Fisher Investments Editorial Staff
Commodities

OPECs’ Biggest Problem—in Two Charts

By, 07/21/2017
Ratings964.239583

OPEC’s efforts to rein in global oil production—and thereby quell the supply glut that has plagued Energy markets for three years—aren’t exactly bearing fruit.

While the cartel did manage to extend its previously agreed-to deal to reduce supply from members and a few select non-members (most notably, Russia), they are struggling to maintain a united front. This week, small-producing OPEC member Ecuador took the unusual step of publicly announcing they’d pump more than their allotted 522,000 barrels per day. And output increased from Libya and Nigeria, two OPEC members excused from the deal, which contributed to June OPEC production rising 1.4% to 32.61 million barrels per day—exceeding the group’s 32.5 million barrel ceiling. What’s more, compliance with the quotas fell to the lowest rate in six months, 78%. While these are no doubt challenges to the cartel’s ability to boost crude prices, there is a far bigger problem—one beyond their control: US shale. In our view, it all adds up to low oil prices sticking around longer than most think, a negative for Energy stocks.

Fast-growing US crude oil production was a key factor generating the glut in the first place, which is largely why OPEC’s initial strategy was to try to ramp up output in late 2014. They presumed lower prices would squash producers, fuel bankruptcies and bring some production offline. And for a time, they were right.

Fisher Investments Editorial Staff
Politics, Reality Check

The State of Gridlock

By, 07/20/2017
Ratings1064.207547


Working at cross-purposes. (Photo by eelnosiva/iStock.)

Disclaimer: As always, our political commentary is intended to be nonpartisan. We favor no party nor any politician, and neither do markets. We assess developments solely for their potential market impact.

In the dog days of summer, the last thing anyone wants is more hot air, but that’s exactly what politicians are giving us. Thankfully, it has a silver lining, and yes we know we’re mixing metaphors: All the squabbling and posturing amounts to gridlock, which lowers legislative risk and makes stocks happy—even as people mostly hate it. The less gets done, the less markets have to worry about sweeping change creating winners and losers.

Fisher Investments Editorial Staff

Don’t Sweat This Summer’s US Economic Data

By, 07/20/2017
Ratings544.212963

It’s the dog days of summer, and if recent US headlines have you feeling in need of an ice-cold tonic, fret not! Your friendly MarketMinder staff has just the remedy: some cool bits of US data. As debates rage about the health of the US economy—particularly after some recent data were mixed—a high-level look suggests the drivers underpinning this expansion remain fine overall.  

June CPI numbers came out last week following Fed head Janet Yellen’s testimony to the Senate Banking Committee, which featured some inflation chatter: “There may be more going on. We’re watching inflation very carefully in light of low readings. … I think it’s premature to conclude that the underlying inflation trend is falling well short of 2%. I haven’t reached such a conclusion.” In recent weeks, Fed people have been mulling whether inflation’s slowdown is “transitory” or more likely to persist—if the latter, some have lobbied waiting on raising interest rates. It seems Ms. Yellen is in the “transitory” camp, though we caution against assuming Fed words mean action. Their decisions are “data-dependent,” which is code for “they are going to wait and see and interpret the data as they will.”

Mostly, we find it odd central bankers are tying themselves in knots over very stable prices, seeing as how price stability is supposedly one of their primary goals. For instance, while June CPI slowed to 1.6% y/y from May’s 1.9%, energy prices’ year-over-year gains petering out were partly to blame. Core inflation, which excludes food and energy, remains in the 1.7% - 2.3% bandwidth seen over the past several years. Prices of some core goods and services (e.g., vehicles and apparel in goods, airline fares, wireless phone services and motor vehicle repairs) have been weak lately, but it’s normal for various items in the CPI basket to diverge. Plus, we daresay consumers aren’t exactly screaming for the Fed to drive airfares higher. 

Elisabeth Dellinger
Across the Atlantic, Forecasting

Wimbledon, Markets, Bad Analogies and You

By, 07/12/2017
Ratings1183.622881

 

Sam Querrey awaits a serve from Italy’s Thomas Fabbiano in their first-round match on Court 11, nine days before his shock quarterfinal win over Andy Murray. Photo by Elisabeth Dellinger.

