|By Charles Riley, CNNMoney, 05/23/2016|
MarketMinder's View: In yet another dire prediction about Brexit’s impact, the UK Treasury estimated economic “shock” and “severe shock” scenarios if Britain voted to leave the EU. Both result in recession, a spike in inflation, a big jump in unemployment and a decline in housing prices, among other terrible outcomes. While this all sounds scary, the methodology and conclusions are quite dubious. For instance, the titular 820,000 job losses does not mean 820,000 jobs would evaporate on June 24. Rather, the Treasury estimates there would be 820,000 jobs fewer than they currently forecast two years from now. Similarly, the 3.6% hit to GDP in the “shock” forecast isn’t a peak-to-trough drop, but a reduction from current baseline forecasts. Those forecasts, like all long-term projections, are a dubious exercise in extrapolating the recent past with straight-line math. The “Brexit” adjustments merely compound the falsehood with arbitrary presumptions (including the presumption that the UK loses all access to the EU’s single market, which is not a foregone conclusion). We don’t have a dog in the Brexit fight, and we aren’t saying leaving the EU would have no impact, but it is predominantly sociological, and the economic aspects will move so slowly that there should be minimal (if any) surprise power over markets. For more, see Todd Bliman’s 5/20/2016 commentary, “Brexit, and the Creative Art of Misinformation.”
|By Nelson D. Schwartz, The New York Times, 05/23/2016|
MarketMinder's View: All right folks, time to put aside your personal preferences aside and look at this piece through a politically agnostic lens—bias is blinding. Though this article focuses on the presumptive GOP presidential nominee Donald Trump, you could very well swap his name with likely Democratic presidential nominee Hillary Clinton (and update their policy differences as necessary). The result is mostly the same: The president faces checks on his or her power—that’s by design. Now we aren’t saying the president is simply a figurehead, because as this piece notes, presidents have leeway in appointing people to regulatory agencies, and those regulators don’t always have Congressional oversight—but even where that is true, their impact is marginal (and often hamstrung by the wonderfully slow-moving bureaucracy that is our civil service). More sweeping change must go through Congress, and broader global changes (e.g., the decline of coal as an energy source) won’t be affected at all by who’s sitting in the Oval Office. Keep that in mind whether you cheer or fear any candidate’s campaign pledges. For more, see our 2/9/2016 commentary, “Presidential Change has Limited Range.”
|By Paul Vigna, The Wall Street Journal, 05/23/2016|
MarketMinder's View: Well, yes, but. We wholeheartedly agree bulls don’t die of old age, and past bear markets have had a range of proximate causes. But in general, bull markets die for one of two reasons. One, they run out of steam as expectations get too stretched, whether due to euphoria or complacency—this is what happened in 2000, when euphoric investors couldn’t fathom the Tech Bubble popping. Or two, a big but little-noticed negative wallops trillions off global GDP—the case in 2008, when the unintended consequences of accounting rule FAS 157 (mark-to-market accounting) shaved nearly $2 trillion off bank balance sheets and the feds’ haphazard response sparked panic. Here is one thing bull markets do not die of: “starvation.” Fund flows don’t drive stock returns, and there is no such thing as a net exodus from stocks, ever, because every share sold is by definition a share bought. Though trying, we caution investors from committing the common mistake of extrapolating recent flat returns into the future—bull market returns often come in starts and clumps, rather than a steady, even uptrend. For more, see our 4/29/2016 commentary, “Flat Past Returns Don’t Foretell Future Flatness.”
|By Gretchen Morgenson, The New York Times, 05/23/2016|
MarketMinder's View: We present this piece not for any explicit forward-looking market takeaways, but because it sheds important light on the financial crisis’s aftermath and the government’s actions, something all investors should understand. It will be up to the courts to decide whether the Treasury’s ongoing seizure of Fannie Mae and Freddie Mac’s profits—which was contrary to the terms of the initial bailout in 2008—was illegal. And the future of these agencies is anyone’s guess, particularly with a new presidential administration taking over in January. That said: “The significance of these documents, however, goes well beyond the future of housing finance. They demonstrate the perils of allowing the government to act in secrecy. In asking for confidentiality surrounding its actions, the government argued that the release of such documents would roil the financial markets. What seems clearer all the time is that their release will instead help the public understand what the government did here and why.” The awareness and resolution might ultimately help shape the government’s response to the next crisis, whenever that happens.
