Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths

8.15 Bits of Bad News That Haven’t Broken Markets in 2016 (But Were Supposed to)

By, 07/22/2016
Ratings613.983607


Don’t worry, the authorities are aware of the problem. Photo by Olivia Harris/Getty Images.

Folks remain pretty glum about the current bull market, now more than seven years old and arguably history’s least-loved. Headlines constantly spout warnings about the next big bad for markets, adding to the overall gloom. However, is the hype behind the fear real? Now that we are more than halfway into 2016, here are 8.15[i] stories that were supposed to derail stocks but didn’t—a friendly reminder about markets’ resiliency.

1. US Recession Worries

Fisher Investments Editorial Staff
Emerging Markets

Turkey’s Failed Coup in Broader Perspective: Statista's Infographic

By, 07/21/2016

Last Friday’s failed attempt by a military faction to overturn Turkey’s elected[i] government and President Recep Tayyip Erdoğan is still garnering headlines. At this point, by some reports, Erdoğan’s purge of the alleged rebels totals nearly 60,000, ranging from military leaders to University professors. Obviously, with its failure, the coup’s primary market impact was rendered null and void—leadership change and the associated uncertainty didn’t happen. However, coming on top of recent terror strikes, the Brexit vote and America’s election, it would be easy to get caught up in headlines and presume this coup is a further expansion of the “wild” times we live in. However, the following infographic, which we share courtesy of Statista, might add useful perspective.

From an equity market perspective, Turkey is tiny. It amounts to only 0.1% of the MSCI All-Country World Index (the MSCI World plus Emerging Markets) by market capitalization and less than 1% of world GDP.[ii] We weren’t likely to see major global ripples even if Erdoğan’s government fell.

Moreover, coups d’etat are a fairly regular occurrence in Turkey, as the infographic shows. (Moreover, even this list omits a brief attempted coup in 1963 and an alleged-but-unproven covert coup in 1993.) But also, note the number of coups by decade globally has been in sharp decline since the 1960s. The world is, of course, not devoid of problems. But seen in proper perspective, it never has been and likely never will be. About all you can say is these types of occurrences have become far less common than in the past, and that’s largely for the best. For investors, keeping broader perspective can help you maintain an even keel when scary headlines hit.

Fisher Investments Editorial Staff
Reality Check, Inconvenient Truths

Don’t Be Swayed by Downgrades

By, 07/20/2016
Ratings234.26087

Credit rating agencies continue to be busy, downgrading a record-number of countries this year. Poor old Britain even lost two notches from S&P! Now the Land Down Under is in their sights, causing some to suggest raters are “tightening the screws” on the banking system—presuming a lower-rated Australian Federal government will boost borrowing costs for banks, other firms and states downstream. Here we advise relaxing. Have a Coke. Smile. As ever, raters are acting and jawboning based on flawed assumptions, arbitrary observations, myths and widely known information, none of it actionable for investors.

Rating agencies’ recent downgrades are based on flawed methodology, philosophy and process, which is sort of par for the course for them historically. S&P and Fitch downgraded the UK in the days following June’s Brexit vote, saying Brexit might reduce foreign investment and increase political gridlock. However, bond markets either don’t think these events are likely to come to fruition or don’t agree that they present a credit risk for Britain, as yields have fallen to historic lows since the downgrades amid strong demand at Gilt auctions. There is no evidence Britain relies on “the kindness of [foreign] strangers” to fund its debt.

Soon after, S&P put Australia on negative watch because political gridlock may prevent it from passing measures aimed at reducing its budget deficit, which has ballooned in recent years. But Australia’s net debt-to-GDP ratio—at 18.9%— is much lower than that of the US, UK and all major European nations. The Aussies can easily service their debt. Earlier this year, S&P downgraded Poland after it passed laws S&P claimed weakened key institutions, and all three raters downgraded Brazil to junk status this year amid continued political turmoil and rising debt relative to GDP. But these factors don’t mean these countries’ creditworthiness is imperiled. More political influence over banks and the media isn’t a good thing, but it’s a far cry from being at greater risk of defaulting. As for rising debt, this is a problem only if it increases enough to jeopardize a country’s ability to make debt payments. This is not the case for Brazil, which has a huge piggy bank stuffed with forex reserves. Besides, in each of these cases, the events S&P cites have already happened—markets likely already reflect them.   

