Fisher Investments Editorial Staff
Across the Atlantic, Reality Check

How to Break the Brexit Blues

By, 11/17/2017
Ratings383.894737

Based on recent headlines, the UK might not seem ok. Brexit talks are plodding along, leaving business leaders antsy. Conservative Prime Minister Theresa May is facing a rebellion from her own ministers. Projections are bleak on the economic front. Sounds bad! However, in our view, many investors fail to appreciate the UK economy’s strength—a sign of sentiment’s disconnect from reality—which sets up bullish upside surprise.

Brexit and its alleged negative consequences continue influencing just about every major economic and political UK narrative. Talks between UK and EU negotiators seem constantly stalled, frustrating both pols and businesses alike. Domestically, controversy has embroiled UK politics. Two ministers resigned from May’s government recently, prompting speculation that the prime minister has lost control—and rumblings of a leadership challenge have started. 20 Tory MPs have also threatened to revolt against a bill enshrining March 29, 2019 in UK law as the official EU exit date.

Beyond these developments, policymakers and experts bemoan the state of the UK economy. BoE Governor and metaphorical “unreliable boyfriend” Mark Carney said the economy would be “booming” if it wasn’t for Brexit. Analysts worry inflation’s 3.0% y/y rise in October—a repeat of September’s rate, which was the highest in five years—could choke consumer spending, especially since wages rose only 2.2% y/y in the same month (implying they fell in real terms). UK retail sales rose 0.3% m/m in October, beating expectations, but headlines dwelled on the first year-over-year contraction in four years.[i] UK industries have also expressed concern future trade deals could hurt them significantly in the long term. The underlying theme: Things are bad now, and they will only get worse when the UK actually exits.

Fisher Investments Editorial Staff
Finance Theory, Forecasting

Volatility (or Lack Thereof) Isn’t Predictive

By, 11/16/2017

It has been 50 trading days since the S&P 500 fell more than -0.5% in a day.[i] Do you know where your children are? While it’s tempting to think danger lurks under still waters—and financial media provide prompts aplenty—calm periods don’t portend big price movements ahead. Nor do they herald further tranquility. Volatility—low or high; up or down—is incapable of foretelling the future.

Low volatility spans the world. US volatility is low whether you measure it by daily percent moves or the VIX’s “options-implied”[ii] volatility. US stocks’ streak without a half-percent decline is the longest since 1968. Moreover, the S&P 500 has risen every month year to date on a total return basis, a first-ever.[iii] October registered the VIX’s lowest monthly average on record (since 1990). Outside America, European stocks’ VIX—VStoxx—also hit record lows. Japan’s Topix index hadn’t fallen by -0.4% or more in 31 trading days until a recent spate of volatility last Friday. Up to then, the Nikkei VIX was near its lowest in a dozen years. Meanwhile, the MSCI All-Country World Index’s[iv] daily percent moves haven’t exceeded half a percent for a couple weeks. That’s some unvolatility! But none of this tells you about future moves. Stocks aren’t serially correlated. Past price movements, whether volatile or not, don’t affect what happens next.[v] Volatility just describes what already happened. It is a measure of past performance, which is never predictive.

Some argue sanguine stocks in the face of seeming threats—geopolitical, political, central bank-related or otherwise—are dangerously complacent. But markets deal efficiently with all widely known information, including headline fears. Yes, they can be irrational in the short term. But nothing widely feared today is new. Nor should stocks have some automatic reaction to any of the day’s news. While headlines dwell on an event or two, stocks consider everything that’s going on. What if all the other (good) variables simply outweigh whatever headlines are scared of? What if what people don’t talk about happens to be more meaningful (and positive) for future corporate profits?

Fisher Investments Editorial Staff
Media Hype/Myths

The Art of Not Actually Scrapping Trade Deals

By, 11/16/2017
Ratings284.392857

Here are some headlines from about a year ago:

These stories aren’t cherry-picked—in the immediate aftermath of Donald Trump’s surprise US presidential election win, concerns about an approaching wave of protectionism were everywhere. Yet a year later, he hasn’t actually done much on the trade front. To us, this shows the importance of not letting campaign trail talk drive investment decision-making.

