Fisher Investments Editorial Staff
Media Hype/Myths, Reality Check

There Was Never a Trump Rally to Trade

By, 01/18/2017
Ratings104.05

With Trumpmania about to reach fever pitch as the greatest reality show on Earth makes its debut—and all the attention it garners (we can’t get enough!)[i]—the financial press unsurprisingly continues to connect every market gyration to the President-elect’s actions. We documented this phenomenon on the upswing and during the holiday interregnum. Now, with stocks flattening out in the wake of a much ballyhooed Trump press conference and the inauguration nearing, the narrative has flipped. Media is atwitter with fears the Trump Rally has reached its zenith! Hold. Your. Horses. The “Trump Rally” narrative always seemed to us to far exceed what the data supported, and stocks’ latest miniscule -0.2% pullback from January 6’s all-time high to date[ii] seems like markets being markets.

Trump Isn’t Responsible...

Seeing every market move through a Trump lens is an error. Considering his election wasn’t even a glimmer in pundits’ eyes when stocks rallied from February 2016’s correction low, it seems a stretch to presume the rally continuing after the election is all about him. The flat two weeks since a record high likely isn’t a Trump phenomenon either. The rally to new highs since the election could well have occurred if Hillary Clinton won. As we said all last year, the motivating force behind last year’s rally is falling political and economic uncertainty. While there is no counterfactual, it seems highly likely markets would have rallied no matter who won, even if it were Jill Stein, Gary Johnson or Evan McMullin. Maybe it would have been bigger!

Fisher Investments Editorial Staff
MarketMinder Minute, Personal Finance

Market Insights: A Heads-Up On Mutual Fund Tax Bills

By, 01/18/2017
Ratings74.214286

This Market Insights video explains how capital gains taxes often surprise mutual fund investors.

Fisher Investments Editorial Staff
Developed Markets, The Global View

Foreign Opportunity

By, 01/13/2017
Ratings1004.205

With the Obama administration on its way out and the Trump administration about to begin, most investors seem fixated on the US. However, America isn’t the world, and much is happening outside our borders—a lot of it positive. Heading into 2017, many foreign economies are in much better shape than investors appreciate, setting up a bullish surprise.  

Let’s start across the Atlantic. While sentiment has warmed some, investors still struggle with old euro crisis ghosts, from a shaky Italian banking system (hello, Monte dei Paschi!) to the rise of populists in France, Germany, the Netherlands and elsewhere. These fears have created an uncertainty fog, which not only weighs on sentiment but also shrouds a little-noticed fact: The eurozone has grown for two and a half years and has been gathering steam lately.

The 19-member bloc grew 0.3% q/q (1.4% annualized) in Q3, and it wasn’t just economic powerhouse Germany (0.2%).[i] Continuing its solid run of late, Spanish GDP grew a robust 0.7% q/q while Ireland grew 4.0%. (Gross National Product, a gauge many consider more telling for the Emerald Isle as it limits the skew from multinationals domiciled there for tax purposes, also rose a stellar 3.2% q/q.) Italy climbed 0.3%, and even Greece(!) rose 0.8%. Of the eurozone’s 19 nations, 18 grew in Q3—the exception being tiny Luxembourg, which contracted by less than 0.1% q/q. Recent purchasing managers’ index (PMI) data, which measure the breadth of growth, are good too: Markit’s December eurozone composite PMI reached 54.4, its highest reading since May 2011. (Reads above 50 indicate growing firms outnumber contracting firms). PMIs for the eurozone’s four biggest economies—Germany, France, Spain and Italy—all bested 50.

Ken Liu
Reality Check, Interest Rates

Don’t Fret Debt

By, 01/11/2017
Ratings904.35

With the Trump administration taking office in less than two weeks, folks may wonder about the US debt situation, particularly since President-elect Trump talked up fiscal stimulus on the campaign trail and will almost assuredly face a budget and/or debt ceiling debate this year. But beyond the political rhetoric, investors should take note: There is no sign US debt is at all problematic.