Hello readers, today I’m going to be self-indulgent and treat you to a “What I Did on My Summer Vacation” essay, complete with two (probably bad) analogies to tie it to markets. When one is a tennis nut and finally gets to attend Wimbledon for the first time—and spends several hours queuing for it—one generally wants to find a way to write about it. So here, friends, is what this year’s tournament can teach you about investing.

Fisher Investments Editorial Staff
Politics, Media Hype/Myths

Debt Ceiling Episode CXI: Return of the Revenge of the Son of the Debt Ceiling and the Temple of Doom Strikes Back, Part Deux

By, 07/12/2017
Ratings693.992754

Summer is here, which means it’s time for bad movie sequels and clichéd analogies likening various things to bad movie sequels. So you can count on your friendly MarketMinder editors—with tongue firmly in cheek—to bring you an article about the debt ceiling, everyone’s favorite bad sequel, which is back in the news thanks to Treasury Secretary Steve Mnuchin’s June testimony to Congress and lawmakers’ loose plans to vote on an increase before their summer recess. We’ve gone through this song and dance—err, sorry, seen this movie—many times before. First politicians play hardball, then administration-types warn about the risk of default, then the media has a conniption fit about default, and on they go until finally they kick the can. We’ve already had the first and second steps, but interestingly, the media commentary this time around has a different flavor: We’ve seen a raft of editorials arguing for the debt ceiling to go the way of the dodo. Seems like a good idea to us! The debt ceiling has always been symbolic. It doesn’t actually limit debt (which isn’t a problem anyway) in practice, and failure to raise it doesn’t do all the terrible things people fear it will. Might as well formally acknowledge it is an annoying heap of nothingness.

In the old days, Congress had to authorize every new debt increase. It worked for a while, but then a little thing called World War I happened, and Uncle Sam needed to mobilize. To speed the war effort, Congress allowed the Treasury to issue new debt at its discretion, without going to lawmakers for approval, as long as debt stayed below a certain amount. When debt reached whatever arbitrary limit they set, they’d simply raise it, and everyone would carry on as usual. The US did not borrow itself into oblivion, the Allies won the war, and all was good.

For a few decades, raising the debt ceiling was a boring procedural matter. But in the mid-20th century, politicians—ever the politickers—figured out voters weren’t big on debt, and that positioning themselves as anti-debt crusaders allowed them to use the debt “limit”[i] as a tool to win concessions. And thus began the time-honored tradition of holding the debt ceiling hostage to use as a bargaining chip in other fights. Both parties—and pretty much all factions within them—are guilty of this, and we suspect you aren’t invited to the “cool” parties on Capitol Hill until you can claim responsibility for setting off a debt ceiling fight. As a result, almost every time it comes around, we are all treated to a political circus. And when everyone is satisfied with whatever symbolic victory they can peddle to their constituents and lobbyist friends, they kick the can and go home.

Christopher Wong
MarketMinder Minute, GDP, Reality Check

Market Insights: GDP Doesn’t Predict Stocks

By, 07/10/2017
Ratings433.883721

In this Market Insights video, we discuss the relationship between Gross Domestic Product (GDP) and stocks. Or, more specifically, the lack thereof.

Fisher Investments Editorial Staff
Investor Sentiment, Reality Check

P/Es Are Above Average and That’s OK

By, 07/07/2017
Ratings834.325301

For years, folks have feared stocks are too expensive. Such worries seem ever-present, but they get renewed attention when various financial luminaries add their own warnings. Last week, for example, multiple Fed members commented on asset prices, using phrases like “somewhat rich,” “running very much on fumes” and “close monitoring is warranted.” Sounds worrying! But valuations alone don’t predict market direction. They are merely a sign of where sentiment is now: warming, but not close to euphoric.