|By Jeremy Warner, The Telegraph, 05/23/2016|
MarketMinder's View: There are three sections here, but we are focusing on the first one regarding high demand for 50-year bonds, which the article claims is a signal economic growth and market returns will be dismal for decades. It is likely nothing of the sort. Rather, we strongly suspect it is yet another side effect of ultra-low bond supply, as issuance hasn’t kept up with demand from central banks and financial institutions, which generally require sovereign debt for regulatory purposes. Pension funds also crave long-term debt. As for the issuers of these ultra-long bonds, it makes sense to extend debt maturities when yields are so low—it is just sound fiscal management. Moreover, bond pricing today reflects only supply, demand and sentiment between now and the next year or two. There is no way for markets to accurately assess fundamentals decades out. Investors might be skeptical enough about growth today to think a 2% coupon over 50 years will beat alternatives, but they could easily end up quite incorrect. It is impossible, in our view, to forecast anything beyond 30 months—too much can change.
|By Tim Duy, Tim Duy’s Fed Watch, 05/23/2016|
MarketMinder's View: Err ... We aren’t sure what the titular “Real Thing” refers to here, though we are pretty sure it isn’t Coca Cola. A line in the conclusion states that, “This meeting is the real thing,” but we always knew that the June FOMC meeting was a thing—they are scheduled in advance with plenty of notice. We presume the “real thing” refers to the possibility that the Fed hikes rates for a second time in six months, but that technically is always true, and no amount of Fed-statement-parsing will tell you whether they are more or less likely to hike at any given meeting or conference call. We aren’t saying monetary policy is unimportant, but the amount of pixels spilled in trying to divine how 10 different people with their own set of opinions and beliefs will vote to act is far overwrought. Whether the Fed hikes in June or not shouldn’t jeopardize either the ongoing US expansion or bull market—and that’s what matters most for investors.
|By Ye Xie, Bloomberg, 05/20/2016|
MarketMinder's View: We have seen a lot of speculation about a possible Fed rate hike lately, with opinions all over the map. The take here argues Wall Street doesn’t believe the Fed will hike in June. Count us in the camp that thinks all this hubbub is more noise than real trouble. Folks, we have seen this movie before: The Fed says some things, folks try to read the tea leaves, the Fed says more words, and folks double-down on their speculation. Remember back in 2014 when everyone was certain that the first initial rate hike since 2004 was going to happen in early 2015? That got pushed back to the summer. After all the handwringing and ink spilled throughout the year, it finally happened in December 2015. We kind of see the second rate hike in the same vein—the FOMC will vote to hike when they vote to hike. No deep reads of meeting minutes or dot plots will uncover the Fed’s next move. And considering that the first couple of rate hikes don’t automatically stifle growth, the chatter here seems far overstated.
|By Jeff Cox, CNBC , 05/20/2016|
MarketMinder's View: The beginning of this piece fundamentally misperceives how markets work, offering a slew of data points that suggest everyone from hedge fund managers to retail investors have already gotten out of stocks out of fear as evidence a crash looms. For one, this evidence is flimsy. Fund outflows, for example, do not mean folks have exited stocks—they don’t indicate where the money went. But even if they did exit, history suggests hedge funds and individual investors aren’t great predictors of where markets are headed. You are likely better off following the advice at the end and seeing these sorts of data as loose indicators sentiment is overly dour.
|By Peter S. Goodman, The New York Times, 05/20/2016|
MarketMinder's View: Look beyond the title and this extensive piece details the many different opinions and interpretations swirling around the “Brexit” debate. We don’t have a dog in this fight—Brexit is mostly a sociological matter masquerading as an economic one—and, as a reminder, taking a side invites bias, blinding in investing. The anecdotes and interviews here make compelling arguments for why Britain should or shouldn’t stay in the EU, but from an investing point of view, we caution folks from concluding that a “stay” or “leave” decision is automatically good or bad. While both camps have taken liberties with the “facts” surrounding Britain’s exit from the EU, we can boil it down to two results: the status quo or wait-and-see. For the latter case, Britain doesn’t automatically pick up its bags and leave on June 24—it will have two years to negotiate an exit, diminishing the potential of any big surprise sneaking up on anyone. With the vote just about a month away, the rhetoric will only get louder and shriller from here. Follow it if you like that sort of thing, but please be sure and apply a healthy dose of skepticism about the economic claims both sides are making. Even if the uncertainty causes some short-term volatility, we don’t believe Brexit packs the type of wallop necessary to derail the current bull market.
