Fisher Investments Editorial Staff
Into Perspective

(Insert Pun About Volatility and Eclipse Here)

By, 08/21/2017
Ratings74.857143

Obligatory partial eclipse photo. Unlike celestial events, stock markets do not follow set schedules. Photo by Elisabeth Dellinger.

“The past 30 days have been the least volatile of any 30-day period in more than two decades. Only five days during the most recent stretch saw the S&P 500 move by more than 0.5% in either direction, the lowest since the fall of 1995. … The quiet market, measured by the realized volatility—a measure of how much share prices move around—of the S&P 500, has led some to worry that a market storm may be brewing, as peaceful periods in the past have frequently ended in sharp corrections.”

Fisher Investments Editorial Staff
Media Hype/Myths, Others

Household Debt: In Depth

By, 08/21/2017
Ratings304.666667

Nearly a decade after the Financial Crisis’s onset, many pundits accuse American consumers of amnesia—forgetting 2008’s lessons and once again racking up excessive debt. A New York Fed report released last week showed US household debt reached $12.8 trillion in Q2—above Q4 2008’s record of $12.7 trillion. But despite widespread warnings about Americans’ forgetfulness, there is nothing troubling about US household debt now. In our view, household debt isn’t at problematic levels today—and it didn’t cause 2008 anyway.

Let’s start by putting household debt in context. Without it, record highs mean nothing—and with it, today’s worries don’t stand up to scrutiny. Mortgage debt balances—the vast majority of household debt—remain below their Q3 2008 peak and aren’t in the limelight right now. Recent fears center on auto loans, credit cards and student debt. Let’s consider each in turn.

Exhibit 1: Q2 2017 US Household Debt Breakdown, in Trillions of Dollars

Source: Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit for Q2 2017, as of 8/18/2017.

Fisher Investments Editorial Staff
Into Perspective

Terrorism Is Tragic But Markets Are Resilient

By, 08/18/2017
Ratings154.366667

Life goes on at London’s Borough Market weeks after the terror attack there. Photo by Elisabeth Dellinger.

Last Thursday, 13 people were killed and more than 100 injured as terrorists struck in Barcelona and Cambrils, Spain.  The violence continued Friday as reports confirmed two dead and several more hurt in a stabbing in Turku, Finland. In the grand scheme of things, the loss of life overshadows anything investment-related. Now is the time for the living to pay respects to the deceased, count their blessings and remain vigilant against future attacks. For investors, though, remember that terrorism’s historical impact on capital markets is small—terrorists are unlikely to deter markets for long.

Fisher Investments Editorial Staff
Currencies

Currency Fluctuations Don’t Offset Global Investing’s Benefits

By, 08/18/2017
Ratings94.222222

In the short-term, currency swings can have an outsized impact on global market returns. A strong currency, for example, will dampen returns on stocks outside your country. A weak currency will supercharge them. This leads many investors to either try to time currency moves or outright eschew global investing, thinking such currency fluctuations add huge risk. We disagree. While in the near term there can be dispersion created by currency fluctuations, in the longer term, the swings tend to balance out. Currency movement does not negate the benefits of diversifying globally.

This year to date, US investors with a global portfolio are enjoying a solid year. In US dollars, the MSCI World Index is up 12.0% through August 17. In euro, though, the same MSCI World Index is up just 0.6%.[i] In local currency terms—which strips out currency fluctuations by pricing all constituent stocks in their issuing country’s currency—it is up 8.8%.[ii] The difference is currency movement: The euro has strengthened this year against most major currencies, including rising from $1.05 to $1.17 against the US dollar. That rising euro dampened returns on non-euro-denominated assets. Meanwhile, the dollar has weakened against most major currencies, boosting returns in the process.

If you are in euroland, you might look at this with some frustration right now. If you’re American, you are either pleased or fret it will reverse soon. Whatever your take, we counsel patience—currency fluctuations aren’t a call to action. It is commonplace amid bull markets to see currencies cycle from weak to strong to flattish and back. Trying to time them is a fool’s errand.