Fisher Investments Editorial Staff
Into Perspective

Stocks Don’t Suffer From the Summertime Blues

By, 07/18/2016
Ratings684.360294

Here is a thought exercise. Imagine at the start of 2016, we told you presumptive presidential nominees Donald Trump and Hillary Clinton would fill headlines with bombastic rhetoric, Britain would vote to leave the EU and stocks would suffer a correction. Meanwhile, bank fears would run rampant, high-yield bond defaults would rise and Energy earnings would continue to circle the proverbial bowl. How do you think global stock markets would be faring in mid-July, approximately halfway into the year? Maybe down a bit, or perhaps even a lot? Well, all those things happened, and markets are actually up year-to-date! This is a timely reminder that during bull markets, stocks rise more than fall, and those returns often come in unpredictable spurts—frequently rebuking the fear du jour. Despite these recent gains—and US stocks reaching new highs—folks are already doubting stocks’ rally. In our view, this skepticism is another sign of dour sentiment—negativity that should fade as uncertainty continues abating this year, allowing investors to realize reality is better than they perceive. 

After a volatile yet overall flat stretch lasting more than a year, the S&P 500 clawed its way to a record high last Monday, surpassing its May 2015 high, and has continued climbing. Other US indexes grabbed headlines, too. The Dow Jones Industrial Average also made a new record, and the Nasdaq turned positive for the first time this year. Globally, the MSCI World isn’t quite at new highs,[i] but it too is positive for the year.

Now, new highs in and of themselves are mostly trivia—there is nothing special about reaching a specific index level. They simply represent stocks’ tendency to rise higher over time. However, rather than embrace the good news and cheer stocks’ resiliency, the reaction has largely been skeptical and/or worried.[ii] Pundits have offered an array of flawed explanations for stocks’ recent hot streak. Some believe stock buybacks are pumping up the rally, while others say markets are rising on stimulus hopes from central banks. Dour interpretations suggest markets aren’t properly pricing in recent events (e.g., Brexit) or are getting ahead of themselves (e.g., overheating valuations). However, these doubtful rationales are off base, in our view.

Todd Bliman
Across the Atlantic

More Reasons Than Usual to Doubt UK Consumer Confidence Data

By, 07/14/2016
Ratings1672.209581

These British consumers in Bath don't seem to lack confidence. Photo by Matt Cardy/Getty Images.

In the wake of last month’s surprising “Leave” victory in the UK’s referendum on EU membership, many pundits, policymakers, politicians and media types are speculating the British economy will suffer. It's understandable, given the particularly acrimonious campaign saw “Remain” proponents link a “Leave” vote to a recession. (Unwisely, as some economists have noted.) Now, with the results known, many suggest the data will confirm these suspicions—and are pointing to consumer confidence surveys conducted by GfK and YouGov as evidence supporting their case. Some even suggest the Bank of England was wrong to hold off on cutting rates, largely based on these data. A suggestion: Don’t buy this at face value. Consumer confidence surveys rarely predict actual behavior. What’s more, this one has a huge asterisk rendering it even less valuable than the norm.

Fisher Investments Editorial Staff
Politics

This Week in Global Politics

By, 07/12/2016
Ratings443.897727

The UK Gets a New Prime Minister

Well that was fast! The race to replace David Cameron was supposed to last another nine weeks, as Home Secretary Theresa May and Energy Secretary Andrea Leadsom duked it out in the Conservative Party’s leadership contest. But Leadsom dropped out suddenly over the weekend, after contracting a case of foot-in-mouth disease[i], leaving May with the prize. Cameron will hand his notice to the Queen after Prime Minister’s Questions on Wednesday, May will start her move into 10 Downing Street that evening, and Cameron will go gentle into that good night while perhaps humming a jaunty tune.

May has two main tasks: uniting the Conservatives after a rough Brexit campaign, and overseeing Brexit negotiations. To accomplish the former—and perhaps win over all the Tory voters eyeing UKIP’s populism—she has suggested requiring corporate boards to include workers and consumers and cracking down on foreign acquisitions of UK firms. Pundits are a-tizzy, as these aren’t exactly stereotypical Conservative proposals, but we wouldn’t get too caught up in them. Whether you love or loathe these and other ideas, politicians often talk big, then moderate—especially when they preside over gridlocked legislatures, as May will. The Conservatives’ majority is razor-thin, and those Brexit divisions run deep. Passing significant legislation will be a tall order.

