Fisher Investments Editorial Staff
GDP, Developed Markets

The Global Economy Is Growing at Now, Now

By, 05/26/2016
Ratings794.113924

Stocks have jumped higher to start this week, which is leaving our skeptical media grasping at straws trying to figure out what is behind the gains. Many seemingly settled early this week on Tuesday’s strong US housing data. First, we caution investors from speculating about daily market movements due to any specific piece of news[i]—markets are far too complex to pinpoint an up or down day based on a single report. But among all the datasets out there, real estate is even more limited, given its small slice of the total economy. However, for you number munchers, fret not! May has provided a bounty of growthy data to enjoy.     

First, let’s start in the good ol’ U-S-of-A. After Q1 GDP missed expectations in last month’s release, May’s news has been more upbeat. April industrial production (IP) rose 0.7% m/m, halting a two-month slide. Though mining output fell -2.3% m/m—reflecting Energy’s long-running struggles—Utilities, bolstered by cooler weather, rose 5.8% m/m after falling the prior two months. Moreover, Manufacturing rose 0.3% m/m, bouncing back from March’s -0.3% dip. Though this noisy gauge continues bouncing around, weak Mining has had an outsized impact on the headline figure. The more representative Manufacturing, which comprises nearly three quarters of IP, has steadily climbed throughout this expansion.  

Elsewhere, April retail sales rose 1.3% m/m, the biggest monthly rise in over a year. Led by auto sales (3.2% m/m), growth was pretty broad-based, with food and clothing sales both up. Even gas station sales—a longstanding weak spot due to plummeting gas prices—rose 2.2% m/m thanks to oil prices’ recent rebound. As always, we suggest investors refrain from reading too much into one monthly report, good or bad—especially since retail sales don’t include services, a large swath of overall consumer spending. However, it does counter overly dour concerns about the US consumer’s health. Finally, the April Institute for Supply Management’s Purchasing Managers’ Indexes (PMIs) for both manufacturing and non-manufacturing topped 50—50.8 and 55.7, respectively. Readings above 50 indicate growth, and more importantly, the New Orders subindexes for both gauges suggest continued expansion is likely. 

Michael Hanson
Finance Theory

Book Review: Philosophy’s Stake in Finance

By, 05/25/2016
Ratings784.352564

Models.Behaving.Badly.: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life – Emanuel Derman

Early in Emanuel Derman’s quintessential book on financial theory, he delivers the punchline: “The longer you live, the more you become aware of life’s contradictions and the inability of reason to reconcile them.”

In the youth of serious intellectual life, for a very long time you search for “final” truths—ideas and theories to finally explain the world, and ourselves. It’s after the very long slog, decades of searching, reading thousands of books, watching ideas come and go, colliding and negating each other, seeing entirely new forms of knowledge and areas of study arise, that one arrives at something far different than the innocent objective of discovering “truth”: The contradictions of life can hold the greatest wisdom.

In this way, Derman’s short but powerful Models Behaving Badly ought to be on the reading list of every aspirant investor. It’s perhaps the best contemporary work of financial philosophy, extant.

A former physicist-cum-financier, we reviewed Derman’s first book awhile back, My Life as a Quant, to some fanfare. That book remains a laudable firsthand account of the rush to make investing like physics—deterministic, statistic and beholden to mathematical truths.

Fisher Investments Editorial Staff
Commodities

There Is Nothing Inherently Special About Gold

By, 05/23/2016
Ratings553.872727

Gold has taken a breather from its 2016 rally this month, yet enthusiasm for the shiny yellow metal remains high—especially now that no lesser than George Soros has piled in. He is far from the only one. With the political uncertainty up and money pouring into gold ETFs, many believe the conditions are ripe for gold to run on and on.

But it’s all myth. Gold isn’t an inflation hedge, bulwark against low interest rates or a safe haven in troubled times. If you bought gold to hedge against inflation at pretty much any point in the 1980s or 1990s, it took years to pay off. Gold has also fallen during equity bear markets and periods of geopolitical turmoil, shattering that safety blanket myth. As an investment, gold has no special qualities. It is just a commodity, and a super volatile one. Its long-term returns trail stocks, yet its short-term returns are far more variable. Long-term gains, theoretically, are your compensation for enduring short-term ups and downs. Stocks deliver on this, but gold largely doesn’t.