When Trump won, investors were largely fearful. Markets generally prefer freer trade, but Trump had talked a big protectionist game during the campaign. He declared other countries are “killing us on trade,” pronounced NAFTA the “worst deal ever” and promised to label China a “currency manipulator” on “day one” of his presidency.[i] Soon after taking office, President Trump appeared to fulfill the worst fears by withdrawing the US from the Trans-Pacific Partnership (TPP), a pending free-trade agreement between America and 11 other nations. But the TPP torpedoing was mostly symbolic. The agreement was likely dead in the water anyway, with both Trump and Hillary Clinton opposed, insufficient popular or legislative support in the US, and ratification roadblocks in other participating countries.

Elisabeth Dellinger
Currencies

A Whole Latte Nonsense About the Dollar

By, 11/10/2017
Ratings804.15625


Which one of these is overvalued? Photo by Elisabeth Dellinger.

Did you hear? The US dollar is simultaneously “11% overvalued” and “5% undervalued.” Weird, right? Well those are the competing conclusions of just two of the many, many outfits spending time trying to calculate whether the dollar is too high, too low or just right. It is largely a fruitless effort: In currencies, there is no such thing as some inherent fair value. The value of a free-floating currency, always and everywhere, is what the market says it is.

Thursday’s online edition of The Wall Street Journal included a rather entertaining chart showing five supranational organizations’ estimates of whether 17 major global currencies are over- or under-valued. It has us half-wondering if people forget currencies trade in pairs, with movement heavily influenced by moves in expected interest rates. Given currencies’ tendency to move with relative interest rates, is the dollar really 11% overvalued, as the Council on Foreign Relations estimates, when US interest rates are among the developed world’s highest? With most observers expecting the Fed to keep gradually hiking interest rates? Or is the market perhaps rationally pricing in those interest rate expectations?[i]

Fisher Investments Editorial Staff
GDP

The Global Economy Keeps on Growing

By, 11/08/2017
Ratings674.223881

Halfway through Q4, countries are releasing Q3 GDP numbers and many research outlets happily note economies are finally growing in sync. Huzzah! Granted, broad-based global growth isn’t necessary for stocks to rise higher—this bull market has run eight years despite weak spots and regional contractions—but it shows how far the expansion has come. While backward-looking, these GDP reports show the global economy was in solid shape entering Q4. More investors realizing this reality could contribute to warming investor sentiment—a bullish development.

North America Is Dealing With Some Natural Disasters

US Q3 GDP rose 3.0% annualized, a smidge below Q2’s 3.1%—the first back-to-back quarters of 3% growth in three years. While headlines called this “impressive growth despite hurricanes,” key areas experienced slowdowns. For example, personal consumption expenditures slowed to 2.4% from Q2’s 3.3%, and trade was also weaker: Exports rose 2.3% and imports contracted -0.8% (compared to Q2’s respective 3.5% and 1.5% rates). This import contraction actually contributes to a higher headline GDP number—a statistical quirk as GDP calculates trade as net exports (exports – imports)—which misses the fact imports represent domestic demand.   

Fisher Investments Editorial Staff
Taxes

Don’t Let the House’s Tax Plan Tax Your Nerves

By, 11/06/2017
Ratings1714.163743

They say life’s only certainties are death and taxes, but we’d add a third: Politicians endlessly debating taxes. This is why we were half-tempted not to write up the House GOP’s shiny new tax proposal for you, dear readers: As much as there is to discuss, the likelihood tax reform happens exactly as this bill envisions is somewhere between zero and close-to-zero. Senate Republicans are set to release their own plan in the next week or two, and both chambers will probably tear into each bill during the legislative process. The final tax bill—if it even gets that far—could have little resemblance to what the House released. And, of course, even that would be subject to debate and change. Hence, we caution anyone against thinking any of this is likely to come to fruition. But what we can do now is use this proposal to illustrate why neither tax hikes nor tax cuts have a predetermined economic or market impact. Simply exploring the fact that all tax changes—whether advertised as hikes or cuts—create winners and losers can help investors understand why there is never much material market reaction. So let’s dive in.