Fisher Investments Editorial Staff
Across the Atlantic, Developed Markets, Market Cycles

Think Global, Invest Global

By, 07/12/2016
Ratings834.060241

Photo by Leonello Calvetti/Getty Images

Monday, the S&P 500 price index notched its first new high since May 21, 2015, capping a challenging streak that tried even the steeliest investors. While global markets have rallied sharply, they haven’t yet reached new highs, likely reminding some of US stocks’ leadership in this bull market—and perhaps spurring  some to wonder if a global approach is worth it. But recent US outperformance doesn’t negate the big benefits a global approach provides. Jumping the global ship now in favor of the US doesn’t make much sense.

Fisher Investments Editorial Staff
Into Perspective

Some Sunshine From Services Surveys

By, 07/08/2016
Ratings1341.932836


At your service! Photo by Hirz/Getty Images.

Good news seems to be in short supply these days. If screaming heads prophesizing doom about the global economy have you a bit rattled—especially in the wake of Brexit, you can take solace in the economic news since. This week saw the release of new PMIs from the US and abroad. The latest word: Service sectors in developed economies globally seem to be chugging along just fine.

First, a PMI primer. Purchasing managers’ indexes (PMIs) are monthly surveys aiming to capture economic activity in a given sector (usually manufacturing or services). Because of their speediness and easy-to-interpret figures—readings over 50 suggests a majority of businesses surveyed grew—pundits frequently cite PMIs as quick-and-handy evidence of economic growth (or lack thereof). However, by no means are they perfect.[i] Businesses fill out these questionnaires based on a limited timeframe (usually about two weeks), and they also only show the breadth of growth, not the magnitude. In short, PMIs are a rough snapshot of trends, not a measure of output.

Michael Hanson
Business in Review

Book Review: Short Ain’t Necessarily Simple

By, 07/08/2016
Ratings1562.384615

Economic Thought: A Brief History -- Heinz D. Kurz (Author), Jeremiah Riemer (Translator)

You can call economic thinking “counterintuitive,” which most economists do. It’s kind of a badge of honor to be part of this brotherhood of thinking that most find inscrutable. I’ve been involved in the study of economics for a long time (though I am no formal economist), and even to this day my interest is piqued by those who—particularly within the academic profession—attempt to write intelligible explanations or histories of the field.

Yet such attempts generally, heroically, fail. At least in the sense that, among the stacks and stacks of books about the basics of economics and its history, most are rigorous and accurate, yet fail to make the basic concepts intelligible to otherwise intelligent people. It’s frustrating because the basic ideas of economics aren’t that difficult. Economic life is something we all do and most or all of it isn’t a secret, nor is it as fantastically difficult as most professors want it to appear (you know, to look smart).

Fisher Investments Editorial Staff
GDP, US Economy

Checking in on US Growth

By, 07/05/2016
Ratings2002.7325

With Brexit dominating headlines and driving most investors to fixate on Europe, many have likely missed recent US economic data. With that in mind, we thought you might benefit from a little data rundown—a rundown that suggests the economy is humming along just fine, and should continue to looking forward. In our view, these cyclical factors are much more important to stocks than the implications of Brexit, which likely take years and years to sort out and are unknowable today.

In its third estimate of US Q1 GDP, the Bureau of Economic Analysis revised growth upward, from 0.8% annualized to 1.1%, more than double the initially reported 0.5%. Admittedly, this is backward-looking and stocks have since moved on, but the prior estimates sparked fears of sluggish US growth. It turns out growth wasn’t quite as sluggish as many previously thought.

More importantly, recent economic data suggest growth is already reaccelerating. Consumption data have been strong. May retail sales rose 0.5% m/m (2.5% y/y). This is a subset of overall consumer spending, but notably, gas station sales contributed on a monthly basis for the third straight month. This suggests gas station sales may soon cease detracting from year-over-year figures—an early sign that oil prices’ drop is poised to fall out of economic data in the near future. On a broader level, the Commerce Department reported real consumer spending jumped 0.3% m/m in May (2.7% y/y), after climbing an upwardly revised 0.8% in April (3.0% y/y). As this accounts for about 70% of total output, it’s a fairly good sign the economy is stronger than many think.