Long term, gold has little utility in a diverse portfolio. Investing successfully in gold requires near-perfect market timing. As Exhibit 1 shows, gold isn’t a very viable long-term investment—with most of its positivity coming in short bursts. After one such burst in the late 1970s and early 1980, gold fell drastically and took 27 years to get back to the pre-drop high. During that span of time, the S&P 500 rose 2,861.7%, a wee bit of opportunity cost for gold holders.[i] Gold posted positive returns in 272 of 498 rolling 12-month periods since 1973, or a 54.6% frequency of positivity.[ii] Stocks rose in 398 of the same 498 rolling 12-month periods—a 79.9% frequency of positivity, crushing gold.[iii] Moreover, fully 132 of gold’s positive 12-month rolling periods came in the 11 years from 2001 – 2012. The hot streak in recent years (before the big gold bust) is probably why so many folks talk up gold these days, but recency doesn’t equal repeatability.  

Fisher Investments Editorial Staff
MarketMinder Minute, Monetary Policy

MarketMinder Minute - Not So Negative Interest Rates

By, 05/23/2016
Ratings234.086957

This MarketMinder Minute looks at negative interest rates and what they mean for the global economy.

Fisher Investments Editorial Staff
Behavioral Finance

Investing’s Timeless Challenge: Patience

By, 05/20/2016
Ratings944.430851

Birthdays. Anniversaries. Graduations. Bar mitzvahs. Promotions. Eagle scout-hood. Most milestones are a cause for celebration. But this weekend investors face one that doesn’t bring much joy: Saturday officially marks one calendar year since the S&P 500 price index last hit a new high, with the gauge down -4.3% since.[i] That markets have gone a year without producing any gains is frustrating, especially when you consider a primary reason for the flattish returns is the correction in between, which added big volatility and scary headlines to the mix. That one-two punch—volatility with no real rewarding payoff—likely has many wondering what’s in it for them: whether stocks’ volatility risk is worth it. Some pundits aren’t helping either, seeing the lack of upside as a sign the bull market is petering out. But here we’d counsel caution: Both these camps of investors could be setting themselves up to make a behavioral investing error. Past market trends—up, down or sideways—are never predictive of where markets are headed. As difficult as it may be, we humbly suggest now is a time to remain patient and disciplined, as fundamentals suggest the bull market likely has further to run.

First, to get a technicality out of the way: US market returns over the last year are actually a smidge better than mere price levels suggest. Including reinvested dividends (total return), the S&P 500 breeched last May’s levels about a month ago. It’s pulled back slightly since, to sit 2.8% below its new record as we type.[ii] Which raises an interesting point: Since 1926, dividends account for a little less than a third of average annual total returns. But most financial media outlets puzzlingly focus solely on market price levels. It is hugely unlikely you can invest in stocks and not earn a dividend, so a price-only fixation is pretty unrealistic. [iii]

But either way, price or total, returns are still basically flattish—and global stocks are a bit behind US and have not set new highs, dividends or no. However, though it may not seem so, flat (point-to-point) returns—even for periods as long as a year—aren’t all that unusual in bull markets. Typically, like the current one, a bull market correction plays a role.

Todd Bliman
Across the Atlantic, Media Hype/Myths

Brexit, and the Creative Art of Misinformation

By, 05/20/2016
Ratings474.276596

Photo by Christopher Furlong/Getty Images.

Recently, Bank of England Governor Mark Carney claimed that if British voters elect to leave the European Union in June 23’s referendum, it will risk recession.

Fisher Investments Editorial Staff
Into Perspective, Monetary Policy

Don’t Let the Yield Curve Flatten Your Spirits

By, 05/19/2016
Ratings674.231343

In these allegedly very uncertain times, one constant remains: the perpetually dour media. Headlines fret the state of the global economy daily, cycling through a steady stream of worries. This week, a fear from the recent past—a Fed rate hike—resurfaced, as the April Fed meeting minutes drove speculation Janet Yellen and Co. will hike in June if economic data are strong enough.[i] Perhaps related to shifting expectations of a hike, short-term US Treasury yields have drifted higher lately, spurring jitters over the yield curve flattening. While we have pointed out why rate hikes aren’t inherently bearish a handful of times (ok, many, many, many times), what are investors to make of the developments surrounding the yield curve, a forward-looking indicator we frequently refer to? Though the yield curve has indeed flattened a bit in 2016, that doesn’t automatically set the US economy up for a tumble, either.  