Don’t take our word for it. The largest and most liquid financial markets are unconcerned about US debt. Otherwise lenders to the US would be unwilling to fund the Treasury at historically low rates. If a prospective borrower wasn’t very creditworthy, a lender would demand higher rates to compensate for the risk of not getting their money back. This is clearly not happening.

Currently, to borrow money for 10 years, the US Treasury must pay lenders about 2.4% a year.[i] While this is a full percentage point higher than the record-low 1.4% notched last July, it’s still lower than almost any point since 1962 (see Exhibit 1). Rates could rise another full percentage point and still be low by historical standards.

Fisher Investments Editorial Staff
Personal Finance

A How-To Guide for Portfolio Review

By, 01/10/2017
Ratings1473.758503


Where to begin? With this article. Photo by Julia_Sudnitskaya, iStock.

With their champagne hangovers having worn off,[i] many investors are now turning to more serious matters: Evaluating the past year. You might be doing the same! However, perhaps you’re stuck on how to approach this task. What should you look at? What should you not focus on? Here are several tips to help frame your review as you weigh your investments for 2017 and beyond.

Assess Asset Allocation

Fisher Investments Editorial Staff
Media Hype/Myths, Reality Check

CAPE (Nothing to) Fear

By, 01/05/2017
Ratings1024.215686

Well, that didn’t take long: Mere months (and only 3.7%)[i] after the S&P 500 finally broke out of a lengthy flat stretch, pundits warn stocks have come too far, too fast, and high P/E ratios signal an overvalued market and unrealistic hopes for 2017 earnings. Many point to the Cyclically Adjusted P/E Ratio (CAPE, or Shiller P/E), which is currently at levels last seen before major crashes, as evidence trouble lurks. Yet, as is typical when valuations hit the headlines, there are several flaws in this reasoning. Some valuations can signal sentiment when they’re at extremes—which they aren’t today—but overall, they are poor predictors of stock returns. Nothing about today’s valuations suggests stocks are overvalued.

Yes, the CAPE is the highest it has been since 2007, 2000 and 1929, when major bear markets began. But coincidence doesn’t make the CAPE a valid timing tool or predictive in any way, shape or form. Conceptually, the CAPE has problems. Its denominator is the 10-year average of bizarrely inflation-adjusted[ii] earnings. That is supposed to adjust for economic cycles, but it doesn’t tell you anything about stocks’ future earnings streams, which is what you’re buying. Never mind the fact it is really, really odd to leave the economic cycle out of your projection for stocks. Moreover, the CAPE doesn’t work. Exhibit 1 shows the CAPE, its average (orange line) since 1881 and one standard deviation (yellow line) above the average, which just means 16% of observations lie above it. So although the current reading is among 16% of the most expensive “outliers,” it has been there pretty darn frequently in recent years.

Exhibit 1: No CAPEs!

Fisher Investments Editorial Staff
Media Hype/Myths

False Fears Roundup—2016 Edition

By, 01/05/2017
Ratings773.928571

A new year has dawned, and with it a fresh list of Very Bad Things people fear will roil markets over the next 12 months. Some are new(ish), like the OECD’s warnings of a looming global property crash. Others—Chinese bonds, foreign outflows from US Treasury markets, the advent of President Trump, European populists—are retreads with a fresh twist. It rather reminds us of this time last year, when everyone was sure a crashing China, plunging oil prices, negative rates and Italian banks would derail the bull market. None did. Neither did Brexit, Trump or any of the other big fears that plagued investors as the year wore on. Every year in every bull market is packed with false fears—plausible-sounding stories that dominate news coverage and frighten investors, until reality proves them wrong or folks move on. 2016’s big fears proved false, and stocks rose past them, showing the importance of staying patient and critically assessing today’s scary headlines.[i]