As you have probably seen from the media’s deluge of coverage, the House’s tax plan aims to cut corporate tax rates, adjust the incentives for US-based firms with operations overseas, and streamline the personal income tax code. The corporate tax rate would fall from 35% to 20%, below the international average, but most of the deductions firms use to avoid paying that 35% rate would go away. So-called “pass through” corporations, which includes most small businesses, would see their headline tax rate drop from 39.6% to 25%. Taxation of most foreign profits would cease, replacing the bizarre system where firms pay foreign taxes up-front and defer US taxes until they repatriate the profits. In theory, that removes the incentive to park cash overseas, helping money move more freely. But it isn’t a free lunch: Firms’ “high-profit foreign subsidiaries” (whatever that means) would face a 10% tax.

The personal income tax changes are more complex. Essentially, they reduce the number of tax bands from seven to four, eliminate most itemized deductions, nearly double the standard deduction, and remove the personal exemption. To save three thousand words, here are three pictures.

Fisher Investments Editorial Staff
Monetary Policy

Mr. Ordinary and the Wizards of Constitution Avenue

By, 11/03/2017
Ratings723.930556


Photo by traveler1116/iStock by Getty Images.

The wait is finally over! After months of speculation and DC cocktail bar chatter, President Trump has named his pick for Fed head: Jerome Powell, currently a member of the Fed’s Board of Governors. The Wall Street Journal calls him “Mr. Ordinary,” which is a refreshing change from nicknames implying magic videogame powers, like “Super Mario” Draghi at the ECB or former Fed head “Helicopter Ben” Bernanke. Wall Street-types are already cheering him as more pro-market than his soon-to-be predecessor, economist Janet Yellen, thanks to his private equity background. Those hoping for deregulation like that he served in George H.W. Bush’s Treasury. Republicans like him because he is a Republican. Yet many also view him as being a lot like Yellen, implying he’ll love low rates and extend the status quo. Those are all opinions. Maybe they are valid! But it’s impossible to know today. What central bankers say before taking the helm and do afterward are often quite different, and you can’t know in advance whether it will be “good different” or “bad different.” All we can do is weigh their decisions as they make them.

Fed-watchers will argue you can find clues on Powell’s monetary policy preferences from his public speeches, past writings, interest rate votes and occasional mentions in Fed minutes. We guess the last two, at least, measure actions (to an extent). But they’re incomplete. People thought they had a good read on Yellen when she took office since she had been at the Fed for years, but in reality, we knew next to nothing. This is the Fed’s fault: They keep full transcripts of every meeting and conference call, which would give investors (and senators) a treasure trove of insight—not just into their actions and opinions, but also into the logic, evidence, biases and mindset behind them. Unfortunately, the Fed releases these at a five-year lag.

Fisher Investments Editorial Staff
Others

Mutual Fund Ratings and Past Returns

By, 11/03/2017
Ratings1024.372549

Most people prefer to watch movies that got two thumbs up[i] from the critics. The best restaurants in the world get Michelin stars. Critics award wine “points.” Online shoppers buy top-rated products from top-rated sellers. Higher ratings mean better products, right? So it’s no surprise folks also seek out investments with high ratings—whether measured in stars, medals, “buy” recommendations or something else. In our view, however, relying on these ratings is misguided: Fund ratings don’t aid investors’ decisions, as they are mostly an incomplete analysis of past returns—not predictive.

This isn’t just our opinion. A recent Wall Street Journal investigation found Morningstar mutual fund ratings don’t predict future ratings or returns for said mutual funds.[ii] Highly rated funds usually fall back to earth and/or disappear. To quote:

“Of funds awarded a coveted five-star overall rating, only 12% did well enough over the next five years to earn a top rating for that period; 10% performed so poorly they were branded with a rock-bottom one-star rating. … The Journal’s analysis found that most five-star funds perform somewhat better than lower-rated ones, yet on the average, five-star funds eventually turn into merely ordinary performers.”