The S&P 500 forward 12-month price-to-earnings ratio (which compares current stock prices to forecasted earnings) is above its post-2000 average—but only just! It stands at 17.6 today versus the post-2000 average of 15.4.[i] This is pretty unremarkable and not a sharp break from the recent past, either: the forward P/E first breached 17 on February 24, 2015 and has averaged 16.5 since.[ii] US stocks returned 21.3% over that time—gains that folks freaked out by “too high” valuations missed.[iii]

Exhibit 1: S&P 500 Valuations’ Mild Rise

Source: FactSet, as of 6/23/2017. S&P 500 12-Month Forward P/E Ratio, 12/31/1999 – 6/23/2017. 

Ken Liu
GDP, Into Perspective

GDP Underestimates Economy’s Amazingness

By, 07/06/2017
Ratings714.28169


A lot of what goes on here isn’t counted in GDP. (Photo by alacatr/iStock.)

Which is right: high-flying stocks or ho-hum GDP? It’s one of this bull market’s defining questions, and GDP recently lost some ground in this intellectual horserace, thanks to the very statisticians who calculate it. That’s right, the BEA’s bean counters recently determined they’ve missed a few over the years, due to the increasing difficulty of calculating inflation. For stocks, the discovery doesn’t mean much—the findings are backward-looking, while markets discount the future. But it does provide more evidence that when markets and the economy (measured by government statistics) seem disconnected, markets are generally a more accurate—and timely—gauge.

Ever since Simon Kuznets spearheaded the effort to create national economic accounts in the 1930s[i]—basically creating GDP in the process—economists have been on a never-ending quest to perfect the measurement. From the start, Kuznets warned accounting for all productive activity is an impossible task—and the final measurement would inevitably be wrong.[ii] Determining what to count and where to classify it has only become trickier as technology improves and the digital economy mushrooms. As a recent book on the subject, Ryan Avent’s The Wealth of Humans, points out:

Fisher Investments Editorial Staff
US Economy, Market Cycles

Happy Expansioniversary!

By, 07/05/2017
Ratings674.470149

As milestone birthdays go, eight usually doesn’t rate. Aside from rhyming with “great,” it seemingly isn’t so special a date. Yet as this economic expansion—which officially began in July 2009—turns eight, let’s all raise a glass and consider some timeless and timely takeaways.

Expansions and Bull Markets Aren’t Twins

When the recession officially ended on June 30, 2009, the bull market was already charging higher. It was born nearly three months earlier, on March 9. By the time the recovery officially began, the S&P 500 was up 36.9% from its low.[i] When the advance report of Q3 2009 GDP came out on October 29—providing the first official confirmation that growth had resumed in July—the S&P 500 had gained 59.8%.[ii]

Fisher Investments Editorial Staff
Trade, Politics

Will a Possible Trump Steel Tariff Corrode Stocks?

By, 07/03/2017
Ratings644.351563

If you follow financial media lately, you might be under the impression you ought to be steeling yourself for some new protectionist measures from the Trump administration. Any day now Commerce Secretary Wilbur Ross is expected to announce findings from an investigation—permitted under Section 232 of the Trade Expansion Act of 1962—that could argue for tariffs on steel, allegedly based on national security concerns. This all plays right into longstanding fears that Trump is a trade disaster waiting to happen, triggering headlines claiming “Trump's plan to slap tariffs on steel imports carries big economic and political risks” and warning they “could set off global trade wars.” But despite the sensational rhetoric, steel tariffs are nothing new and, in our view, are unlikely to live up to pundits’ fears.

President Trump’s positions on trade have stoked these fears. On the campaign trail, Trump was a sharp critic of trade, in particular the North American Free Trade Agreement (NAFTA) and China. He frequently said on the stump he would use executive branch powers to “protect” American jobs and specifically that he believes steel imports are “killing our steelworkers and our steel companies.” (Hence, why we say Commerce’s investigation is allegedly based on national security concerns.) Trump’s protectionist rhetoric is a major reason why Wall Street feared him winning, and why some economists and pundits argue his policies are bad for the economy.

But regardless of those fears, what the Trump administration is proposing is nothing new. Basically every administration since President Lyndon Johnson has enacted some variety of steel tariff, even if the justification slightly differs now.