Michael Hanson
Politics, Reality Check

One Simple Investors’ Trick for Navigating Brexit

By, 07/01/2016
Ratings1993.660804

There has been plenty of Brexit fallout. Breaking news seems to hit by the minute: The day after the vote, Prime Minister David Cameron resigns! Monday, Labour head Jeremy Corbyn was struck by a decisive no confidence vote … and then he refused to step down! Thursday, the ostensible frontrunner to be the next PM, Boris Johnson, bowed out of the race after multiple, scathing criticisms! It’s high drama, but we’d advise paying less attention to the bluster and look instead for real fundamental developments. To that end, Spain held an election Sunday that in our view speaks volumes more about what will happen next with the EU, and in stark contrast to all the sensationalism out there.

As we noted in depth here, euroskeptic support didn’t surge in Sunday’s vote—former PM Mariano Rajoy’s People’s Party picked up 14 seats. Importantly, that implies, just a few days removed from Brexit, a nation like Spain isn’t going to fall like a “domino” and directly demand its own referendum. Gridlock prevailed, as did the pan-EU status quo. Both the PP and center-left PSOE are traditionally status-quo parties within Spain, taking turns running the government since 1982 (virtually all of Spain’s history of democracy). Even with still relatively high unemployment and political scandals that eroded support for the PP and PSOE lately, newer, outsider parties like Podemos and Cuidadanos couldn’t capitalize.

So far, short-term sentiment and market pricing have imbibed heavily in all the fear-driven “what if,” “domino effects” the Brexit could one day bring. But the truth is, at this moment, what we have is a large economy voting to eventually leave a trade union within a large economic area. That’s it. Everything else is speculation and short-term hand-wringing, and in the most general sense the global economy is not a lot different today than it was last week. The Spanish election result is a hard piece of fundamental data arguing against all the “what if” fear. Markets are bouncing the last couple days, but it’s impossible to say whether that marks the end of Brexit fears. Maybe turmoil goes on for days more, or even weeks.

Fisher Investments Editorial Staff
Politics, Across the Atlantic

Adiós to the EU?

By, 06/30/2016
Ratings1191.65126

With all the pixels spilled over last Thursday’s Brexit referendum, some things happening on the Iberian Peninsula may have gotten overlooked. However, Spain’s general election was kind of a big deal, given Madrid has been government-free for more than half a year. Besides its importance to the Spanish people, last Sunday’s election also amounts to the only actual evidence to assess claims that Brexit may motivate other nations to follow suit—a potential domino effect threatening the EU itself. Though just one vote, Spain shows worries over voters rejecting the current status quo and political establishment are premature—something investors should keep in mind amid post-Brexit hysteria.

First, a primer on Spain’s political scene: Sunday’s election was necessary because officials couldn’t form a government following last December’s vote. For most of its democratic history, Spanish politics have been dominated by two major parties: the center-right People’s Party (PP) or the center-left Spanish Socialist Workers’ Party (PSOE). However, due to growing dissatisfaction with the political establishment, upstart parties have gained prominence recently, most notably, far-left Podemos and centrist Ciudadanos. December’s parliamentary elections resulted in a hung parliament, for although the PP and PSOE won the most overall votes and parliamentary seats, both fell far short of the magic number necessary (176 seats) to form a government—they would have to form a coalition. The new parties (particularly Podemos) grabbed more seats than ever, yet it was mathematically impossible for either the left-leaning or right-leaning parties to form an ideologically unified government. After months of discussions and political wrangling, nobody could cobble together a workable majority, prompting Spain’s King Felipe VI (largely a figurehead politically) to call for new elections in June.[i] In the lead-up to June’s vote, some speculated Podemos would follow its surprising December performance with an even better showing—perhaps even supplanting the mainstream PSOE as the party of the left.

Yet that didn’t happen. (Exhibit 1)

Fisher Investments Editorial Staff
US Economy

What About America?

By, 06/24/2016
Ratings2343.555556

So far, our post-Brexit commentary has centered on the UK and Europe—the epicenter of Thursday’s vote, and the region with the highest stakes in the eventual outcome. But what about America, the other half of the “Special Relationship?”

The long-term implications for the US are as unknowable today as they are for the UK and Europe. Trade, the primary economic issue, will take time to sort out—both with the UK and the rest of the EU. US-based multinationals with European headquarters in Britain can’t know yet whether they’ll need to up sticks. These are crucial issues, but they are long-term issues. Markets move on probabilities, not possibilities. With so much unknown, it is impossible to discern probabilities today. In time, they will become apparent, but that time isn’t yet here. For now, stay patient, and know nothing changes for US firms doing business in Britain or the EU today. Tellingly, while US stocks fell Friday, they held up far better than markets in the UK and Europe.  There is literally and figuratively an ocean between America and the Brexit saga.