Fisher Investments Editorial Staff
Interest Rates, Market Cycles, Into Perspective

Making Sense of Credit Spreads

By, 10/27/2017
Ratings824.262195

This summer, former Fed head Alan Greenspan gave voice to many folks’ fears by stating bond markets were frothy—a bubble was “about to break.” In the intervening two months, headlines piled on, with most pointing to super-low corporate and high-yield bond interest rates as their evidence. This, they presume, has facilitated a record year of corporate bond issuance. But rates alone don’t tell the whole story. Credit spreads provide a frame of reference and a more complete picture when evaluating bond markets. Currently, yield spreads are somewhat tight, but not abnormally so: Tightening credit spreads are normal at this point in the market cycle and can persist for years.

Credit spreads—the difference in yield between government bonds and corporates of the same maturity—are closely watched by bond investors. Corporate bonds nearly always yield more than high-quality sovereign debt—since companies can’t print money and don’t have the ability to tax, they are seen as carrying more default risk. But the perception of risk fluctuates during the market cycle—that’s where credit spreads come in. When spreads are widening, investors are demanding extra compensation for corporates’ increased risk of default—which often coincides with equity bear markets.

The flipside is also true. During expansion, spreads generally tighten across the credit spectrum—from the most highly rated corporates to high-yield or “junk” bonds. Exhibit 1 shows high-yield and corporate spreads during the past couple market cycles. For all the talk of a “bond bubble,” which implies irrational demand and unsupported high prices, spreads were lower for much of the 20022007 equity bull market and the mid-to-late 1990s. Investors then were bidding corporate bonds even higher, relative to Treasurys … soooooo, were bonds in a bubble then, too? Or is it perhaps just normal for credit spreads to narrow as an expansion runs on and investors gain confidence in corporations’ abilities to honor their debts?

Fisher Investments Editorial Staff
Monetary Policy

Word Games With ECB Head Mario Draghi

By, 10/27/2017
Ratings194.342105

If you buy the major media narrative, Thursday morning ECB head Mario Draghi made a watershed announcement. The bank announced it would reduce—taper!—monthly bond purchases from its present €60 billion pace to €30 billion beginning in January 2018. But they also said they would extend the program’s life from its previously scheduled January end to September 2018. Media further latched onto some fuzzy, hedgy language[i] in Draghi’s statement that suggested future policy would be (in Fedspeak) data dependent.[ii] Stocks rose, which media interpreted as markets celebrating the “dovish” beginning of the ECB’s taper. To us, that's a bit perplexing. We never thought ECB tapering was a negative—in our view, that got the impact of quantitative easing (QE) backwards. Moreover, here is some breaking news from 11 months ago: This isn’t new. The ECB did the same thing last December—they just denied it was a taper then, when they didn’t now.

The reason why tapering didn’t—and shouldn’t—torpedo stocks is effectively two-fold: One, the ECB telegraphed this move months ago. Markets don’t wait around for policy announcements to start acting on them—markets anticipate. The fact the ECB did what it hinted at made this largely a yawn. Second, in our view, QE never supported stocks and the economy the way many presumed. While central bankers talked up this “stimulus,” it really discouraged lending. Banks borrow short term and lend long, profiting off the difference (or spread) between them. QE’s long-term bond buying depressed yields. With short-term rates super low already, their buying narrowed the gap between the two. Less profitable lending meant less plentiful lending. People respond to incentives.

By now, you’d think most would have caught on to the notion that taper fears are misplaced. We’ve already seen the US not only taper QE (meaning they reduced the rate of bond purchases), but begin unwinding it slowly.[iii] No calamity ensued; lending sped; the economy grew; stocks rose. Same deal for the UK. Japan’s asset purchases have also (quietly) slowed of late, although BoJ Governor Haruhiko Kuroda hasn’t called it a taper.

Fisher Investments Editorial Staff
Politics, Reality Check

Shut Down Shutdown Fears

By, 10/26/2017

Editors’ Note: Our discussion of politics is focused purely on potential market impact and is designed to be nonpartisan. Stocks don’t favor any party, and partisan ideology invites bias—dangerous in investing.

With Halloween around the corner, frightful things seemingly abound. A ghost from 2013 lurks in the not-too-distant future: a government shutdown. Eek! Both congresspeople and the president alike have hinted at one recently. If the impasse persists—as some headlines are forecasting—the federal government will close a bunch of agencies’ doors come December 8. But before you start worrying, here is a friendly reminder: government shutdowns don’t doom stocks, as markets can do just fine even if Washington decides to close up shop for a bit.

