Fisher Investments Editorial Staff
Media Hype/Myths, US Economy

People Are Not Leaving the Workforce

By, 07/02/2015
Ratings334.181818

US job growth topped 200,000 again in June, knocking the unemployment rate down to 5.3%—lowest since April 2008—but many headlines chose to dwell on a perceived negative: the falling labor force participation rate. Many argue this is a sign folks are still leaving the workforce in droves, indicating labor markets remain distressed after the 2007-2009 recession. This is all backward-looking as far as stocks are concerned—whatever happens in job markets stems from economic growth (or contraction) several months before. Growth drives hiring, not the other way around. Stocks, by contrast, move before the economy does. But we would like to clear up this whole bugaboo about folks leaving the labor force, because it is just not true, and knowing what’s what might improve your perspective on the economy.

The labor force participation rate is the ratio of the civilian labor force to the total civilian noninstitutional population.[i] Here is how it has moved over the last 45 years:

Exhibit 1: Labor Force Participation Rate

Fisher Investments Editorial Staff
Into Perspective

Some Thoughts on Greece’s Don’t-Call-It-a-Default

By, 07/02/2015
Ratings634.555555

Greece’s Tweeter-in-Chief, Prime Minister Alexis Tsipras, gives a national television address urging Greeks to reject harsh austerity. Photo by Greek Prime Minister’s Office via Getty Images.

So Greece officially missed its €1.5 billion IMF payment due Tuesday, and it is now “in arrears” with the organization. It is not in “default,” because the IMF doesn’t use that term. Nor does missing an IMF payment trigger credit default swap (CDS) payouts or earn a “default” grade from credit ratings agencies. But that’s all semantics. What matters more is where Greece goes next.[i] Whatever verb you use to describe what happened Tuesday, Greece has missed a debt payment and is without a bailout program for the first time in five years.

Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths

On Greek Tweets, Capital Controls, Chaos and Volatility

By, 06/30/2015
Ratings564.428571

Greek Prime Minister Alexis Tsipras takes a break from Tweeting to address Parliament Sunday. Photo by Kostas Tsironis/Bloomberg via Getty Images.

So Greece had a busy weekend, PM Alex Tsipras sent 30 increasingly bizarre Tweets[i], and global markets had a busy Monday pricing in all the chaos. Except in Greece, where markets are closed all week to prevent panic. Virtually everywhere else, though, volatility reigned. With Greece facing political pandemonium, capital controls and imminent default—and creditors clearly out of patience—we can only imagine the bludgeoning Greek stocks would have taken if it weren’t for the emergency bank holiday.[ii] Our take hasn’t changed: However this ends, the risk of protracted global fallout remains quite small. But brace for more volatility, just in case, and spare a thought for Greek people, because they’re in for a tough time.

Fisher Investments Editorial Staff
Media Hype/Myths

How Not to Use Valuations

By, 06/29/2015
Ratings304.116667

19, 17, 27. No, this isn’t a pattern-identification test. Nor is it a Fibonacci number sequence or our gym locker combo. It is also not LeBron James’ salary (in millions of dollars) over the last three years, though that’s close. These are three flavors of current S&P 500 price-to-earnings (P/E) ratios. All are above their long-term averages, leading many to contend that any way you slice it, US stocks are overvalued ,  expensive, or any other adjective you might use—hence sub-par returns must lie ahead. But valuations—no matter the flavor—do not predict future returns.

What exactly are these different P/Es? Simple! They are, in order, the S&P 500’s trailing, forward and cyclically adjusted P/E ratios. Trailing earnings are the index constituents’ reported profits over the prior 12 months. This is the oldest and arguably best-known P/E ratio—stock price divided by actual, reported, known earnings.

But reported earnings are … well … already reported—old news. Stocks look forward, so many consider trailing P/Es irrelevant. To solve this, many use forward P/Es—the second “traditional” measure—which compare prices to consensus earnings expectations for the next year. Analysts estimates often prove inaccurate, but proponents claim they are usually close enough and are at least forward-looking. Analysts currently expect rising profits over the next year—explaining why the S&P 500’s forward P/E is currently the lowest of the three.