First, a refresher: The yield curve refers to the distribution of bond yields across all maturities from one borrower. The spread is the difference between long-term and short-term rates, which also serves as a proxy for loan profitability for banks. Banks’ core business is to borrow short (e.g., deposit accounts) to fund longer-term loans (e.g., mortgages, car loans, etc.), so the more long-term rates exceed short, the more money the bank would make. Hence, a positive spread would likely encourage banks to lend to capture the profit, and more plentiful capital stimulates economic growth.

Typically speaking, yield curves are positively sloped because longer-maturity loans mean the lender is exposed to risks for longer and rationally demands higher rates to compensate. However, that isn’t always true. An inverted yield curve—when it costs more to borrow short than long—indicates something isn’t right in credit markets and that weak economic conditions may be forthcoming. A flat yield curve lies somewhere in between—banks may be a bit more hesitant to lend, given they are paid less for the risk they take, but it still wouldn’t necessarily be unprofitable to do so. The importance of the yield curve to future growth is why The Conference Board’s forward-looking Leading Economic Index (LEI) uses the interest rate spread of 10-year Treasurys less federal funds—it provides a telling sign about the upcoming economic environment. So what are folks fretting about today?     

Fisher Investments Editorial Staff
GDP, Media Hype/Myths

Quick Hit: A Few Bullet Points to Shoot Down Lingering Eurozone Fears

By, 05/18/2016

Last week, the 19-nation eurozone reported revised Q1 2016 GDP growth, which showed growth ticked down from the preliminary estimate of 0.6% q/q (2.2% annualized) to 0.5% q/q (2.1% annualized). The media reaction, as it is with most things including the words “eurozone” and “economy,” was dour. Some bemoaned that only now had the eurozone “scraped” back to pre-crisis GDP levels. Others suggest this uptick is likely fleeting and too reliant on Germany. Others claim the eurozone crisis is just on pause. Still others remain fixated on the fact eurozone CPI was in negative territory in April, fretting a deflationary spiral looms. But a negative take on a growing eurozone is really nothing new. So let’s look at the data and assess whether there is really so much to be dour about.

Here are a few quick factoids and charts:

  • With 2.1% annualized growth in Q1, the eurozone grew faster than Japan (1.7%), the UK (1.6%) and US (0.5%).[i] Now, the eurozone posting the fastest growth rate of the four major developed economies isn’t the trend and we don’t expect it to continue, but it is worth noting.. Eurozone GDP, as noted above, has grown in 12 straight quarters and has now eclipsed pre-2008 levels.[ii]

Exhibit 1: Eurozone GDP at an All-Time High

Fisher Investments Editorial Staff
GDP, Forecasting, Media Hype/Myths, Reality Check

The ‘Retail Recession’ Label Doesn’t Fit

By, 05/13/2016
Ratings1064.226415

It was some department stores’ turn in the Q1 2016 earnings season spotlight this week, and to say their results were weak understates the media reaction pretty dramatically. Declining sales and profits led to cries the US is in a “retail recession” and assertions the consumer is tapped out—bad signs for US growth looking forward. But we’d humbly suggest that is incorrect. A recession is a broad-based decline in economic output. This is more a story of narrow, virtually anecdotal data points and a shift in shopping habits—away from department stores and towards online and specialty retailers. Despite some retailers’ recent woes, there is ample evidence US consumers are in fine shape, and that the economy is not headed for recession anytime in the foreseeable future.

On Wednesday, Macy’s reported Q1 sales fell over -7% y/y while earnings tumbled -29% y/y. The following day, Kohl’s said Q1 year-over-year revenues fell more than expected and earnings slid -50%. The carnage continued after market close on Thursday when Nordstrom reported Q1 earnings contracted -61% y/y, badly missing estimates (though sales grew about 1%). All lowered their guidance for full 2016 results. Friday, JC Penney joined the “party,” also posting poor results.

To hear the media tell it, this is a sign consumers are materially tightening their belts. And, with consumer spending accounting for roughly 70% of US GDP, they suggest it signals a weak economy—and maybe an approaching recession. That narrative, however, is based on only a handful of companies, and is pretty darn odd when you square it up against broader economic data like, we dunno, US retail sales. April’s data happened to be reported Friday, and beat estimates with 1.3% m/m growth (3.0% y/y). And, as Exhibit 1 shows, this isn’t a new thing—retail sales are growing at a fine clip, which is especially clear when you remove the negative influence of falling gas prices by excluding gas station sales. (Which reversed in March and April.)