Fisher Investments Editorial Staff
Commodities

Oil Drum Doldrums

By, 06/29/2017
Ratings923.86413

Last year, Energy was the MSCI World’s best-performing sector and ended 2016 on a relative upswing as investors cheered OPEC-led oil production cuts attempting to alleviate a supply glut. There was just one small thing folks didn’t anticipate: surging US shale oil production, which has offset OPEC’s weak efforts. By June 21, crude was down over -20% from a February high, and Energy stocks are down -10.1% year to date—the world’s worst sector.[i] Last year’s outperformance? Largely gone. Energy is now lagging cumulatively over the last year and a half—and is only ahead by a fraction of a percentage point since January 20, 2016—oil’s low.[ii] With hindsight, it’s clear 2016’s Energy outperformance was a countertrend rally in a longer-term slide. Although sentiment is catching up with reality, with a fundamental supply overhang unlikely to dwindle anytime soon, we think it’s still too early to load up on Energy stocks.

Oil’s latest downturn is an extension of a much larger slide that began mid-2014. (Exhibit 1) But our story begins long before then, in the 2000s, when sky-high oil prices incentivized US producers to invest in the technology[iii] they’d need to tap America’s vast shale oil reserves. Shale oil was expensive and difficult to access, but nosebleed oil prices made it worth the cost. It took a few years, but by 2012, the efforts were bearing fruit, and US oil production was soaring. For a while, oil bounced in a high range, as demand was also growing at a fast clip. But as China’s infrastructure buildouts slowed and Emerging Market growth rates cooled, so did energy demand growth. Meanwhile, supply kept soaring. By 2014, supply growth far exceeded demand growth, sending prices plunging to just $26 a barrel in January 2016.

Exhibit 1: Oil’s Wild Ride

Fisher Investments Editorial Staff
Emerging Markets

Chinese Stocks’ Symbolic Emergence

By, 06/27/2017
Ratings464.163043

Last Tuesday, China received the news it has awaited for four years: MSCI, a prominent index provider, will include mainland Chinese stocks known as A-shares in its Emerging Markets (EM) Index starting in May 2018—a move some declared a “huge vote of confidence,” a “breakthrough” that will unleash a “wave of foreign investment.” Perhaps, one day, we’ll all look back at this as the first major milestone on China’s long road to financial openness. However, let’s not overstate the case now. The change was mostly symbolic, and it doesn’t render China a more (or less) attractive investment destination. 

While Chinese stocks have been in the MSCI EM Index for over two decades, mainland China mostly hasn’t. Because of China’s capital controls, big Chinese companies have three main share classes: H-shares (traded in Hong Kong), A-shares (traded in Shanghai and Shenzhen) and B-shares (traded in foreign currency in Shanghai and Shenzhen, and far less common). Foreigners can easily access H-shares, but the government restricts access to A-shares, so MSCI included only H-shares and B-shares in its EM Index. Since there are only 222 H-shares (with a market cap of $762 billion) versus 3261 A-shares (with a market cap around $7 trillion), many see A-shares’ inclusion as a big deal for all managers and index funds benchmarked against the MSCI EM.

China sees it as a big deal, too, hoping mainland shares’ inclusion will attract a flood of capital from fund managers and institutional investors with MSCI EM-based mandates—hence their years-long lobbying effort. Until now, MSCI declined, citing restrictions on investment, regulators’ tendency to arbitrarily halt trading of volatile stocks for long stretches, and rules limiting index funds’ stock sales. But now it seems China has done enough to win MSCI’s blessing.

Yet the change is scarcely noticeable. MSCI will add only 222 A-shares—not the whole kit and caboodle. China was already 28% of the MSCI EM Index; after the change takes effect, it will rise to 28.73%. MSCI is starting small because Chinese markets are still fairly restricted. Pilot programs have improved foreign investors’ access to A-shares, but they have strict caps, and lengthy trading suspensions are also still common. Trading in about 8% of A-shares was halted as of May, and MSCI has to add A-shares in two stages next year (May and August) to get around “daily trading limits.”