Fisher Investments Editorial Staff
Behavioral Finance, Forecasting

The Missing Lesson: Unfriend the Trend

By, 06/26/2015
Ratings593.898305

Thursday’s personal finance pages were awash with pundits sharing investing lessons learned (with varying degrees of value). The Wall Street Journal’s Morgan Housel offered up four mostly sensible points. The Motley Fool’s Sean Williams offered 21 occasionally overlapping points that have some real pearls of wisdom. Best of all, US News and World Report’s Catherine Alford offered “12 Money Lessons Your Child Should Know Before Age 12.” (This latter article included the most basic-yet-overlooked lesson of all—the power of compound interest. Many folks older than age 12 could benefit from learning to love compounding.) However, might we suggest a timely 38th lesson? Recent trends do not predict the future. That is a lesson it seems to us many investors—including some professional prognosticators—should probably consider.

Next week, 2015 will reach the halfway mark and, as is customary, Wall Street forecasters are already unveiling their second-half outlooks. Thus far in 2015, US stocks (the S&P 500) have returned a paltry 3.4% including dividends (2.4% without). Global stocks have fared better, rising 5.6% (with net dividends), led by Europe and Japan.

Exhibit 1: Year-to-Date Global Stock Market Returns by Country/Region, in Percentage Points

Fisher Investments Editorial Staff
Media Hype/Myths

Down With the Dow

By, 06/25/2015
Ratings593.915254

In the stock market, not all numbers are created equal. Photo by Courtney Keating/Getty Images.

Tuesday evening, Convergex Trading’s Nicholas Colas and Jessica Rabe released an interesting note that caught our eye, highlighting a curiosity in the Dow’s 1.8% return thus far in 2015 (on a price basis). Colas and Rabe point out the year’s modest positive return is accounted for by only two stocks: Goldman Sachs and United Healthcare. That’s it! The other 28 stocks’ returns net to basically zero. They go on to discuss the fact the top 10 Dow stocks dominate the gauge’s return, suggesting whatever big round number you think is next for the Dow, your outlook better hinge on the top 10 stocks. While they don’t come right out and say it, this echoes a point we’ve long made here: Narrow, price-weighted gauges like the Dow are fatally flawed. The Dow simply does not reflect the US stock market, and investors would be well served to set it aside in favor of broader, market-cap weighted indexes.

Elisabeth Dellinger
Into Perspective

Divestment and Rational Expectations

By, 06/24/2015
Ratings724.152778

Genocide in South Sudan. Ethnic cleansing in Myanmar. Political prisoners and purges in China, Iran and Venezuela. Continued Russian attacks in Ukraine. Human trafficking in Africa and Asia. Our world is sadly never free from state-sponsored atrocities. As we often remind readers, markets are cold-hearted and often rise in the face of localized human suffering. But people aren’t cold-hearted! Many investors care deeply about human rights and other social issues. So what is a warm-hearted investor to do about companies that run afoul of their convictions and values?

Ultimately, it is a personal choice. I’m not here to tell you how to think or what to do. But one tactic championed by pundits, activists and advocates these days—divestment—is cloaked in myth. Understanding what divesting does—and doesn’t—do can help make investors make more educated decisions.

Divestment, as the name implies, means not investing in any companies that are involved—directly or indirectly—in situations or activities you don’t support. That might include Energy companies drilling for oil in South Sudan if you feel passionately about ending genocide. High-tech companies manufacturing in Malaysia, if human trafficking is your issue. Industrials and banks investing in Myanmar’s burgeoning infrastructure development, if the strife faced by the Rohingya Muslims is your cause. Any Energy firm drilling for fossil fuels, if you’re gunning for a green world.

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

User’s Guide to a Critical Week for the Euro(TM)

By, 06/23/2015
Ratings443.829545

Hello, readers, and welcome to a new Critical Week for the EuroTM![i] It will have rumors, summits and deadlines galore.[ii] Sensationalism and hyperbole will rule the headlines. Things will sound scary and crazy. If markets don’t wobble, headlines will warn stocks are complacent and ignoring huge risk. If markets do wobble, headlines will warn the endgame is finally coming. If you are into political theater, it will be entertaining as all get out. If you are into wordplay, you will giggle over the Grexhaustion, Grexcitement[iii], Grexit and Graccident and sigh over the dra(ch)ma and rumors of drachmail.[iv] If you are trying to ignore the spectacle and figure out what it all means for your investments, you might well find the cacophony confusing and contradictory. So here is our attempt at a rational rundown of what’s at stake, what’s coming up and why the outcome probably doesn’t mean much for global markets, regardless of what that outcome is.