The US and UK share a long history, over a century of strong diplomatic ties, a language and a spirit of self-determination. The Magna Carta is the forefather of America’s Constitution. The Glorious Revolution, which empowered Parliament to check the king’s power, informed America’s own system of checks and balances. The bonds between our countries are undeniable. Yet economically, America and Britain are less intertwined than many perceive. Yes, many businesses operate on both sides of the Atlantic. Many Americans consume British products daily, and vice versa. Yet only 3.7% of US exports last year went to the UK. Only 2.6% of US imports came from Britain.

Todd Bliman
Behavioral Finance

Your Chief Enemy Today Is Likely Yourself

By, 06/24/2016
Ratings2004.005

Maybe you love European politics, and understand Thursday’s Brexit vote inside and out. Maybe you don’t know anything about it and figure the Queen still runs the show. Perhaps you’re really old school and figure Oliver Cromwell is in charge. No matter. This morning you are awaking to scary headlines and sharply swinging markets tied to last night’s UK vote to leave the European Union. (If you want to learn the specifics and what it means and doesn’t mean, click here.) These swings might be triggering strong “SELL” signals in your gut. Maybe it even feels queasy or in knots. Those feelings are natural! But acting on such urges is perilous. Now, during a time of massive volatility, isn’t a time to trade—it’s time for introspection.

Humans are hard wired with the fight-or-flight urge—the uneasy feeling you must “do something” to try to avoid danger. In markets, that urge arises during volatility because of prospect theory (also known as myopic loss aversion). Prospect theory holds that investors feel the pangs of loss more than twice as much as they appreciate an equivalent gain. Then, when fear rises, you get that shot of adrenaline coursing through your bloodstream. Now you think not only that you must do something, but you must do something NOW. This is what’s making you feel uneasy, and driving the urge to take action.

As I wrote to readers five years ago in the hellaciously volatile moments after the US’s credit rating was downgraded amid an acrimonious debt ceiling fight, that urge is not your friend. It is, in my opinion, why legendary investor Benjamin Graham once wrote that, “The investor’s chief problem—even his worst enemy—is likely to be himself.” For long-term investors, controlling emotion and keeping an even keel at times like the present is crucial. With that in mind, here is the strategy I laid out to conquer volatility five years ago, when I gave you my grandfather Dex’s classic-if-redundant advice: “Desperate people do desperate things.” It is apropos today, too:

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Recent Commentary

Fisher Investments Editorial Staff
Into Perspective

8.15 Bits of Bad News That Haven’t Broken Markets in 2016 (But Were Supposed to)

By, 07/22/2016
Ratings613.983607

False fears don’t scare stocks.

read more
Fisher Investments Editorial Staff
Emerging Markets

Turkey’s Failed Coup in Broader Perspective: Statista's Infographic

By, 07/21/2016

A new infographic puts the recent failed coup in Turkey in historical perspective.

read more
Fisher Investments Editorial Staff
Reality Check

Don’t Be Swayed by Downgrades

By, 07/20/2016
Ratings234.26087

Credit rating agencies continue to downgrade sovereign debt, but this doesn’t mean nations’ finances are imperiled.

read more
Fisher Investments Editorial Staff
Into Perspective

Stocks Don’t Suffer From the Summertime Blues

By, 07/18/2016
Ratings684.360294

Amid myriad worrisome headlines, stocks have plowed higher this year.

read more
Todd Bliman
Across the Atlantic

More Reasons Than Usual to Doubt UK Consumer Confidence Data

By, 07/14/2016
Ratings1672.209581

British consumer confidence plunged post-Brexit, but you should approach these data skeptically.

read more

Global Market Update

Market Wrap-Up, Thursday, July 21, 2016

Below is a market summary as of market close Thursday, July 21, 2016:

  • Global Equities: MSCI World (-0.1%)
  • US Equities: S&P 500 (-0.4%)
  • UK Equities: MSCI UK (-0.1%)
  • Best Country: Norway (+1.3%)
  • Worst Country: Ireland (-0.7%)
  • Best Sector: Utilities (+0.4%)
  • Worst Sector: Energy (-0.5%)

Bond Yields: 10-year US Treasury yields fell 0.02 percentage point to 1.56%.

 

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.