|By Ellyn Terry, Atlanta Fed Macroblog, 05/20/2016|
MarketMinder's View: Warning: Wonkish. But also, interesting. This post offers an analysis by income level of the Atlanta Fed’s Wage Growth Tracker—an alternate means of capturing wage growth that tracks the same workers over time to eliminate the impact of older high earners retiring and being replaced by younger, lower-compensated employees. The findings are very interesting and cut against the popular dour sentiment that suggests only high earners are seeing material income growth. Now then, the conclusion of this discusses a connection to inflation, which we think is a bit of a stretch. The link between wage growth and inflation is not nearly so tight as many economists suggest, as Milton Friedman showed years ago.
|By Jill Ward and Scott Hamilton, Bloomberg, 05/20/2016|
MarketMinder's View: Mixed bag here. The notion the UK slowdown isn't related to Brexit is quite sensible, and this statement should put Bank of England Governor Mark Carney's recent comments that Brexit risks recession into context: “‘We don’t have concrete evidence that some of the softening we are seeing now is all referendum-related and uncertainty related, and there is a chance other things are going on.’” But the rest of the piece overthinks what seems most likely to be simple growth rate variability. There isn't any sign Q1's slight growth slowdown and a one month dip in the UK Services Purchasing Managers’ Index (PMI) is worth such fretting—they are each one data point and retail sales’ strong report the other day is one data point to the contrary.
|By Jason Zweig, The Wall Street Journal, 05/20/2016|
MarketMinder's View: Given equity markets have been frustratingly bumpy over the past year, we understand the temptation some investors may have to invest in assets offering a higher yield. Remember, though, that securities with higher yield come with higher risk—that’s the tradeoff. As this article points out, certain closed-end funds holding master limited partnerships (MLPs) sound pretty enticing when they’re in high demand. However, the drawbacks are pretty pronounced: They are heavily concentrated in one sector (Energy, which has been slammed for the better part of two years), they’re illiquid, often leveraged and come with high costs. Even though they seem to be trading at a “discount” now, that doesn’t mean they’re set to rebound—with a global commodity supply glut, Energy’s headwinds look likely to persist. Nothing against these types of industry-specific investments, but you should see that narrow investment for what it is. Too often, brokers sell these as safe bond replacements, which is a joke. As this piece concludes, “No matter what kind of investment someone is flogging, you should always remember that high yield and low risk are like oil and water.”
|By Steve Vernon, CBS Money Watch, 05/20/2016|
MarketMinder's View: Here is some Friday “News You Can Use” on an important topic for long-term, growth-oriented investors: life expectancies. Thanks to the advances in healthcare and technology, folks are living longer, especially compared to previous generations. While this is undoubtedly a positive, it also requires your money to work for you longer—perhaps even much longer than you might initially think. Most life expectancies you see published in the media are based on some sort of average, and as this piece points out, “But if you’ve lived to your 50s or 60s, you’re in a more select group of people who’ve been healthy enough—or lucky enough—to make it that far.” While it may sound great if you wind down your account to zero on your final day, you’re going to be in a really tough spot if you underestimate that projection. For more tips on retirement investing, see our Market Insights blog.
|By Eric Balchunas, Bloomberg, 05/20/2016|
MarketMinder's View: 99.4% of the reason we offer this article is the sheer entertainment value of the tickers included. 0.6% of the reason we offer it is to point out how ridiculous most of these thematic ETFs are—mere invitations to invest in fads and secular trends that aren’t related to the market cycle. But really, if you are going to read this for any reason, do it for the table of silly tickers.