As best as we can tell, here is where things stand now, at 1:10 PM Pacific Daylight Time on June 22.[v] Greece’s bailout extension expires next Tuesday, June 30. If Greece and creditors agree on reforms by then, they get the €7.2 billion left in the bailout. No deal, no money, and Greece faces almost certain bankruptcy. For now, they seem to be inching toward a deal. After promising to say “the big no” to more austerity last week, Greek PM Alexis Tsipras and his team of negotiators submitted a new reform proposal that made a “potentially major concession on pensions” late Sunday (or early Monday, depending on the source). The ever-leaky unnamed sources familiar with talks said that concession is eliminating early retirement next year, replacing the planned gradual phase-out. Tax concessions reportedly include doubling VAT on hotels and hiking taxes on business profits over €500,000 annually and annual incomes over €30,000. The goal here is to close a €900 million budget gap between Greece’s earlier proposals and creditors’ demands, and Athens estimates their plan will hit fairly close to creditors’ target. Jeroen Dijsselbloem, head of the Eurogroup (the official name for the gang of eurozone finance ministers), called it “a welcome step in a positive direction” and “an opportunity to get that deal later this week.”

Temper your enthusiasm, though, because there is a lot of ground to cover, and not everyone shares Dijsselbloem’s optimism. Entering Monday’s Eurogroup meeting, the German, Irish and Finnish finance ministers threw cold water on hopes of a deal in the near future. Dijsselbloem warned they’d all “really need to look at the specifics to see whether it adds up in fiscal terms.” The Eurogroup meeting wrapped with no announcements or fanfare. The emergency eurozone leaders’ summit held Monday was similarly inconclusive—partly because Greece evidently submitted two versions of its plan, partly because no one had enough time to read the whole shebang before they all sat down.

Fisher Investments Editorial Staff
Media Hype/Myths

Efficient, Not Complacent

By, 06/22/2015
Ratings304.45

Are investors sleepwalking their way to disaster? Some say so, with global stocks once again flirting with all-time highs in the face of what many believe are big, bad negatives. The Greek debacle. Looming Fed rate hikes. China slowdown. They suggest investors are being too complacent, ignoring big risks—cause for alarm. But are markets really ignoring these things? Or are they instead doing what markets regularly do—efficiently discounting widely known information and moving on what is most likely over the mid-to-longer term. 

Stocks, like all highly liquid markets, are forward-looking and efficient. Today’s big news is near-always already reflected in stock prices, regardless of when “today” is or what the “big news” entails. Stocks usually aren’t concerned with the right now. They’re concerned with the foreseeable future. While sentiment can swing stocks in the short term, in our experience, stocks don’t move on fundamental events that occur within the next three months or beyond the next 30 or so. Instead, they weigh—and move on—what is likeliest to occur between the next 3 and the next 30 months, focusing most on the next 12-18 months. While investors and headlines obsess over the day’s headlines, markets look beyond the myopia and, usually, move on the things few talk about.

The existence of negatives—real or perceived—is typical in bull markets. The world is never pristine and needn’t be for stocks to rise. Consider the present bull market: It wasn’t born when some sounded the All Clear to Buy Stocks Again siren. It was born in early 2009, when the world economy was in rough shape but less bad than most headlines and investors feared. Folks feared Great Depression Part Deux, which became priced into markets, and, when it didn’t come, stocks surged on positive surprise. Most often, markets weigh positives versus negatives, then compare the balance to sentiment—this is what good old Ben Graham meant when saying markets are weighing machines in the long run. If the positives outweigh the negatives over the foreseeable future, that is often good enough for stocks.

Fisher Investments Editorial Staff
Into Perspective, Developed Markets

Greece Is the Word, Not the World

By, 06/19/2015
Ratings284.285714

With most eyes focused elsewhere (ahem, Greece), investors might have overlooked some tidbits of data confirming the global economy continues plowing forward, undeterred by the Hellenic Republic’s drama. Most of these numbers didn’t make the front page, but they suggest the bull stands on a firm economic ground—and this doesn’t look likely to change in the near future.

