Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths, Personal Finance

Three Backward-Looking, Not-So-Predictive Valuations Are High

By, 03/31/2015
Ratings134.423077

Evidently, Uncle Sam wants YOU … to be worried stocks are overvalued. At least, that’s the impression we get from a recent report by the US Treasury’s Office of Financial Research, “Quicksilver Markets,” which has trickled through mainstream financial publications since it was published March 17. Citing three … ummm … unconventional valuations, the report warns US stocks are “nearing extreme highs,” so look out below. Folks, this warning and its supporting evidence are about as useful to investors as a whale’s hip bone—bizarrely calculated backward-looking ratios do not predict stocks.

The report does point out that traditional valuations, like the 12-month forward price-to-earnings (P/E) ratio, aren’t extreme—then dismisses that because they didn’t signal trouble in 2007. Hence the focus on the oddballs, which were supposedly more prescient then and are higher still today. The measures in question are the cyclically adjusted P/E (CAPE), Q-ratio and the market value of all listed US equities as a percentage of all goods and services produced by US residents—or the ratio of US market cap to gross national product (GNP). In July 2001, Warren Buffett called this “the best single measure of where valuations stand at any given moment,” so it is now known as the “Buffett Indicator.”

No disrespect to any of the fine minds behind these indicators, but none tell you where stocks go. CAPE, created by John Campbell and Nobel Laureate Robert Shiller, compares stock prices to the last 10 years of inflation-adjusted earnings—the height of backward-looking. The intent is to even out market cycles’ impacts on earnings, smoothing away the extreme highs and lows at peaks and troughs, but it actually adds skew. The 2007-2009 recession is still in CAPE’s denominator. Does that have anything to do with how things go this year? Next year? 2017? There is little reason to think average earnings over the last decade predict anything, whether it’s this year’s earnings or the next decade’s (CAPE is designed to “predict” 10-year returns). CFOs don’t write business plans by slotting the last decade’s earnings into the next 10 years. They try to assess the actual return on all their current and new investments, which generally have little to do with the last 10 years. They’re at now now. Stocks look forward, too, not backward.

Fisher Investments Editorial Staff
Inflation

Deflation Fears Are Over-Inflated

By, 03/30/2015
Ratings194.421052

Recently, the Bank for International Settlements (BIS) released a study spanning 140 years and 38 countries aiming to assess the economic impact of deflation. Their findings? The widely feared deflationary spiral is actually very rarely seen. Here is their more technical lingo:

Concerns about deflation - falling prices of goods and services - have loomed large in recent policy discussions. The debate is shaped by the deep-seated view that deflation, regardless of context, is an economic pathology that stands in the way of any sustainable and strong expansion.

The almost reflexive association of deflation with economic weakness is easily explained. It is rooted in the view that deflation signals an aggregate demand shortfall, which simultaneously pushes down prices, incomes and output. But deflation may also result from increased supply. Examples include improvements in productivity, greater competition in the goods market, or cheaper and more abundant inputs, such as labour or intermediate goods like oil. Supply-driven deflations depress prices while raising incomes and output. 

Fisher Investments Editorial Staff
GDP, Media Hype/Myths

Pundits Already Lowering Expectations Bar for Q1

By, 03/27/2015
Ratings414.073171

US Q4 2014 GDP was revised for a third time Friday, with headline growth remaining unchanged at 2.2% (seasonally adjusted annual rate). Consumer spending was revised up a tad, to 4.4% from 4.2%, but this was basically offset by a slight downward revision in business investment (from 4.8% to 4.7%). If you care to read through all the gory details of the revision, click here. But we are betting that if you are like most media types, you won't click because this revision is the economic equivalent of a yawn.[i] To the extent analysts are discussing Q4 2014’s revision, most focus on a drop in the Bureau of Economic Analysis’ broad measure of corporate profits and project this forward. That forward part is the key—most analysts seem to have already turned the page and are talking down growth in Q1 2015. These lowered expectations are being reported as a threat, but this is overwrought—in our view, lower expectations set up positive surprises, the sort that drive bull markets.