Fisher Investments Editorial Staff
Into Perspective

Sizing Up Sterling's Swoon

By, 06/26/2017
Ratings403.9125

Happy Brexitiversary, everyone! Yes, a year ago Friday, the UK voted to leave the EU, unleashing a tidal wave of media hyperventilation. Among the most frequent sources of angst in the 12 months since is the pound, whose drop fueled fears aplenty. Yet putting the pound’s gyration in some context may be valuable—and, in the process, shed light on a few media theories about what’s ahead.

As Exhibit 1 shows, the pound’s post-Brexit decline occurred mostly between June 23 and July 6, 2016. During this eight-trading day stretch, the BoE’s Broad Effective Exchange Rate Index—a measure of the pound’s value against 21 trading partners’ currencies—dropped -11.6%.[i] The pound also fell -13.0% against the US dollar.[ii]

Exhibit 1: Not So Sterling

Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths, Across the Atlantic

Brexit: One Year Later

By, 06/22/2017
Ratings714.098591


Breaking up is hard to do. Photo by Chris Ratcliffe/Bloomberg via Getty Images.

Do you remember where you were when Britain turned its back on Europe? It was headline writers’ time to shine! After “Little England Beat Great Britain” and “opened Pandora’s Box,” pundits reflected on the “24 Hours in Which the World Has Changed.” Some said Brexit was “the biggest blow to a united Europe since the Second World War” and the Continent “may be plunged into the worse crisis in its history.” Though a few outlets weren’t quite so apoplectic—“Brexit won’t be as bad as people think[i]”—many were freaking out over the surprising result and what it meant not just for the UK, but the world. Yet a year after Brexit, the UK is still in the EU. We know, shocker! (Kidding, of course.) With a year now behind us, the present seems like a good time to recap what has—and, perhaps more importantly, hasn’t—happened.   

After the vote, fear abounded. Stocks’ sharp selloff drove bear market dread. The business environment suddenly looked iffy, with uncertainty allegedly icing potential mergers. Others predicted businesses would spend less and inflation would crimp consumers, rendering recession. Across the channel, EU-types feared losing a major trading partner as well as a potential domino effect if increasingly popular anti-EU political parties gained power.

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Recent Commentary

Fisher Investments Editorial Staff
Commodities

OPECs’ Biggest Problem—in Two Charts

By, 07/21/2017
Ratings964.239583

OPEC faces internal struggles to cutting back production, but the biggest complication is beyond the cartel's control.

read more
Fisher Investments Editorial Staff
Politics

The State of Gridlock

By, 07/20/2017
Ratings1064.207547

Taking stock of gridlock six months into the new administration.

read more
Fisher Investments Editorial Staff

Don’t Sweat This Summer’s US Economic Data

By, 07/20/2017
Ratings544.212963

Though some recent data were mixed, US economic drivers look solid overall.

read more
Elisabeth Dellinger
Across the Atlantic

Wimbledon, Markets, Bad Analogies and You

By, 07/12/2017
Ratings1183.622881

Two investing lessons from The Championship.

read more
Fisher Investments Editorial Staff
Politics

Debt Ceiling Episode CXI: Return of the Revenge of the Son of the Debt Ceiling and the Temple of Doom Strikes Back, Part Deux

By, 07/12/2017
Ratings693.992754

Congress might not repeal the debt ceiling, but they’ll almost certainly raise it for the 111th time.

read more

Global Market Update

Market Wrap-Up, Friday, July 21, 2017

Below is a market summary as of market close Friday, July 21, 2017:

  • Global Equities: MSCI World (-0.2%)
  • US Equities: S&P 500 (-0.0%)
  • UK Equities: MSCI UK (-0.4%)
  • Best Country: Singapore (+1.0%)
  • Worst Country: Germany (-1.4%)
  • Best Sector: Utilities (+0.5%)
  • Worst Sector: Energy (-0.9%)

Bond Yields: 10-year US Treasury yields fell 0.03 percentage point to 2.23%.

 

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.