Let’s start with retail sales, which rose and beat expectations in America and Britain last month. While retail sales have limitations, they indicate consumer spending—a large component of economic activity—is doing just fine. US sales jumped up 1.2% m/m (2.7% y/y), prompting relief that consumers were “finally” spending their gasoline savings after months of lackluster retail results—with almost no discussion of the fact that retail sales largely omits the service sector (where most consumer spending happens). In the UK, headlines were more optimistic about the 0.2% m/m (4.6% y/y) rise, even though it was slower than April’s 0.9% m/m—they simply concluded consumers were spending their extra cash on services, not gadgets and baubles. Which seems about right to us, considering the UK’s retail sales gauge excludes food service, making it even narrower than the US’s gauge. Full consumer spending is what matters, and retail sales won’t tell you much about that, whether it’s the US’s jump or the UK’s slowdown. Plus, it was always presumptuous to say falling oil and gas prices are big economic stimulus. Sure, they help consumers, but folks always had three choices when it comes to their gas savings: save, pay down debt or shop. 

The week’s industrial production data were less rosy, but we wouldn’t make much of it—the developed world’s factories haven’t led this expansion. In the UK, April industrial production rose 0.4% m/m (1.2% y/y)—its third straight monthly rise—but mining and quarrying drove the increase. The narrower manufacturing gauge, which better reflects UK factories, contracted -0.4% m/m. Manufacturing also contracted -0.2% m/m in the US in May while industrial production missed expectations—dropping -0.2% m/m. Eurozone industrial output ticked up on a monthly basis in April—0.1% from March’s -0.4%--though the year-over-year number was lower (0.8% vs. 2.1%). Some good, some meh, but all consistent with the trends we’ve seen throughout this expansion—choppy, uneven growth. The month-to-month bumpiness in industrial and manufacturing output hasn’t prevented these regions’ economies from growing overall. We don’t see much (if any) evidence today’s wobbles are different than past wobbles.

Fisher Investments Editorial Staff
Into Perspective

While Greece Was Reeling

By, 06/18/2015
Ratings564.321429

For such a small country, Greece sure has hogged a lot of headlines this week. We’re complicit, adding to the headline count yesterday and devoting five of Wednesday’s 11 story blurbs to the Hellenic Republic. It’s a fascinating topic and changes by the moment. But it is a big world, and a lot of non-Greek things have happened this week—things we reckon investors might like to know about. So here is a rundown of news you might have missed amid the Greek news deluge.

The Fed Didn’t Raise Interest Rates

Ok, this one you probably saw. No big changes, no new forward guidance—just acknowledgment that growth has picked up since Q1, which most already suspected. The legendary “dot plot” of Fed people’s interest rate forecasts showed they expect rates to rise more gradually than they anticipated three months ago. In her post-game presser, Chair Janet Yellen urged people to stop focusing on the timing of the first hike and think more about the pace of the overall tightening cycle—then told everyone not to read into the dot plots and reminded us it’s all data-dependent. “It’s data-dependent” is the rough translation of approximately half her answers, which seems like appropriate use of non-committal Fedspeak. Though she did slip once when discussing the eventual first hike, ruminating on the relative unimportance of the timing “whether it is September or December or March,” which most assume means no hike in July.[i] And she made an odd reference to the Fed's desire to raise rates “gradually,” which she helpfully (?) clarified as about one percentage point per year, or a quarter-point every other meeting. We suggest you not take that to the bank, given how her previous attempts at clarity, specificity and transparency have fizzled—she always seems to move the goalposts. Maybe the Fed indeed “wants” to follow this schedule, but wanting doesn’t mean they will. Like the San Francisco Fed’s t-shirt says, it’s all data-dependent[ii].

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

Greece Is Still the Word

By, 06/17/2015
Ratings244.520833

Greece's Parliament is having a rough week. Photo by Milos Bicanski/Getty Images.