Here are some takes on Q1. The first sentence of The Wall Street Journal’s coverage, for example, is this: “The U.S. economy slowed in the final months of 2014 and corporate profits fell, putting the growth trajectory on a lower path ahead of an apparent slowdown early this year.”[ii] (Boldface is ours, they didn’t do that.) Bloomberg noted, “The rate of economic growth will prove hard to replicate this quarter as harsh winter weather, a stronger dollar, a port slowdown and a global oil glut translate into disappointing spending on the part of consumers and businesses.” Some cite obscure gauges like the Atlanta Fed’s GDP “Nowcast,” a compilation of various monthly data points that attempts to presage what the next quarter’s GDP report will be, and that is asserting growth will be a paltry 0.2% in Q1. (The Atlanta Fed notes this gauge is an average of just over 1.2 percentage points wide of the mark at this point in a quarter.)

Let’s presume these forecasts hold and GDP slows in Q1. What’s that mean for stocks? The answer: Very little. You see, two of the main factors that have weighed on some data releases thus far in 2015 were a West Coast Port labor dispute and a really snowy, cold winter in America’s Northeast. The former likely created a backlog of goods piling up in Portland, LA, Seattle/Tacoma and other major import/export terminals, but it is over, with a new five-year deal inked in February. This likely pushes some economic activity to Q2, but it doesn’t eliminate it. The winter is also over, except maybe in Boston, where The Weather Channel is projecting roughly another inch of fluffy white stuff on Saturday.[iii] It is unlikely cold weather skews data come June, but hey, you never know.

Fisher Investments Editorial Staff
Behavioral Finance

Funds Behaving Badly

By, 03/26/2015
Ratings453.877778

Revolutionary technology! Hot-shot startups! Super-high yield! Funds offering exposure to these goodies are making the rounds, all trying to tempt investors with visions of smokin’ returns and the Next Big Thing. Exciting? A word of caution—this all smacks of heat-chasing, one of the biggest pitfalls investors face as bull markets age and human nature makes us greedy. Flashy tactics might seem splashy, but in our experience, gimmicks and sound long-term strategies don’t mix. This is a time to stay grounded and focused on your long-term goals.   

Consider the gimmicks in question, and you’ll see a theme. One glitzy new ETF will track companies that develop, use and invest in “disruptive” technologies like robotics, 3-D printing, nanotechnology and bioinformatics (analyzing body chemistry and genetics)—all on the theory that exposure to “technology of the future” is the ticket to sky-high returns. That’s a popular view these days, but it betrays a fundamental behavioral error: viewing investing as a get-rich-quick trick. There actually isn’t much evidence “disruptive technologies” offer superior returns over time. In short bursts? Sure. But a lot of it ends up being a flash in the pan (see: Bubble, Dot-com). Plus, a strategy that banks on this will likely be over-concentrated in Tech and Health Care. The fund in question has about 60% in those two sectors alone. Great if they surge, but there is a giant opportunity cost—and risk of loss—if they don’t.

Elsewhere some mutual funds are taking a different approach to chasing the Next Big Thing: buying shares in private tech startups, banking on a big IPO payout. Think of it as the mutual fund equivalent of investors searching high and low[i] for “the next Dell” in the late 1990s—more swinging-for-the-fences, get-rich-quick thinking. Now, on the one hand, these are traditional mutual funds and generally more diversified than the pure disruptive technology-chasers. On the other, they’re tying up pretty significant sums in illiquid investments that may or may not pay out one day. That’s an odd mismatch with mutual funds’ traditional purpose of offering instant, highly liquid diversification. It’s also an odd mismatch with the goals of most folks who own mutual funds in their retirement accounts. Most people simply do not need to double down on some speculative startup. But it’s a powerful marketing gimmick[ii], and many investors might not consider the tricky details and potential drawbacks here.[iii]

Fisher Investments Editorial Staff
Inflation

Misinflation

By, 03/25/2015
Ratings194.368421

Is inflation about to start inflating again? You might get that impression from recent headlines announcing inflation may have turned a sharp corner and is headed for greater heights. The evidence? US and eurozone prices rose in February. In our view, though, everyone is being a tad hasty—a deeper look at the data shows February’s figures are likely a blip rather than the start of a new trend. 

