken on Friday, while others last spoke on the issue since June and those remarks may not represent their current stance.” Heck, some of these folks did speak on Friday and even “those remarks may not represent their current stance.” People change their minds all the time, and we’re pretty sure Fed governors are people too. (Like 80% sure.) Already, rate hikes were supposed to come “something on the order of around six months or that type of thing” after QE ended, which would have meant roughly May 2015. Before that, we were told to anticipate hikes after unemployment hit 6.5%, a level pierced in April 2014. Forecasting the Fed is impossible. Fortunately, it isn’t necessary either, since there is no evidence initial rate hikes knock bull markets or economic expansions. Now we (and probably you as well, dear reader) would prefer if the Fed just gets on with it so investors can put this false fear in their rearview mirror, but until that happens, we suggest doing your best to tune out the rate hike noise as best you can.  

By , The Wall Street Journal, 08/31/2015

MarketMinder's View: Those three questions are: When will the Fed raise rates?; did the correction bottom out?; and is the bull market ending? Our answers: we don’t know (and nobody else does either, though, more importantly, initial rate hikes aren’t bearish); we don’t know (and nobody else does either, as we aren’t aware of anyone with a successful track record of timing corrections); and no, not in our view. Bull markets end in one of two ways: they run out of steam as reality can no longer match investors’ euphorically driven expectations or a big, unforeseen negative wipes away trillions of dollars of global GDP. While China certainly is a big, integral part of the global economy, it isn’t in the dire straits many believe—which is also a sign skepticism persists. So while corrections are definitely unpleasant to endure, this isn’t the time to jump out of stocks and wait in cash until volatility passes. For more, see our 8/31/2015 commentary, “Dry Powder Doesn’t Pay.”

By , MarketWatch, 08/31/2015

MarketMinder's View: There are so many problems with this “analysis” that we don’t really know where to begin. Here’s a stab: It’s the Dow, a price-weighted, 30-stock gauge that is a faulty measure of markets. But more problematic is the methodology. That 18-month prediction was conjured like this: Take the 52-week high and the 52-week low. Calculate the number of days between. Multiply by 5.5 because it takes 5.5 days of recovery to per day of decline to reach a new high. Oh and all this only works if the drop was within a 100-day window. Folks, this is going to be very skewed by bear markets. What we just went through was a correction—and we’re presently only about 7% from all-time highs. 7% may sound big but the average quarterly move (up or down) is 5%. It wouldn’t take much to get that 7% back. Finally, the method of calculation here is a complete misuse of market history assuming past patterns are predictive.

Global Market Update

Market Wrap-Up, Monday August 31, 2015

Below is a market summary as of market close Monday, 8/31/2015:

  • Global Equities: MSCI World (-0.8%)
  • US Equities: S&P 500 (-0.8%)
  • UK Equities: MSCI UK (+0.2%)
  • Best Country: Ireland (+1.8%)
  • Worst Country: Australia (-2.0%)
  • Best Sector: Energy (+0.7%)
  • Worst Sector: Health Care (-1.3%)

Bond Yields: 10-year US Treasury yields rose 0.04 percentage point to 2.22%.

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.