|By David Rogers, The Australian, 05/19/2016|
MarketMinder's View: This is a mish-mosh of mythology. For one, the Fed’s statement yesterday still leans on a June rate hike being “data dependent,” which actually means that if the Fed’s opinion of the data is in line with a hike, then they will hike. This doesn’t mean you can ink in a hike next month. Moreover, rate hikes don’t materially increase the chances of volatility (which is random), and the Northern Hemisphere’s summer doesn’t usually come with a sell-off. Average May-October returns are positive, and they have been positive more often than not in this cycle—sometimes massively so, like 2009.
|By Kate Rooney, CNBC, 05/19/2016|
MarketMinder's View: “‘The U.S. LEI picked up sharply in April, with all components except consumer expectations contributing to the rebound from an essentially flat first quarter,’ Ataman Ozyildirim, director of business cycles and growth research at The Conference Board, said in a statement. ‘Despite a slow start in 2016, labor market and financial indicators, and housing permits all point to a moderate growth trend continuing in 2016.’”
|By Jeff Cox, CNBC, 05/19/2016|
MarketMinder's View: So a Dallas Fed economist published an analysis that concludes (correctly in our view) that the current Fed talks too much and is missing or confusing its audience with long, complicated communications. (Ironically, it contained more than 1,600 words and four Exhibits!) The article concludes policymakers’ communications are frequently misperceived by the public, which mitigates the Fedspeak’s influence on monetary policy outcomes. The report suggests, “A more effective communication strategy for the central bank could be to speak less often and make each speech count by delivering a more focused, cohesive and concise message.” While we entirely, totally, completely agree with that advice, we’d note the issue isn’t policy-related, but rather, that Fedspeak muddles investor sentiment and spreads misperceptions—and possible investor mistakes. That, however, isn’t due to the audience’s attention span or lack of knowledge. RULE: Clarity is a social matter, and it is on the author to be as clear as possible. To that end, consider these truths about Fed policymakers’ communications: 1) They have no cohesive message, despite having more than 10 folks who regularly comment publicly. 2) They create terms that seem ironclad (“data dependent” policy) when they are anything but. 3) They stress certain benchmarks (6.5% unemployment rate anybody?) then ditch them. 4) They unveil new tools we are told are important (the dot-plot for forward policy guidance), but then tell the public they are putting too much weight on them. The public gets a pass for not getting what the Fed means because it’s unclear the Fed has a message to send.
|By Paul Hannon, The Wall Street Journal, 05/19/2016|
MarketMinder's View: Eurozone consumer prices were confirmed at -0.2% y/y in April’s final read, which is leading some to fret falling prices will cause consumers to hold off on spending in anticipation of still-lower prices, creating a vicious cycle of falling prices and cratering consumption. However, it is worth noting that the eurozone’s present 12-quarter-long growth string has been underpinned by consumer spending. All the while, eurozone prices have been either in disinflation, very low inflation or deflation. The deflationary spiral is kind of like the economists’ version of the Loch Ness Monster. You can’t totally disprove it, and folks talk about it a lot, but actually seeing one would be quite noteworthy indeed.
|By Saumya Vaishampayan, The Wall Street Journal, 05/19/2016|
MarketMinder's View: While the Dow is a broken, price-weighted index and we would usually critique this article for focusing on it, we’ll give a pass here as the S&P 500 marks one year without a record on Sunday. It’s been a frustrating, back-and-forth year with a lot of volatility to be sure. But the biggest issue here is acting as if this is predictive or fundamentally driven. This piece snakes through a series of different misperceived “drivers” of the bull—buybacks, earnings, low interest rates, valuations, allegedly “anxious investors”—to suggest the flat returns were justified because the bull market is tired. But the reality is, the flatness seems pretty heavily influenced by a correction—a sentiment-driven move. Of past periods of bull market flatness, most (including this one) were caused by corrections. And in no way, shape or form do past returns or a recent correction indicate trouble or flatness ahead. This all runs the risk of letting past returns influence your outlook, a critical behavioral error.