In the US, the Consumer Price Index ticked up from January’s -0.1% y/y to 0.0%[i], as prices rose 0.2% m/m, the first monthly rise since last October. The eurozone’s annual inflation rate decline slowed from January’s -0.6% to -0.3%, with prices increasing 0.6% m/m. The UK, however, didn’t follow suit—while prices rose 0.5% m/m in February, its annual inflation still dropped from January’s 0.3% to 0% due to falling food and energy prices. Pundits cheered overall, welcoming higher prices in the US and Europe and the prospect of “good” deflation in Britain. Some suggested the US report “could give the Fed confidence inflation is slowly heading toward its 2% target.” In euroland, many breathed easier, saying fears of prolonged deflation were “eased.” In Britain, some welcomed the lowest inflation rate on record by pondering a new term for falling prices during a growing economy.[ii]

Far be it from us to pooh-pooh optimism, but in our view, this all misses the elephant in the room. February’s m/m CPI upticks result from a short-lived jump in oil prices—the same oil prices that drove deflation in prior months. From June 2014 through January 2015, Brent Crude oil prices fell from $111.03 to $47.52.[iii] That pulled down headline monthly CPI from September through January. But in February, Brent prices rose a bit reaching $61.89 by month’s end.[iv] So, they naturally boosted February CPI. But they will probably detract from March CPI, considering crude is down 11.4%[v] this month (through 3/23/2015). WTI Crude, the US benchmark, moved similarly.

Fisher Investments Editorial Staff
Politics

One Fish, Two Fish, Red Fish, Blue Fish

By, 03/24/2015
Ratings394.038462

We did not hear Ted Cruz’s speech, but we are told it didn’t rhyme. Photo by Mark Wilson/Getty Images.

Editors’ Note: Our discussion of politics and elections is purely focused on potential market impact. Stocks favor neither party. Believing in the market/economic superiority of one group of politicians over another can invite bias—a source of significant investment errors.

Elisabeth Dellinger
Reality Check

Friday Treat: Why 2015 Won’t Repeat the S&P 500’s Worst Year Ever

By, 03/20/2015
Ratings714.443662

According to one investment research group, of all the years on record, 2015’s stock returns look most like 1931—the S&P 500’s worst year ever, and there are two things you need to know about this. One, this predicts nothing, and two, 2015 does not resemble 1931.

To make the comparison, the researchers compared the S&P 500 price index’s year-to-date return through March 18 with equivalent periods at the beginning of every year on record, then ranked them according to their correlation coefficient. That is statspeak for how closely one year’s directionality resembles another. 1931’s first 54 trading days had the highest correlation, 0.8%—very close to 1, which would represent perfect correlation. The next closest was 1945 at 0.76, then 1996 at 0.7.

This is a fun study, because history and patterns are fun! But fun is all it is. Around the MarketMinder braintrust, we have a slogan: “No correlation without causation!” But even if you don’t buy that and instead believe patterns are predictable, there actually isn’t much of a pattern here. Yes, there is mathematical correlation! But here is what that supposedly strong relationship actually looks like.

Fisher Investments Editorial Staff
Politics, The Big Picture

Political Tool Returns After One Year Vacation: Debt Ceiling

By, 03/20/2015
Ratings214.452381

The debt ceiling returned Monday, along with warnings the US will default unless Congress raises it before the Treasury’s spare cash runs out. It’s a foregone conclusion Congress will comply at some point, as they have 109 times since its 1917 inception. But how they do it is anyone’s guess. Maybe they’ll do it with little debate and no fanfare, like 2012! Or maybe they’ll have a knockdown drag-out, a la 2011 or 2013 (or 1985—debt ceiling fights aren’t new). Congress isn’t split this time, but they could still have a standoff with the White House, and intra-party bickering is always possible. If it does get noisy, fear not: These debates are political grandstanding, nothing more, and delayed action won’t trigger default.

Today, the debt ceiling is an annoyance, but it wasn’t intended to be. Initially, it was a convenience, designed to spare Congress the drudgery of approving each bond issue needed to fund World War I operations. In the intervening decades, it has become a political tool: a lever for parties to extract concessions from the opposition or to manage their own appearance to voters.