Shutdown chatter has swirled for most of this year as Congress toyed with government funding. Lawmakers reached a late agreement and kicked the can back in May. The White House and congressional leaders—including some notable Democrats—then agreed to a deal in September that kept the government funded through early December. With that deadline now only weeks away, Congress is (unsurprisingly) at odds over several issues, including a border wall, immigration, health care subsidies and hurricane relief. Coming to terms on a spending bill may be a tall order—and no deal means a shutdown.

Fisher Investments Editorial Staff
Politics

‘Repeal and Replace’ Debate No Poison Pill

By, 10/24/2017

One year ago, President Trump and the Republican Party were marching down the campaign trail’s home stretch and promising to repeal and replace the Affordable Care Act. It hasn’t happened yet, as gridlock reigns both in Congress and the GOP. Yet it isn’t for lack of trying. Lawmakers have debated numerous proposals. The House even passed one. And President Trump has chipped at the ACA’s implementation with executive orders. The efforts attracted heaps of media attention, complete with concerns over the potential impact on Health Care stocks—both from repeal (hospitals and health insurers) and stalemate (Pharmaceuticals, Biotech and Medical Devices). However, the chatter hasn’t been a headwind: Health Care stocks have outperformed this year and appear poised to do so looking forward as gridlock continues preventing radical change.

While repeal talk can create uncertainty, stocks are quite good at seeing through the chatter and weighing the probability of change. It has been clear for months that the GOP lacks consensus, helping Health Care stocks move beyond the talk and rise on expected gridlock, as Exhibits 1 and 2 illustrate.

Exhibit 1: A Brief History of ACA Repeal Efforts

Fisher Investments Editorial Staff
Repeatable History, Reality Check

Fun With Fun Facts

By, 10/18/2017
Ratings934.064516


Investment trivia might be useful for quiz night, but not for your portfolio. (Photo by natasaadzic/iStock by Getty Images.)

MarketMinder does not recommend individual securities. The below simply illustrate a broader theme we wish to highlight.

Pub quiz! Here are three fun factoids. What do they have in common?

Fisher Investments Editorial Staff
MarketMinder Minute, Taxes

Market Insights: Tax Reform and Stocks

By, 10/17/2017
Ratings814.08642

In this Market Insights video, we discuss the relationship—or lack thereof—between US tax policy changes and US stock performance.

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Recent Commentary

Fisher Investments Editorial Staff
Across the Atlantic

How to Break the Brexit Blues

By, 11/17/2017
Ratings383.894737

Dour sentiment toward the UK isn’t warranted, in our view. 

read more
Fisher Investments Editorial Staff
Finance Theory

Volatility (or Lack Thereof) Isn’t Predictive

By, 11/16/2017

Low or high, volatility is a distraction.

read more
Fisher Investments Editorial Staff
Media Hype/Myths

The Art of Not Actually Scrapping Trade Deals

By, 11/16/2017
Ratings284.392857

Contrary to election season fears, President Trump hasn’t unleashed a barrage of anti-trade actions since taking office.

read more
Elisabeth Dellinger
Currencies

A Whole Latte Nonsense About the Dollar

By, 11/10/2017
Ratings804.15625

Coffee is one of the most useful substances on earth, but it is not a gauge of currency values.

read more
Fisher Investments Editorial Staff
GDP

The Global Economy Keeps on Growing

By, 11/08/2017
Ratings674.223881

Q3 GDP data show a global economy on firm footing.

read more

Global Market Update

Market Wrap-Up, Thursday, November 16, 2017

Below is a market summary as of market close on Thursday, November 16, 2017:

  • Global Equities: MSCI World (+0.8%)
  • US Equities: S&P 500 (+0.9%)
  • UK Equities: MSCI UK (+0.6%)
  • Best Country: Ireland (+1.9%)
  • Worst Country: Portugal (-0.9%)
  • Best Sector: Information Technology (+1.4%)
  • Worst Sector: Energy (-0.4%)

Bond Yields: 10-year US Treasury yields rose 0.03 percentage point to 2.36%.

 

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.