Fisher Investments Editorial Staff
Investor Sentiment, Into Perspective

The Profit Prophets Were Too Dour (Again!) in Q2

By, 08/18/2017
Ratings594.067797

While most investors and financial reporters seem fixated on summer White House theatrics, Q2 earnings season is quietly wrapping up—and it was a doozy. With 472 S&P 500 companies reporting as of yesterday, Q2 earnings jumped another 10.3% y/y, confounding the many who expected a big slowdown from Q1’s 13.7%.i Now pundits again warn the party is temporary, and that’s just fine by us—it means expectations remain low and probably easy to beat. As Corporate America continues racking up profits and surprising the naysayers, we believe investors have plenty of reasons to become increasingly optimistic and bid up stocks.

When Q1 earnings soared, the popular narrative held that booming Energy earnings were the biggest driver and only temporary, so investors had better get ready for profits to come back to earth. So when Q2 ended, analysts expected earnings to rise just 6.4% y/y.ii Yet with most results in, 73% of S&P 500 companies have beaten expectations, greater than the average of 68% over the last five years. They’ve also beaten by more than usual—6.1 percentage points versus the 4.1 ppt five-year average.iii Needless to say, this isn’t an Energy-only story. Every sector except Telecom reported growth.

Earnings have long been healthier than advertised. It was just difficult to see because Energy’s extreme moves skewed the headline number—first down, then up. When S&P 500 earnings fell for a year and a half in 2015 and 2016, Energy was the culprit. Only once in those six quarters did earnings outside of Energy fall. That broad strength is simply more visible now that Energy is in the plus column.

Fisher Investments Editorial Staff
Media Hype/Myths, Interest Rates, Forecasting

Popping Bond Bubble Fears

By, 08/16/2017
Ratings514.284314


These are the kind of bubbles that make us happy. Photo by mikkelwilliam/iStock by Getty Images.

Are bonds in a bubble? One prominent ex-central banker recently said they are, renewing the bubbly bond jitters that have plagued investors off and on since 2013. While none of those fears came true, some are convinced now is the time to be worried and wonder how it will all play out. However, this concern seems overwrought to us: There is little evidence a bond market bubble exists right now.

Bond bubble talk has been around for years, coming back to the fore whenever anyone high-profile talks it up. Enter former Fed head Alan Greenspan, who made waves for the following comments a couple weeks ago:

Fisher Investments Editorial Staff
MarketMinder Minute, The Global View, Developed Markets

Market Insights: Why Non-US Stocks Likely Take the Lead

By, 08/15/2017
Ratings564.089286

In this Market Insights video, we discuss the eurozone’s broad economic expansion and non-US stocks’ outperformance so far in 2017.

Fisher Investments Editorial Staff
Geopolitics

Stocks’ Calm Isn’t Irrational

By, 08/10/2017
Ratings1024.362745


If you’re watching this, markets are too. Photo by SeongJoon Cho/Bloomberg/Getty Images.

Volatility has been largely absent in recent weeks, much to media’s chagrin. On Tuesday, after President Trump vowed “fire, fury, and frankly power the likes of which this world has never seen before” in response to further North Korean provocations, the S&P 500 had its biggest drop in a month—a whopping -0.2% decline.[i] When the sabre-rattling escalated further Wednesday when Kim Jong-un threatened Guam, the S&P 500 dropped just -0.04%.[ii] Thursday’s drop was larger at -1.4%, but perhaps still not the sort of freakout most assumed an apparent nuclear standoff might cause.[iii] Some argued the calm is because it’s impossible to price in a potential “extinction event.” Others called it a sign of complacency. But in our view, markets are doing what they always do—pricing in all publicly available information, including risks, and weighing probabilities. While stocks can behave irrationally in the very short term, presuming they’re wrong about something is fraught with peril.