|By William Mauldin, The Wall Street Journal, 05/19/2016|
MarketMinder's View: We are skeptical of these kinds of long-range forecasts that attempt to model out the impact of one policy change into the far future, because there are far too many variables that could change between now and the end point of the study. But in a more forecastable sense, we are also very skeptical the 12-nation Trans-Pacific Partnership free-trade deal will be enacted. Protectionist rhetoric is running hot and heavy on both sides of the aisle in this year’s US presidential election campaign, and there is virtually no way the deal will be inked before the current government leaves office in January. Large, multilateral free-trade agreements are always hard to see through to reality, and it appears the TPP could become the latest example. Ultimately, though, should it fall through, we’d note it would likely be merely the absence of an added positive and not a surprising new negative with the power to roil stocks.
|By Lucy Meakin, Bloomberg, 05/19/2016|
MarketMinder's View: Sales at UK retailers jumped 1.3% m/m in April, more than doubling the 0.6% estimate. Excluding gasoline, sales were even stronger, rising 1.5% m/m. It’s a strong report that comes after “weak reports from the British Retail Consortium, the Confederation of British Industry and GfK had suggested heightened consumer caution ahead of the June referendum on European Union membership.” Those are all based on confidence surveys, and BoE Governor Mark Carney’s recent statement that a leave victory would raise recession risk hinges on the same culprit—falling confidence. But the thing is, confidence surveys and data attempting to forecast confidence are notoriously unreliable, which this report illustrates pretty well.
|By Jasmine Ng, Bloomberg, 05/19/2016|
MarketMinder's View: The notice that the miner issued here: Low cost commodity production is set to surge, which would send supply higher. This suggests, to both of the big mining firms cited herein, that the extant supply glut relative to demand is likely to persist. This supports our view that the year-to-date rally in relative performance for Materials and Energy firms is unlikely to prove lasting.
|By Staff, BBC, 05/18/2016|
MarketMinder's View: Tuesday, the US Commerce Department massively increased tariffs on a particular type of Chinese-made steel used in car manufacturing, shipping containers and construction to a whopping 522%. US officials claim China is unfairly selling steel at below market rates—“dumping”—in order to gain market share, and the tariffs are designed to level the playing field. Though new US tariffs on select steel imports are a negative, in our view, keep this move in perspective: As the article here notes, China exported only $252 million (with an M) worth of the steel in question to the US—tiny. And this is about just the latest in a long string of very similar fringe moves on steel, solar panels and the like. Protectionism is bad, and a destructive practice. But on this small a scale, it only really matters if it massively spreads and escalates into a full-blown trade war. So while this is worth watching for the potential it grows, a trade war doesn’t look likely anytime in the foreseeable future. Much as some US presidential candidates talk up dinging China if they are elected, such moves cannot be broadly enacted by presidential fiat—assuming they aren’t just hollow promises in the first place.
|By Min Zeng and Ben Eisen, The Wall Street Journal, 05/18/2016|
MarketMinder's View: The yield curve spread—the difference between short- and long-term interest rates—is arguably one of the most predictive measures of future economic trends because of its influence on loan availability. Banks typically borrow short term (deposit accounts, overnight funding, etc.) to fund long-term loans, so long rates exceeding short means lending is profitable. Profitable lending stimulates loan growth, providing capital businesses need to grow. Lately, the yield curve has flattened somewhat, as long rates have fallen, likely in part due to strong foreign demand for US Treasurys. This has caused some to fret future growth may falter, but a little perspective is in order. First, the spread most are citing is 10-year Treasury minus 2-year rates. Banks’ primary funding source isn’t the 2-year, it is more akin to overnight, or fed funds rates. Second, the curve remains positively sloped, and even if it were to briefly become flat or inverted this still doesn’t necessarily spell immediate doom for stocks or the economy. Historically, inverted yield curves are a sign of troubled credit markets, but they aren’t a very good timing tool. Moreover, they are not a silver bullet. There have been false reads—when yield curves inverted, only to reverse course with no recession or bear market following. Finally, there is nothing to say the yield curve will flatten further. This is a lot of overthinking, in our view.