China

Chinese stocks crashed hard as the year began, and investors freaked as officials appeared to devalue the yuan for the second time in five months. Weak manufacturing PMIs triggered another round of “hard landing” worries. As capital controls relaxed, over half a trillion dollars flowed out, weakening the yuan and (many feared) China itself.[ii] As the year closed, some argued “mindless Chinese stimulus” was inflating a corporate bond bubble, as China’s total debt-to-GDP ratio hovered around 300%. Yet for all the chatter, China did fine. GDP growth stayed near the government’s target, most recently hitting 6.7% y/y in Q3, and monthly economic data stayed firm. The yuan’s gradual slide has been carefully managed—Chinese authorities aren’t about to risk social upheaval by permitting sudden, deep depreciation. As for the much-feared debt, which features on 2017’s “scary things” list, a good chunk of that supposedly[iii] $30 trillion in debt is bank loans. Troubled bank loans, perhaps, but the government has experience with recapitalizing banks. Corporate bonds held by private investors are a much smaller, manageable segment of the market. And whether it’s struggling manufacturers or financial firms, the government seems willing to spend portions of its $3 trillion in foreign exchange reserves on limiting or cushioning defaults. But above all else, hard landing fears have swirled since 2011. Markets are well aware, sapping surprise power.

Fisher Investments Editorial Staff
Others

Auld Lang Syne

By, 12/30/2016
Ratings1254.48

Photo by Muenz/iStock.

As the curtain closes on a topsy-turvy 2016, we want to take a brief moment to thank all our readers for taking the time to visit our site. We know you have lots of options and limited time and we appreciate you spending even just a little bit of it with us. Hopefully, you have found something on these pages this year that made you think, laugh, critique popular narratives or perhaps—and this may be a stretch—was useful in your approach to investing.

Fisher Investments Editorial Staff
Interest Rates

The Year in Fixed Income: A Tale of Two Halves

By, 12/29/2016
Ratings684.117647

2016 was a tale of two halves in the bond market. When uncertainty swirled early in the year, 10-year US Treasury rates fell in July to what Global Financial Data reports was the lowest since 1786. Bond prices and yields move inversely, so given the falling rates, Treasury prices surged. However, as the year progressed, uncertainty gradually fell and rates rose. This changed everything in bonds, leading to Treasury underperformance and corporate bond outperformance. Here is a look back at the year in interest rates, and a few forward-looking lessons we can draw from it.

To flash back, in early 2016 we noted 10-year Treasury yields would likely end the year little changed from the 2.24% they began at, though we expected volatility along the way. We counseled readers not to buy forecasts of four Fed hikes, particularly given the election, which incentivized inactivity on short-term rates. While the magnitude and scope of rates’ decline by July was perhaps bit bigger than we envisioned, with two trading days left, rates have rallied and are slightly up on the year. Moreover, the Fed hiked exactly once this year, after the election. That is in keeping with our expectations in January. Exhibits 1 and 2 show the year in interest rates.

Exhibit 1: Investment Grade Yields “Smiled” ...

Fisher Investments Editorial Staff
Across the Atlantic

The Ghost of a Banking Crisis Past Visits Italy

By, 12/28/2016
Ratings364.291667

Editor's Note: MarketMinder does NOT recommend individual securities; companies referenced herein are merely cited as examples of a broader theme we wish to highlight.

The world’s oldest bank is at the center of what media presents as the world’s newest financial scare—Monte dei Paschi di Siena, a venerable Italian institution known for its rich history and faring poorly on stress tests. Last Wednesday, the bank failed to raise private funds to plug a €5 billion (~$5.2 billion) shortfall (since grown to €8.8 billion) and Italy increased its public borrowing limit to €20 billion to prepare potential rescues for Monte dei Paschi and, potentially, others. This perpetuates a long-running meme that shaky (maybe contagious!) Italian banks could sink the eurozone economy. The issue may finally be coming to a head—and as uncertainty falls and false fears fade, sentiment (and stocks) should get a lift.