Reading into market movement (or lack thereof) is nothing new—we have an informal running series on the topic, marked by titles beginning with “Searching for Meaning in …” The investing world’s tendency to overthink these things seems to stem from an ingrained belief that certain developments should have predetermined market impacts. That ignores the simple truth that short-term market movement can happen for any or no reason. Is there any logical reason stocks should or shouldn’t have fallen less on Thursday than they did on May 18, when the DoJ named Robert Mueller special counsel for the Russia investigation? Trying to assign inherent expected volatility to current events will do nothing but give you a headache.

None of the things investors are allegedly complacent about this week are new. From the debt ceiling to North Korean threats, all have hogged headlines for weeks, months or longer. Individual developments like the “fire and fury” remark and Guam threat might heighten attention on North Korea, but the Hermit Kingdom has been testing increasingly (allegedly) more powerful missiles most of this year. And yet US and world markets have been largely calm and up. Stocks were also up in 2013, when Kim Jong-un announced he considered the 1953 armistice null and void.

Elisabeth Dellinger

This Is Not the Financial Crisis’s 10-Year Anniversary

By, 08/09/2017
Ratings734.547945

Editors’ note: MarketMinder does not recommend individual securities. The below simply represent a broader theme we wish to highlight.

10 years ago today, France’s largest bank froze three hedge funds as subprime-panicked investors fled. Headlines globally are calling this the beginning of the Global Financial Crisis, and at first blush, it certainly has all the trappings. Packaged subprime mortgages, a run on a bank, a liquidity crunch and hard-to-value assets. World stocks slid -7.3% in just 6 trading days when the news broke.[i] But then they bounced. By Halloween, the MSCI World Index was up 6.2% since BNP Day.[ii] That turned out to be world stocks’ peak. US stocks peaked weeks earlier, on October 9. “Why” is always harder to pin down than “what,” but all evidence suggests it’s no coincidence the bear market began as banks started taking the asset writedowns required by FAS 157—the mark-to-market accounting rule—which took effect in November. Subprime and frozen funds are part of the backstory, but in my view, mark-to-market was the catalyst that ultimately destroyed nearly $2 trillion in bank capital. That catalyst no longer exists, as regulators subsequently neutered the rule—something to keep in mind today, as headlines warn a resurgence of allegedly risky debt raises the likelihood of a 2008 repeat.

BNP’s funds weren’t the only ones that imploded in 2007. Two Bear Stearns hedge funds collapsed in June and July, forcing creditors to liquidate some of the funds’ collateral. As The New York Times reported at the time:

Fisher Investments Editorial Staff
Investor Sentiment, Media Hype/Myths

A Prime Way to View the Latest Jobs Numbers

By, 08/09/2017
Ratings664.030303

As August gets going and parents count down the days before school begins, financial media are doing a little cheering of their own about Friday’s “banner jobs report.” Specifically, nonfarm employers added 209,000 jobs in July and the unemployment rate dropped to 4.3%. Many analysts banged on about the political implications of the latest jobs numbers, but we aren’t focused on that here. Rather, we found a less-heralded stat—the prime-age labor force participation rate—more interesting because its trend highlights how sentiment remains below reality, evidence investors’ optimism isn’t universal (never mind euphoric).    

The unemployment rate makes most headlines, but the BLS has dozens of ways to measure US labor markets. One prominent gauge is the labor force participation rate: the percentage of the civilian population, 16 years and older, that is working or actively looking for work. The “prime-age” rate—which focuses on the 25-54 age group[i]—hit 81.8% in July, the highest since December 2010.  

Policymakers often cite this rate when discussing employment trends, and they commonly squawk about its long-term decline. The Obama White House wrote a 47-page paper about falling prime-age males’ labor force participation, and the issue also arose during the 2016 presidential election. More recently, Fed chair Janet Yellen mentioned the falling labor participation rate in broader remarks to Congress about the opioid crisis. Based on the general tone, you might think the workforce has been in perpetual decline. However, the data tell a different story as the slide seemingly stopped about two years ago. (Exhibit 1) While the prime-age men’s participation rate has been flat to up a teensy bit over that period, the total participation rate is clearly trending higher.