|By Emily Flitter and Steve Holland, Reuters, 05/18/2016|
MarketMinder's View: Note: We support neither side in this year’s presidential campaign, as neither side is “better” for stocks and political bias blinds. With that said, Donald Trump, the presumptive Republican nominee, recently announced he would soon announce a plan to effectively dismantle 2010’s Dodd-Frank Wall Street Reform and Consumer Protection Act, triggering the firestorm of politicized rhetoric this article documents well. But regardless of your views of the legislation overall, no president can dismantle it, or even any part of it, without Congress’ consent. Maybe, just maybe, he can dismantle it if Trump a) wins the White House, b) doesn’t leave this promise on the campaign trail c) aligns his plan with core party interests (which most of his plans to date haven’t) and d) the Republicans retain control of Congress. They currently hold just 54 Senate seats and it’s entirely possible they will hold fewer come January, a factor worth watching. So why announce a plan at all? Because this is what presidential nominees do, laying out their agenda regardless of whether they can actually fulfill their promises. As the campaign continues to heat up, expect to see more comments from candidates that they will do X, Y or Z once in office, but remember, few extreme measures will ever come to fruition. Oh, and finally, let’s consider that both the case for and against Dodd-Frank is massively overstated in the politicized snippets from candidates and politicians included here. Loan growth over the past couple years suggests bankers can function a-ok. And there isn’t anything in this law addressing the actual causes of the crisis, so we’re not sure how one can argue this is a vital protection for the public.
|By Robin Harding and Peter Wells, Financial Times, 05/18/2016|
MarketMinder's View: Good news! Japan’s economy grew 1.7% annualized in Q1, reversing a Q4 contraction and avoiding a recession (based on one widely accepted definition: two straight quarters of negative growth). But the headline number isn’t as strong as it may appear and Q1’s growth spurt likely doesn’t mean Japan’s struggling economy has turned a corner. Consumer spending grew 1.9% annualized, but economists estimate that without the quarter’s extra leap-year day private consumption would have been flat. Net trade (exports minus imports) contributed positively, but only because imports fell more than exports. Private capital expenditures fell -5.3% annualized. And, one of the major positive contributors was government spending, which grew 2.8% annualized. None of this is exactly the hallmark of a vibrant, capitalist economy. In that sense, Q1’s results speak more to Japan’s weakness than its strength.
|By Eduardo Porter, The New York Times, 05/18/2016|
MarketMinder's View: US annualized GDP growth has averaged only about 2% during the current expansion, down from almost 3% from 2001-2007, about 3.5% throughout the 1990s and 4%-5% in prior post WWII expansions. This piece argues that secular slowing calls for a raft of economic reforms, or else it’s likely US growth will slow further in future decades. This is all a wee bit overconfident in the ability of econometrics to actually capture the real economy. They have never done so with precision, and over time it’s likely their accuracy has fallen, as the economy shifts from easier-to-tally production to services. So while some of these proposed reforms are fairly sensible—for example, easing occupational licensing requirements, eliminating restrictive zoning laws and encouraging more business investment—the US economy is already in better shape than this acknowledges. Further, recent growth rates aren’t nearly as low as they may seem on the surface. Combined federal, state and local government spending has fallen since 2009—the only expansion on record in which total government spending detracted from headline GDP. Absent this one factor, growth rates in this expansion basically match 2001-2007. But either way, none of this predicts future growth rates, as it is all backward-looking data, and stocks see through all these quirks and focus on the private sector. Conditions may not be 100% hunky dory right now, but given forward-looking indicators remain positive, growth should continue for at least the foreseeable future. Moreover, persistent pessimism means stocks have a low bar to surpass overly-dour expectations.
|By Jonathan Berr, CBS Moneywatch, 05/18/2016|
MarketMinder's View: Gold has rallied sharply this year, which this piece attributes to underwhelming US Q1 economic data, political uncertainty tied to the election and the fact the Fed hasn’t hiked since December 2015. And hey, who knows, one or all of those could be influencing sentiment for gold. Hey, maybe it even continues! But in our view, this is trivia for long-term investors. Why? It is exceedingly hard to do well in gold relative to stocks over the long run. Since it began trading freely again in 1973, returns have been positive much less frequently than stocks. On a monthly basis, gold is up 50.4% of the time. Stocks? 61.2%. On a rolling 12-month basis? Gold is up 55.6% of the time. Stocks 78.2%. Here is a chart. What’s more, gold has lower average long-term returns than stocks and higher average volatility (standard deviation), and it doesn’t pay interest or dividends. Fundamentally, unlike stocks, whose underlying businesses and profits grow overtime, an ounce of gold will never grow into two or three ounces years down the road. Heck, it won’t even grow into 1.1 ounces. As for gold hedging against uncertainty, there is no evidence underpinning the notion gold is a viable hedge. Whether gold shines or sinks, there are better opportunities for long-term investors.