Despite new headlines, these issues are old—ancient history, from a market perspective. From 2009 – 2012, most eurozone members faced and dealt with bank weakness, but Italy didn’t. Ireland initially capitalized its banks directly, sending deficits skyward and leading to a 2010 EU/IMF/ECB bailout. (Today, Ireland is growing nicely.) In 2009, Spain created the Fund for Orderly Bank Restructuring (FROB)—a bailout fund—and used it to resolve failing institutions and oversee bank mergers (mostly among troubled cajas).[i] In 2012, Spain tapped the European Stability Mechanism (ESM)—the eurozone’s permanent bailout fund—in a very special non-bailout bailout,[ii] using €100 billion to recapitalize its banks. Like Ireland, it has recovered well.

Fisher Investments Editorial Staff
Emerging Markets, Media Hype/Myths

The Return of a Chinese Ghost Story

By, 12/27/2016
Ratings464.206522

China fears kicked off 2016, and after the relative quiet[i] following the tumultuous start, some old ghosts have returned. This time, Chinese bond markets are grabbing headlines, spurring questions about potential financial system stresses. In our view, this is the latest in a litany of overstated fears about China—there is little sign the most recent feared problems are a real risk to the world’s second-largest economy.  

When the Fed hiked rates on December 15, sovereign debt yields rose globally—yet China got special attention after its 10-year bond yield hit a 16-month high of 3.4%. Rising government and corporate bond yields mean higher borrowing costs, which amplified fears over Chinese corporate debt. Toss in angst over wealth management products (WMP)—which some fear banks use to speculate on bond prices—and this adds another dimension of risk if things turn south.

If you feel like you’ve heard this before, your thoughts aren’t betraying you:  Headlines about Chinese bonds and WMPs have popped up before, related to that oft-feared, though never-seen, economic “hard landing.” Worries about Chinese debt in general have been commonplace since 2011. WMP concerns? Those were so 2013. It isn’t just debt and financial products, either. Questions about Chinese property arise constantly: 2009, 2011, 2014 and even today. Manufacturing had its times in the headlines, and there is even a Chinese auto bubble feared ready to pop! We aren’t outright dismissing these stories as non-issues. They reflect a still-developing nation where the government, rather than the market, determines winners and losers—creating bloat and excess in certain sectors. However, these issues alone haven’t derailed China’s economy yet. Nothing about the country’s economic prospects have radically changed, so we find it unlikely the same issues trigger problems now

Fisher Investments Editorial Staff
Trade

More Green Shoots in Global Trade

By, 12/23/2016
Ratings533.915094

A couple months ago, we highlighted a nascent uptick in global trade—an encouraging development, unnoticed by the many fearing weak trade volumes and mounting protectionism in recent years were here to stay. Since then, trade data have stayed largely positive, and the rebound has spread further—an incremental economic tailwind, and nice news for global stocks.

The biggest news came from Korea, where trade soared in November. Exports and imports rose 2.5% y/y and 9.3% y/y, respectively, leading to a 5.5% y/y rise in total trade (exports plus imports)—Korea’s best trade month in more than two years.[i]

Exhibit 1: Korean Total Trade

Fisher Investments Editorial Staff
US Economy

Q3 US GDP: Comparing Pure Private Sector Components to Headline GDP

By, 12/23/2016
Ratings873.839081

Thursday, the US Bureau of Economic Analysis released its third estimate of Q3 GDP, and the data show growth was 3.5% annualized—up from 3.2% and slightly higher than analysts’ consensus estimates of 3.3%. The media was fast to seize on the sunny headline figure, with many dubbing it The Fastest Growth in Two Years. Now, they’re on to fretting this growth rate is unsustainable. In terms of headline growth, we don’t disagree—it is the fastest in two years and was driven by some wonky components. But under the hood, it doesn’t seem like such a sharp acceleration at all—it’s in keeping with the trend we’ve seen for years now. The reaction to this latest revision is yet more evidence sentiment is warming toward a more rational take hard data have justified for years.