Elisabeth Dellinger
Media Hype/Myths, Reality Check

Happy Downgrade Day!

By, 08/04/2017
Ratings664.30303

Six years ago Saturday, Standard & Poor’s downgraded the US from AAA to AA+, which many feared sounded the death knell for US debt, rendering America the next Greece—as if taking an A off America’s credit rating would send buyers fleeing and pave the way for default. It was, on all accounts, a circus. After S&P officially announced the US would join such debt-ridden basket cases as Belgium and New Zealand[i] in the AA+ club that Friday evening, they got in a war of words with the White House—which was all too happy to point out a $2 trillion error in S&P’s math. So the rater scrambled, re-pinned its decision on Congress for taking too long to raise the debt ceiling earlier that week, and made plans to hit the talk show circuit bright and early Monday morning to really whip up the frenzy. Apparently they were successful: The S&P 500 plunged 6.6% that day, and pretty much everyone feared the 21st century’s second financial crisis was here.[ii] Meanwhile China seized the moment, lambasting America’s “debt addiction” and calling for a new global reserve currency. Chicken Little was probably running around, too.

Today it’s clear the sky hasn’t fallen. Uncle Sam didn’t default. Investors didn’t dump US Treasurys en masse. China upped its holdings.[iii] Interest rates didn’t soar. Stocks didn’t implode. Capital markets didn’t have to reorganize around a new safe-haven asset. Nor did pension funds or other institutional investors. The dollar is still tops in the forex reserve world. China’s yuan gained reserve currency status, and almost no one noticed. Through Friday’s close, 10-year Treasury yields are still down 31 basis points since Downgrade Day.[iv] The S&P 500 is up 134.9%.[v] Here, pictures.

Exhibit 1: Downgrades Are Bullish

Fisher Investments Editorial Staff
Media Hype/Myths, Market Risks

From the Annals of Badly Constructed Indicators

By, 08/04/2017
Ratings524.326923

With great computational ability comes the temptation to quantify and compute everything[i]—whether it makes sense to or not. To wit, major newspapers have digitized their catalogs stretching back over a century and made them publicly available—great fun!—but too-clever researchers have mined these archives, seeking to discover patterns they claim measure “partisan conflict” or “policy uncertainty.” And lo, they found the Partisan Conflict Index (PCI) is near record highs—since 1890!—while the US’s Economic Policy Uncertainty Index[ii] (EPUI) is coming off elevated levels but remains above its historical average (since 1985). The conclusion many draw: Presently high partisan conflict and policy uncertainty levels mean the ongoing bull market is sleepwalking its way to trouble. But there are a slew of flaws with these gauges and that interpretation. In our view, markets don’t face the threat proponents presume.

While we don’t disagree partisan conflict is high now, it is worth wondering whether it is really a “record high.” It’s natural to think current events are more important and conflictier than the past—recency bias at work!—but it’s also historically myopic. Is partisan conflict really higher than during the Civil Rights era (when the PCI was near its lows)? The 1960s Civil Rights debate was jam-packed with angst, including 1968’s tumult and riots. While it wasn’t purely partisan, it doesn’t get much more conflicty ... outside war. Speaking of war, what about the Vietnam War era? It’s hard to say the Vietnam-American War didn’t divide the nation. (Relive the memories this fall!) While Nixon (and Ford) eventually got the US out of Vietnam—ending that conflict segment—Watergate was ongoing. Next to that, the Comey hearing is peanuts. (Exhibit 1)

Exhibit 1: More Conflictier Than ...

Christopher Wong
Developed Markets, Across the Atlantic

Chart of the Day: The Eurozone’s Journey From the Abyss

By, 08/04/2017
Ratings804.0375

After several years of being overlooked, it seems like the eurozone is finally getting a little love from the financial press. Headline writers admit the “Eurozone Recovery Is Even Better Than It Looks” and acknowledge the much-maligned monetary union is leading other developed economies’ growth rates. Yet this isn’t breaking news: The eurozone has grown 17 straight quarters and the “recovery” moniker has been officially wrong since 2015. While growth hasn’t been even—some countries officially entered “expansion” territory more recently than others—it is increasingly broad-based. But the growing awareness is a sign sentiment is improving, which we think should help fuel eurozone stocks.