Welcome, folks, to another critical week for the euro![i] In this week’s installment, Greece is on the “brink of disaster.” Eurozone officials have urged Greece to prepare for a “state of emergency if the government defaults, runs out of cash and stops paying civil servants. Greek PM Alexis Tsipras said the IMF bears “criminal responsibility” for the hardships wrought by austerity. Talks collapsed after creditors gave their allegedly final “take it or leave it” offer. Eurozone finance ministers meet for more talks Thursday , but German Finance Minister Wolfgang Schäuble said  not to expect much. Greek officials warned they lack cash to pay the IMF by month’s end, while Greece’s central bank warned the nation could leave the eurozone and even the EU—but said only a “little ground” separates Greece and creditors. Then again, Tsipras warned Parliament Wednesday even that “little ground” might be an uncrossable pit and he “will assume the responsibility to say ‘the great no’ to a continuation” of austerity. Fin Min Yanis Varoufakis looked on while sitting cross-legged on the chamber’s floor, head in hands. It is all increasingly bizarre and ever-more impossible to handicap. Will they kick the can? Give Greece just enough cash to get through this month or next? Or will we have default, capital controls and panic on the streets of Athens? No one can know, and we hope for the best for all involved. But as far as cold-hearted markets are concerned, the risks for global investors remain low regardless of what happens. Default and Grexit would probably make life even harder for Greeks in the near term, but probably not for markets globally. All signs indicate the risk of contagion remains minimal.

Fisher Investments Editorial Staff
Inflation

Deflating Inflation Stats’ Importance

By, 06/17/2015

Here is some free advice: Take inflation data with a grain of salt these next several months.

You won’t get that advice from ECB head Mario Draghi, who’s engaged in an extended round of spiking the football after pundits lauded his quantitative easing (QE) program for May’s eurozone inflation uptick. Similarly, media hailed May’s uptick in British inflation which, exhale, alleviated the first ever deflationary read.

These are just the latest in a series of sketchy inflation interpretations made during this bull. Way back in 2009, folks figured the financial crisis would drive deep deflation. A few readings aside, those fears proved false. What followed was an alternating series of hot inflation and deep deflation fears, culminating most recently in early 2015’s fears the eurozone would slide into a deflationary spiral. This was how Draghi sealed the deal on QE, despite the fact it hasn’t been proven to stoke inflation anywhere else. Yet QE isn’t responsible for the eurozone’s inflation uptick. Math and oil prices are.

Elisabeth Dellinger
Into Perspective

Thank Some Angry English Barons for Your Portfolio

By, 06/15/2015
Ratings604.383333

One of the remaining Magna Carta manuscripts from 1215, displayed at the British Library. Photo by Dan Kitwood/Getty Images.

800 years ago today, a bunch of brassed-off English barons and King John signed their names to the words that would forever change the world: “There shall be standard measures of wine, ale, and corn (the London quarter), throughout the kingdom.”

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Recent Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

People Are Not Leaving the Workforce

By, 07/02/2015
Ratings334.181818

Don’t let the falling labor force participation rate fool you.

read more
Fisher Investments Editorial Staff
Into Perspective

Some Thoughts on Greece’s Don’t-Call-It-a-Default

By, 07/02/2015
Ratings634.555555

Things got even weirder the day after.

read more
Fisher Investments Editorial Staff
Into Perspective

On Greek Tweets, Capital Controls, Chaos and Volatility

By, 06/30/2015
Ratings564.428571

Has the endgame finally arrived?

read more
Fisher Investments Editorial Staff
Media Hype/Myths

How Not to Use Valuations

By, 06/29/2015
Ratings304.116667

While market valuations do not predict forward returns, they are a useful gauge of sentiment.

read more
Fisher Investments Editorial Staff
Behavioral Finance

The Missing Lesson: Unfriend the Trend

By, 06/26/2015
Ratings593.898305

Beware forecasts that simply extrapolate the year’s start forward.

read more

Global Market Update

Market Wrap-Up, Wednesday July 1, 2015

Below is a market summary as of market close Wednesday, 7/1/2015:

  • Global Equities: MSCI World (+0.7%)
  • US Equities: S&P 500 (+0.7%)
  • UK Equities: MSCI UK (+0.7%)
  • Best Country: Austria (+2.4%)
  • Worst Country: Norway (-0.8%)
  • Best Sector: Health Care (+0.%)
  • Worst Sector: Energy (-0.9%)

Bond Yields: 10-year US Treasury yields rose 0.07 percentage point to 2.42%.

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.