After 2011’s debt ceiling fight drove credit rater Standard and Poor’s to strip America’s AAA credit rating, Congress passed the Budget Control Act, which allowed for three debt limit increases at Presidential request. Congress would have to pass bicameral acts disallowing the second two increases, which didn’t happen. We guess they (temporarily) tired of the theatrics, because in early 2013 the debt limit was unceremoniously suspended until May, when brinksmanship began anew—continuing through October’s big debate and semi-related government shutdown. Last February, another quiet suspension followed, then another. This last suspension is the one that expired March 14. That’s how we got where we are—with debt at the new limit and nary a “raise it” bill close to a vote. What gives?

Fisher Investments Editorial Staff
Monetary Policy, Media Hype/Myths

Pundits Forecast Fed, Prove Forecasting Fed Is Folly

By, 03/20/2015
Ratings264.365385

Ever since the Fed began “tapering” quantitative easing, fears have morphed from misplaced terror over the taper to a similarly false fear over the fed-funds rate. So we guess it wasn’t surprising Thursday’s headlines remained fixated on the Fed’s word choices and editorial decisions, with speculation running rampant about what the deletion of “patient” and some dots meant regarding the timing of a rate hike.

(For our coverage of Wednesday’s decision, please click here.)

But as we’ve written time and again, trying to divine when a hike may come is unnecessary and impossible. Yesterday’s flip-floppy Fed illustrated that once this week. And the headlines in its wake put an exclamation point on it. (!)

Fisher Investments Editorial Staff
Politics, Across the Atlantic

UK Politicians Want Some Votes

By, 03/19/2015
Ratings34.833333

Chancellor of the Exchequer George Osborne showcases the famous red briefcase before delivering this Parliament’s final budget to the House of Commons. Source: Getty Images/Bloomberg.

A guy walked out of an old London townhouse holding a red briefcase Wednesday, and with that photo-op, the UK election campaign was off and running.[i] Yes, it’s Britain’s Budget spectacle, where the government toots its own horn, the opposition blasts them, leaders announce sweeteners, and opposition leaders argue those sweeteners are bitter pills. It’s an annual rite, and that rite is even noisier this election year, as both major parties used the Budget to launch their economic campaigns. Now come 40-something days of debating, one-upping and bargaining—and all the accompanying noise. While it’s too early to handicap the winners, the likeliest outcome is more gridlock—bullish for UK stocks.

Elisabeth Dellinger
Media Hype/Myths, Into Perspective

Unfunded Liabilities, the Lockbox, and Other Social Security Myths

By, 03/19/2015
Ratings734.315069

Social Security trust funds do not live in this or any other lockbox. Photo by Joe Corrigan/Getty Images.

Social Security: It’s the third rail of American politics. Its trustees warn it will be insolvent by 2033. Third-party studies warn the day of reckoning could come nearly a decade earlier. Pundits warn its $70 to $120 trillion in “unfunded liabilities” will bankrupt America.[i] Congress recently held hearings on how to fix it. One Senator just tabled a bill to patch it with a high-income tax hike and expand benefits to battle what pundits call a “retirement crisis.” Two Connecticut Congressmen submitted legislation to hike Social Security taxes across the board. However, if you take a closer look at the solvency projections in question and how Social Security works, it becomes clear this is a manufactured crisis. Rumors of Social Security’s impending demise have been greatly exaggerated.

Michael Hanson
Into Perspective, Media Hype/Myths

Book Review: The Shifts and the Shocks Obsesses Over Equilibrium

By, 03/19/2015

The Shifts and the Shocks: What We’ve Learned—and Have Still to Learn—From the Financial Crisis -- Martin Wolf

In the world of ideas, metaphors rule—a continually underestimated fact. In economics, the metaphor of equilibrium has prevailed for over a century. It's perhaps the most antiquated and dangerous of myths, but it's seared into the brains of virtually every economist in the world. Understanding this can help investors see through the euphemistic arguments for and against post-crisis financial regulations—and come to terms with the fact that crisis-proof economies are a fantasy.

The idea that there is a point where supply meets demand is fine enough—we call that a price. But equilibrium is a biological and physical metaphor—it denotes a kind of balance to be sought everywhere. That prices want to reach a "balance" point, a homeostasis as it were. That's the myth—there is no such thing as a "balance" I can find in any economic system. Prices never, ever, find a resting point—they roil, turn, churn, react and adapt at every second of every day to new information, new opinions, new developments. Markets are a flow, not an equilibrium.