To highlight how far the eurozone has come, consider how the just-released July purchasing managers’ indexes (PMI) figures compare to those from March 2013: the last PMI report before the eurozone began its 17-quarter growth streak.

Exhibit 1: IHS Markit’s Eurozone PMIs, March 2013 vs. July 2017

Fisher Investments Editorial Staff
Currencies

Pssssst—Stocks Don’t Care About the Dollar

By, 08/02/2017
Ratings854.047059

The S&P 500 keeps clocking new highs, while the dollar sags—and predictably, pundits don’t agree whether this is a “despite” or “because of.” Did the weak dollar goose earnings and make stocks happy? Or does it reflect darkening fundamentals that stocks overlook? Sorry but reality is probably more boring: The dollar isn’t a huge earnings driver, and it doesn’t have magic “see the real world” goggles stocks lack. Currencies don’t work like that, and outside of banana republics with unsustainable pegs, we don’t believe they are major market drivers.

Here is a picture of the S&P 500 and trade-weighted US dollar over the last 43.5 years. As you will see, there are times when both rose, times when they both fell and times when they diverged. The correlation coefficient, which is statspeak for “a number showing how much movement in A relates to movement in B,” is -0.15. A correlation of 1 would imply a perfect positive relationship—always moving in the same direction at the same time. A correlation of -1 would imply they always moved in opposite directions. Zero would mean they have no relationship. -0.15 is close enough to zero that you can safely call these two things unrelated. When they move together or opposite, it is coincidence.

Exhibit 1: Stocks and the Dollar Aren’t Going Steady

Source: FactSet, as of 8/2/2017. S&P 500 Price Index and Nominal Trade-Weighted US Dollar Index (Major), monthly, January 1973 – July 2017. Price returns used in lieu of total and major index used in lieu of broad due to data availability.

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Recent Commentary

Fisher Investments Editorial Staff
Into Perspective

(Insert Pun About Volatility and Eclipse Here)

By, 08/21/2017
Ratings74.857143

Stocks’ recent calm doesn’t say anything about whether a correction will strike.

read more
Fisher Investments Editorial Staff
Media Hype/Myths

Household Debt: In Depth

By, 08/21/2017
Ratings304.666667

Americans are borrowing more than ever—but that doesn’t mean another financial crisis looms.

read more
Fisher Investments Editorial Staff
Into Perspective

Terrorism Is Tragic But Markets Are Resilient

By, 08/18/2017
Ratings154.366667

Stocks have historically proven resilient to terror. We expect they will again after attacks in Spain and Finland.

read more
Fisher Investments Editorial Staff
Currencies

Currency Fluctuations Don’t Offset Global Investing’s Benefits

By, 08/18/2017
Ratings94.222222

Currency fluctuations occasionally boost or weigh on returns outside your home country. But don't let this distract you from global investing's much more important benefits.

read more
Fisher Investments Editorial Staff
Investor Sentiment

The Profit Prophets Were Too Dour (Again!) in Q2

By, 08/18/2017
Ratings594.067797

Earnings volatility has been a distraction. Broader markets are healthier than most think.  

read more

Global Market Update

Market Wrap-Up, Monday, August 21, 2017

Below is a market summary as of market close Monday, August 21, 2017:

  • Global Equities: MSCI World (+0.1%)
  • US Equities: S&P 500 (+0.2%)
  • UK Equities: MSCI UK (+0.3%)
  • Best Country: Denmark (+0.8%)
  • Worst Country: Ireland (-0.4%)
  • Best Sector: Consumer Staples (+0.5%)
  • Worst Sector: Energy (-0.3%)

Bond Yields: 10-year US Treasury yields rose 0.02 percentage point to 2.18%.

 

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.