Fisher Investments Editorial Staff
Politics, Inconvenient Truths, Media Hype/Myths

History Shows Election Nerves Don’t Stress Stocks

By, 05/13/2016
Ratings574.342105

Are US politics going to make this a cruel summer for stocks? Speculation about November’s US presidential election has ramped up now that some uncertainty has faded. Donald Trump is the presumptive GOP nominee and Hillary Clinton holds a commanding delegate lead on the Democratic side. Pundits are doing pundit-y things,[i] from postulating about hypothetical matchups to speculating about what the potential winner will do once in office. There is also lots of chatter about what the near-term market impact will be, with some arguing that the closer we get to the election, the greater uncertainty will be—roiling stocks. However, this is largely backward. History shows stocks don’t usually stumble as elections near. Instead, uncertainty falls as the election approaches and markets gain more insight on both candidates, getting used to the idea of either as president. Falling uncertainty is often a bullish force as the election nears. That doesn’t mean stocks are certain to do great this summer and autumn—we don’t make short-term forecasts—but it is powerful evidence they shouldn’t automatically suffer.

The “pre-election = volatility” crowd believes the campaign trail’s noise will raise uncertainty and fear about what either candidate will do once in office. However, this presumes markets will automatically hate everything candidates say—a sign of bias. While a ton of pundits analyze and speculate about what politicians say, these takes are opinions, not facts. And in an election year, political opinions bombard folks from every direction—the TV, the Internet, the newspaper and in regular day-to-day conversation.

Investors may be forgiven if they find themselves overwhelmed by all the noise, but the notion stocks are similarly unnerved isn’t quite right. While in the ultra-short term, talk can stoke volatility, the sheer volume of political noise also means basically every political opinion and take gets priced in. One person’s political feelings are unlikely to be radically unique or surprising—and surprises move markets. Moreover, everything discussed on the campaign trail for Democrats and Republicans alike is part of markets’ discovery process, which clears up question marks about the candidates. Stocks hate uncertainty above all else, and every little nugget about what Candidate X argues or Candidate Y focuses on chips away at that uncertainty.  

Fisher Investments Editorial Staff
Media Hype/Myths

How to Lie With Statistics: Election-Year Stock Returns

By, 05/12/2016
Ratings654.238461

How will 2016’s election impact stocks?

We’ve seen a wealth of speculation in recent weeks, much of it purportedly based on market history—and much of it wrong. Here are three of the biggest fallacies:

All exemplify what Darrel Huff called “lying with statistics” in his seminal 1954 book, whose title we borrowed for this article. Some use limited datasets with averages skewed by extreme outliers. Others cherry-pick broken indexes like the Dow or ignore dividends. It all amounts to misinformation, and none of it is actionable for investors.

Fisher Investments Editorial Staff
Forecasting

The Long and Short of Long-Term Forecasts

By, 05/11/2016
Ratings1114.315315

 
Do stocks face a bleak future? Photo by RubberBall Productions/Getty Images

Headlines questioning stocks’ long-term growth potential abound lately, and many reach the same conclusion: Investors should expect subpar returns for decades. The last 30 or so years were an aberration, they say, and the party is over. Here’s a word of advice: Beware all long-term forecasts, good or bad, as they are merely fallacies masquerading as research. Moreover, they are meaningless for markets, which don’t look more than 30-ish months ahead. As our boss, Ken Fisher, wrote in his 2015 book, Beat the Crowd, “Anything further out is sheer guesswork—possibilities, not probabilities, and markets move on probabilities.”

One recent study by the McKinsey Global Institute typifies the error, claiming “exceptional economic and business conditions” in the US and Europe over the last 30 years drove stock and bond returns above their hundred-year averages, and we’re about to go back to “normal”—lower—for the next two decades. It’s full of models and math, lending an air of precision. But it isn’t airtight. Nothing looking that far ahead can be. It’s impossible to say what the world will look like 20 years from now. For evidence, look to an array of other attempts to divine the distant economic future: fears of peak oil; the Congressional Budget Office’s projections; the famous “Dow 35000” call—we could go on. All had “data” supporting them; all seemed plausible given the zeitgeist of the day. None were right. Not all are this off-base, but these examples show long-term forecasting’s pitfalls.