Elisabeth Dellinger
Media Hype/Myths, Monetary Policy

Fed People Write Words, Draw Dots

By, 03/18/2015
Ratings264.730769

Don't let the smile fool you—Janet Yellen is no longer feeling patient. Photo by Bloomberg/Getty Images.

Welp, the Fed is officially impatient, stocks are over the moon, and everyone is reading way too much into 157 words and two charts. Sorry folks, but we don’t know the Fed’s next move any more than we did yesterday.

Fisher Investments Editorial Staff
Into Perspective, Personal Finance

A Winning Standard?

By, 03/18/2015

Tuesday, SEC chair Mary Jo White announced the SEC “should implement a uniform fiduciary duty for broker-dealers and investment advisers where the standard is to act in the best interest of the investor.” And with that, after five years of waiting[i], we finally know the SEC chief’s opinion of Dodd-Frank’s orders to investigate the matter. While this doesn’t mean the SEC for sure writes a rule, it raises the likelihood they’re headed that way. Predictably, there are cheers and jeers, though we think strong reactions on both sides largely miss the point. We’re all for more transparency in this industry, but a uniform fiduciary standard won’t ensure investors’ best interests are protected.

Most US investment professionals are currently subject to one of two regulatory standards: the suitability standard or the fiduciary standard. Brokers and most financial salespeople fall under the suitability standard, which requires them to sell investments that they reasonably believe are in keeping with a client’s basic financial situation. They don’t have to disclose conflicts of interest or put their clients’ interest first. Registered Investment Advisers[ii] (RIAs) are held to the fiduciary standard, which requires them to reasonably believe they are putting clients’ interests first and disclosing any potential conflicts of interest and how they attempt to mitigate them.

For years, regulators have pushed to broaden the fiduciary standard’s reach. The White House has backed the Department of Labor’s (DOL) plans to apply the fiduciary standard to every investment professional working with retirement accounts, like 401(k)s and IRAs—a backdoor approach to spreading it across the industry, as most brokers handle IRAs. The SEC’s unrelated potential rule charges through the front door, applying to every RIA and broker and all of their relationships. At least, we assume it would, as no one knows what the SEC’s rule would include. As White said, if the SEC decided to move forward, they’d have to first define the new standard, which could be tougher or more watered down than the current rule. They could also follow the UK’s lead and introduce new services where the rule wouldn’t apply, like “execution-only,” where the broker would merely take orders for the client, not proactively sell or recommend a security. So it’s premature to think about specifics, and at the rate regulators move, it could be years before this goes anywhere.[iii]

Subscribe

Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.

Recent Commentary

Fisher Investments Editorial Staff
Into Perspective

Three Backward-Looking, Not-So-Predictive Valuations Are High

By, 03/31/2015
Ratings134.423077

The US Treasury makes a market forecast.

read more
Fisher Investments Editorial Staff
Inflation

Deflation Fears Are Over-Inflated

By, 03/30/2015
Ratings194.421052

The Bank for International Settlements released a study that is a breath of fresh air on deflation.

read more
Fisher Investments Editorial Staff
GDP

Pundits Already Lowering Expectations Bar for Q1

By, 03/27/2015
Ratings414.073171

Q4 GDP was revised again Friday, but the real story here is analysts' low expectations for Q1.

read more
Fisher Investments Editorial Staff
Behavioral Finance

Funds Behaving Badly

By, 03/26/2015
Ratings453.877778

Discipline is still the key to investing success.

read more
Fisher Investments Editorial Staff
Inflation

Misinflation

By, 03/25/2015
Ratings194.368421

Do February data indicate inflation will soon be on the rise?

read more

Global Market Update

Market Wrap-Up, Monday Mar 30, 2015

Below is a market summary as of market close Monday, 3/30/2015:

  • Global Equities: MSCI World (+0.7%)
  • US Equities: S&P 500 (+1.2%)
  • UK Equities: MSCI UK (0.0%)
  • Best Country: Austria (+2.1%)
  • Worst Country: Australia (-2.7%)
  • Best Sector: Energy (+1.1%)
  • Worst Sector: Telecommunications Services (0.0%)
  • Bond Yields: 10-year US Treasury yields fell 0.02 percentage point to 1.95%.

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.