|By Staff, RTT News, 05/17/2016|
MarketMinder's View: First, the raw numbers: Manufacturing, which makes up nearly three quarters of industrial production, reversed March’s -0.3% m/m decline with 0.3% growth in April. Cooler weather also bolstered Utilities output, which rose 5.8% m/m. Weakness in oil, natural gas and coal production drove Mining’s continued decline—it fell -2.3% this month, and is currently mired in a deep -13.4% y/y slump. But even Energy’s struggles weren’t enough to knock the headline figure negative. Now, industrial production is a pretty noisy data series, and April’s bounce doesn’t mean a ton on its own. If you pair it with recent surveys of factory activity, however, an interesting trend emerges: Manufacturers recorded higher output and more new orders in the last couple months, and now more manufacturing gauges are showing growth. This could signal manufacturing’s soft patch is nearing an end. Heavy industry is a fairly small slice of the US economy, dwarfed by services. But if it has left behind its late 2015 – early 2016 soft patch—even before Energy’s drag dropped out of the data—that could positively surprise many too-dour investors.
|By Howard Gold, MarketWatch, 05/17/2016|
MarketMinder's View: Let’s start by setting aside the sociological aspects of this piece, like speculation about a hollowing middle class, the rise of outside-the-mainstream presidential candidates and Americans supposedly giving up on their future—all irrelevant for investors. The article uses a Gallup poll showing stock market participation at a low of 52% to argue folks are bailing out of the market because they’re simply too poor to save. The data don’t prove it. Conflating aversion to stocks with the inability to save is a fallacy—folks may be investing elsewhere, as the poll makes clear. Just 15% of Americans believe stocks are their best long-term investment; savings accounts and real estate were more than twice as popular. Third, fund managers—hardly cash-strapped—are also trimming equity holdings in response to early-2016 volatility. Taken together, this widespread skepticism about stocks’ return potential is actually bullish! When money managers and retail investors alike are worried, markets often surprise. What’s more, this is a stark illustration of the fact we aren’t at some euphoric market peak, in case you were worried.
|By Patrick Gillespie, CNNMoney, 05/17/2016|
MarketMinder's View: Last year, foreign central banks—especially China’s, Brazil’s and Russia’s—sold $225 billion in US debt, and they’ve followed up by selling another $123 billion in 2016. Referring to the trend as a selloff or “debt dump” implies the sellers are fundamentally concerned about the value of US debt. Now, certainly a few of these countries—mostly oil and commodity-reliant ones like Brazil and Russia—are doing so because of economic conditions at home, but we wouldn’t conflate that with global panic, considering such commodity-heavy countries are a small slice of the world. To us, the bigger story here is the one you can’t write based on these data: For years, folks wrongly feared such a sale of US debt would send rates skyrocketing. Rates are down. If concern about the dollar or US debt were widespread, Treasury bond yields would be moving up, not finding willing buyers looking to lock in the meagre rate of 1.76% for 10 years.
|By Luciana Magalhaes and Rogerio Jelmayer, The Wall Street Journal, 05/17/2016|
MarketMinder's View: Interim Brazilian President Michel Temer is using Dilma Rousseff’s suspension from office (pending impeachment proceedings) to make some changes, such as installing a new central bank chief. Meet Ilan Goldfajn: He holds an economics degree from MIT, ran the Brazilian central bank from 2000 – 2003 and boasts a record of fighting inflation—a welcome skill in a country facing a double-digit rise in prices this year. We wish him luck. More important than the man, though, is a proposed change in how the central bank operates: While it would remain under the umbrella of the Finance Ministry—a government agency, staffed by political appointees—it would enjoy “technical autonomy” in its decisions, instead of working under the thumb of the administration. This is positive: Monetary policy is best insulated from populist pressures and opportunistic politicians. The reform isn’t a silver bullet though—Brazil’s cyclical struggles are likely beyond any central banker’s powers to solve, unless he or she has the power to raise commodity prices, which seems unlikely. As a structural step in the right direction though, we award Temer a wink and a tip of the cap.