Fisher Investments Editorial Staff
Into Perspective, Repeatable History

Greek Debt Talks Start With a Shocking Twist

By, 05/09/2016
Ratings343.882353

Greece is back in the headlines, and in years gone by, this would mean the world’s most entertaining political circus is back in town. But it seems times have changed. Even though it had the attendant protests and Molotov cocktail-throwing, Sunday night’s austerity vote didn’t threaten to take down the government. Monday’s emergency meeting of eurozone finance ministers (aka the “Eurogroup”) was a hug-fest, not a shouting match, and Greece’s rep wasn’t mentally water-boarded. There were no threats, lines in the sand or ticking time-bombs. No one called anyone else a criminal, as far as we know.[i] (We know, shocker, right!?!) There wasn’t a deal, but—in grand eurozone tradition—they agreed on a plan for a plan, and everyone left happy. So happy you might even question why we’re writing this, but six years after the first bailout, we know better than to hold our breath. Greek negotiations have a long history of collapsing on the home stretch, and this round could still implode before Greece’s next big payment is due in July. Consider this your advance notice—and reminder that whatever happens in Greece, global stocks shouldn’t much care.

This time Friday, it didn’t look like things would go this well. Greece still hadn’t passed the reforms necessary to pass the first checkpoint in last July’s bailout—a review process that has dragged since last autumn. Meanwhile, the Greek government, still hung up on a leaked IMF teleconference transcript that implied the IMF was keen on pushing Greece to the brink to force a compromise, was accusing the organization of unnecessarily stalling the review. To clear her name, IMF chief Christine Lagarde sent the Eurogroup a letter explaining her beef with Greece and Europe’s progress and outlining the IMF’s additional demands. (Naturally, it leaked.) In response, Greek fin-min Euclid Tsakalatos sent his own letter basically saying, no way. Exhibit 1 illustrates the state of the debate as Parliament convened Sunday using the Cadillac of Explanatory Images, the Venn Diagram.

Exhibit 1: Who Wanted What

Fisher Investments Editorial Staff
Media Hype/Myths, Forecasting

Don't Believe the Energy Hype

By, 05/09/2016
Ratings624.008065

Is it time to jump into Energy stocks? After suffering alongside oil prices since mid-2014, Energy stocks have crushed the S&P 500 since late January, leading many to wonder if Energy’s bloodbath is finally over and investors should hop on the bandwagon. If you’re among those tempted, stay cool: Frenzies are rarely worth following, and fundamentals aren’t on Energy’s side. Energy’s time will come, but we don’t think it’s here yet.

Most Energy firms’ earnings and revenues depend on oil prices, which are up over 50% since January, fueling the hope and hype. But oil has had false dawns before, and this isn’t Energy’s first market-beating stretch since mid-2014 (Exhibit 1). Those runs proved to be short-term countertrends, and this one quite likely follows suit.

Exhibit 1: Energy Countertrends Are Normal

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Recent Commentary

Fisher Investments Editorial Staff
GDP

The Global Economy Is Growing at Now, Now

By, 05/26/2016
Ratings794.113924

May’s data show a blooming world economy. 

read more
Michael Hanson
Finance Theory

Book Review: Philosophy’s Stake in Finance

By, 05/25/2016
Ratings784.352564

Emanuel Derman’s Models.Behaving.Badly is perhaps the best contemporary work of financial philosophy.

read more
Fisher Investments Editorial Staff
Commodities

There Is Nothing Inherently Special About Gold

By, 05/23/2016
Ratings553.872727

Gold is just a commodity, and a volatile one at that.

read more
Fisher Investments Editorial Staff
MarketMinder Minute

MarketMinder Minute - Not So Negative Interest Rates

By, 05/23/2016
Ratings234.086957

This MarketMinder Minute looks at negative interest rates and what they mean for the global economy.

read more
Fisher Investments Editorial Staff
Behavioral Finance

Investing’s Timeless Challenge: Patience

By, 05/20/2016
Ratings944.430851

Saturday marks one year since stocks last hit a record high. Here is how to think about this.

read more

Global Market Update

Market Wrap-Up, Thursday, May 26, 2016

Below is a market summary as of market close Thursday, May 26, 2016:

  • Global Equities: MSCI World (+0.2%)
  • US Equities: S&P 500 (-0.0%)
  • UK Equities: MSCI UK (-0.2%)
  • Best Country: Portugal (+1.5%)
  • Worst Country: Spain (-0.3%)
  • Best Sector: Utilities (+0.9%)
  • Worst Sector: Energy (-0.2%)

Bond Yields: 10-year US Treasury yields rose 0.04 percentage point to 1.83%.

 

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.