GDP is comprised of personal consumption, private investment, government consumption and net exports. The “headline” figure everyone talks about is the sum of these major categories. This is what many folks presume is “the economy” in statistical terms.

Exhibit 1: US Real GDP Growth Rates Since 2009

Fisher Investments Editorial Staff
Politics

Trump Trades Fade Post-Election

By, 12/20/2016
Ratings1044.086538

Editor's Note: MarketMinder does NOT recommend individual securities; companies referenced herein are merely cited as examples of a broader theme we wish to highlight.

Ahead of the US Presidential election, did you see lots of articles like these: “6 Stocks to Buy When Donald Trump is President,” or “16 Best Stocks to Buy Under President Hillary Clinton”? We sure did. And it continues today, with all the talk of Trumponomics bringing the Trumpflation that will boost Trump industries in a lengthy Trump Rally. While it’s surely a refreshing change from the “sky is falling” mentality that persisted earlier this year, in our view, it isn’t totally accurate. Recent developments show this was all just unreliable rhetoric, proving again investors shouldn’t turn political talk into portfolio action.

Since it began, we’ve held that the Trump Rally is really just an extension of the post-Brexit rally, which was an extension of global markets’ strong rebound from the correction that ended on February 11. Yet few observers look back that far, instead noting that the categories everyone believed would benefit from Trump’s policies are outperforming: Financials, buoyed by hopes for deregulation; Materials, benefiting from proposed infrastructure programs; Aerospace & Defense and other segments of the Industrials sector, soaring on talk of defense spending. Yet another Trump Trade isn’t working out so hot. Folks forecasted gold would rise, presuming a) gold is a hedge against calamity and b) said victory would be a calamity. Instead, it plunged. Over the summer, gold was perhaps the year’s best-performing asset, at 28.7% year to date on July 6.[i] But it has since given up most of that gain, leaving year-to-date returns at just 7%, with over half the decline coming after the election.[ii]

Exhibit 1: Gold’s Post-Election Slump

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Recent Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

There Was Never a Trump Rally to Trade

By, 01/18/2017
Ratings104.05

Whether up or down, stocks are not tied to whatever passes through the President’s head.

read more
Fisher Investments Editorial Staff
MarketMinder Minute

Market Insights: A Heads-Up On Mutual Fund Tax Bills

By, 01/18/2017
Ratings74.214286

This Market Insights video explains how capital gains taxes often surprise mutual fund investors.

read more
Fisher Investments Editorial Staff
Developed Markets

Foreign Opportunity

By, 01/13/2017
Ratings1004.205

The world outside the US is doing better than investors appreciate.

read more
Ken Liu
Reality Check

Don’t Fret Debt

By, 01/11/2017
Ratings904.35

Using apples-to-apples comparisons to underlying assets, the U.S. could afford even more debt.

read more
Fisher Investments Editorial Staff
Personal Finance

A How-To Guide for Portfolio Review

By, 01/10/2017
Ratings1473.758503

Planning a portfolio review in early 2017 or beyond? Here are some helpful tips.

read more

Global Market Update

Market Wrap-Up, Wednesday, January 18, 2017

Below is a market summary as of market close Wednesday, January 18, 2017:

  • Global Equities: MSCI World (+0.2%)
  • US Equities: S&P 500 (+0.2%)
  • UK Equities: MSCI UK (+0.0%)
  • Best Country: Hong Kong (+1.0%)
  • Worst Country: Singapore (-0.6%)
  • Best Sector: Materials (+0.5%)
  • Worst Sector: Telecommunication Services (-0.4%)

Bond Yields: 10-year US Treasury yields rose 0.11 percentage point to  2.43%.

 

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.