|By Anthony Mirhaydari, The Fiscal Times, 05/17/2016|
MarketMinder's View: This article seems pretty flummoxed. On the one hand, it argues retailers are getting pummeled—concluding that “The trend is clear: Americans just aren't shopping.” Then it goes on to express confusion at US April’s US retail sales report, which showed 1.3% m/m growth. So what gives? Is the consumer spent? Is the government fudging the data? Nope. Online sellers like Amazon are snagging market share and selling more than ever. Americans are changing the way they shop, increasingly heading to the computer and specialty retailers rather than the local mall or department store. But overall consumer spending is growing fine, along with disposable income. Pointing to an array of struggling big box stores doesn’t change this. For in-depth analysis on retail’s health, check out our recent article, “The ‘Retail Recession’ Label Doesn’t Fit.”
|By Carl Richards, The New York Times, 05/17/2016|
MarketMinder's View: Here is a fun review of a crucial investment principle: In frightening times, fleeing markets until “things calm down” jeopardizes your financial future in exchange for short-term comfort. By the time the cries of panic subside and it feels safe buy back in, markets will likely be much higher. We know of literally no one who has successfully reached his or her investment goals by selling low and buying higher. The solution: “Instead of doing what fear is making you want to do … remember these three things: You made your portfolio based on your goals. It still matches your goals. If you sell that portfolio now and buy it back later when the markets are better, all you will do is lose money.” Internalizing this lesson in calmer markets could pay dividends when stocks’ inevitable gyrations kick in.
|By Laura Litvan, Bloomberg, 05/17/2016|
MarketMinder's View: Quick disclaimer: We are of course not taking any political side here and offer this solely to point out the investment takeaways. This election season has seen a lot of protectionist rhetoric from all sides—an election regularity, perhaps writ larger this time as pols try to outflank their rivals by one-upping each other with how “pro-jobs” they are. Seeing the popularity of such rhetoric on the presidential campaign trail, many in Congress are following in the footsteps of the three remaining candidates and working to establish their pro-jobs bona fides with voters. This casts a shadow over trade agreements currently in the works—namely the Trans-Pacific Partnership (between the US and eleven other Pacific Rim countries) and the Transatlantic Trade and Investment Partnership (between the US and the EU)—a possibility we’ve long alluded to. Negotiations were already bogged down though, as major legislation rarely passes this close to an election—too controversial. Whether they will get a favorable hearing under the next administration is uncertain, but not out of the question: Candidates regularly move to the middle once elected. Now, this likely means we won’t see an expansion of free trade deals soon, which isn’t great. But it also is merely the absence of a potential positive—not a negative in itself. Enacting protectionism is different, requiring new legislation rather than simply letting an existing deal hang.
|By Staff, Associated Press, 05/17/2016|
MarketMinder's View: An 8.1% m/m spike in gas prices pushed consumer prices up 0.4% (1.1% y/y), winning the lion’s share of credit for boosting headline inflation. That said, the much less volatile gauge, core CPI, continued its low and stable trend, rising 2.1% y/y. Now, some argue the persistence of low inflation means the Fed will stave off interest rate hikes, but we would caution against using any single measure to forecast the decisions of a group with a range of opinions and buckets and buckets of data to consider. Maybe they hike this year, maybe not. At any rate—errrr, regardless, the US economy remains in good shape.
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Market Wrap-Up, Monday, May 21, 2016
Below is a market summary as of market close Monday, May 21, 2016:
- Global Equities: MSCI World (-0.2%)
- US Equities: S&P 500 (-0.2%)
- UK Equities: MSCI UK (-0.7%)
- Best Country: Japan (+0.5%)
- Worst Country: Portugal (-1.7%)
- Best Sector: Materials (+0.1%)
- Worst Sector: Utilities (-0.8%)
Bond Yields: 10-year US Treasury yields were unchanged at 1.84%.
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.