Fisher Investments Editorial Staff
Personal Finance, Into Perspective

Are Markets Retesting Your Mettle?

By, 02/09/2016

Global markets retested the correction’s lows Monday, and with the volatility came more dreary headlines. We had Wall Street strategists cutting their S&P 500 forecasts, pundits warning about slowing capex, chart-watchers finding scary things in charts, and banks and tech stocks replacing oil and China as the nexus of fear. Odd as it might seem, this is all quite encouraging—freakouts and a vain search for fundamental cause are normal in corrections, and capitulation often escalates as a correction’s end approaches. The further sentiment falls, the easier it is for any bit of positive news to be a pleasant surprise—the sort of pleasant surprise that buoys stocks. While no one can know when this correction will turn around, we believe now is a time for steely nerves and patience.

We often pick on the media a bit for peddling fear during corrections, but chances are your biggest enemy isn’t the headlines. Most likely, it is your brain. The human psyche is hard-wired to respond to volatility with a fight-or-flight mentality. When the going gets tough, survival instincts kick in, telling us to stop the bleeding—or, in other words, to sell. It’s a myopic instinct, making people forget their time horizon could stretch 10, 20, 30 years or more, depending on where they are in life. It’s all too easy to forsake the future for instant comfort in the now.

This instinct is often magnified by a behavioral phenomenon called myopic loss aversion—our tendency to feel the pain of a loss far more than we enjoy an equivalent gain. When paper losses mount during a correction, most folks feel it far more than they feel equivalent paper gains during a rally. Not knowing when the correction will end sows further discomfort, as it means not knowing when that pain will end. Hitting the “sell” button seems like the solution.

Elisabeth Dellinger
The Global View

About That ‘Brexit’ Pounding

By, 02/05/2016
Ratings194.131579

What happens if these two break up? Photo by Toby Melville – Pool/Getty Images.

Stop me if you’ve heard this one before: If the UK leaves the EU, the pound will plunge, interest rates will soar and the economy will crater, because foreign investors will stop funding the current account deficit. Financial Armageddon will ensue, and probably a plague on humanity. Or something—I might have exaggerated for dramatic effect.[i] BoE Governor Mark Carney and others have warned of this dismal chain reaction, and the sirens got louder after the first draft of Britain’s renegotiated EU membership landed with a resounding thud, giving Brexit advocates more momentum. But it is far too early to fear the worst, and not just because the vote could easily go either way. These warnings are dubious on their face and frankly misunderstand how capital markets work.

Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths

Survey Says … Growth!

By, 02/04/2016
Ratings973.845361

In today’s upside-down financial press, what’s fair seems to be foul. For instance, a January survey reported more businesses grew than didn’t in the US’ robust “non-manufacturing” sector, which includes industries ranging from Retail Trade and Mining to Health Care and Construction. The UK’s own burgeoning services sector experienced a similar January. Sounds grand, right? Not if you read the news coverage. Headlines bemoaned services growth at its slowest pace in two years in the US, while another pundit declared the “UK’s economic recovery is a shadow of its former self.” All this left us a wee bit confused, especially when the media attempted to pin stock market volatility on reported output last month. While old January data don’t mean much for forward-looking stocks, this also overlooks the larger point: The latest non-manufacturing and services PMIs show growth. That so few recognize this speaks to how dour sentiment is.     

For the US, the Institute for Supply Management’s Non-Manufacturing Purchasing Managers’ Index (PMI) slowed to 53.5 in January—down from December’s 55.8. In the UK, Markit/CIPS’ Services PMI rose a tad from December’s 55.5 to 55.6. PMIs are business surveys asking whether activity in various categories rose or fell in a given month, and readings over 50 indicate more respondents grew than contracted once all the categories were aggregated. While PMIs have limitations—they don’t tell you the magnitude of growth and they’re surveys—many use them as a quick-and-dirty proxy for business growth since they hit within days of month-end.

Considering both surveys were well in expansion, we’re a little perplexed by the near-uniform gloom. Even though ISM’s non-manufacturing PMI is at its slowest level since February 2014[i], it still indicated growth—as does Markit/CIPS’ Services PMI. And while monthly data can be pretty darn volatile, the longer-term trends suggest nothing out of the ordinary for both the ISM and Markit/CIPS PMIs. (Exhibits 1 and 2)

Fisher Investments Editorial Staff
Politics, Media Hype/Myths

That Raucous Iowa Caucus

By, 02/03/2016
Ratings284.232143


As his thumbs up seemingly indicate, Martin O’Malley is out. Photo by Steve Pope/Getty Images.

As always, we favor no candidate or party and assess politics solely to analyze how it may impact markets. We believe political bias is blinding and dangerous for investors.

And then there were 12. Former Governors Martin O’Malley (MD) and Mike Huckabee (AR) dropped out of the Presidential race after Monday’s Iowa caucus[i], which saw Democrat Hillary Clinton edge Bernie Sanders in a photo finish, while Ted Cruz trumped[ii] pollsters and The Donald on the GOP side. Kentucky Senator Rand Paul, who finished fifth on the GOP side, suspended his campaign early Tuesday.[iii] Pundits are slicing and dicing the caucus results, and if you’re into that sort of thing, there is entertainment and wonkery galore. But for investors, there are really only two main takeaways at this juncture: Polls are terrible at predicting primary races, and it’s too early to handicap who wins the Republican nomination. That means it’s too early to assess how November’s vote will impact markets.  

Fisher Investments Editorial Staff
Into Perspective

Did the US Economy Have a Case of the Mondays?

By, 02/02/2016
Ratings1024.117647

The latest US manufacturing and consumer spending numbers hit Monday, and if you take most coverage at face value, it wasn’t pretty. “Cautious consumers hold back on spending in December as concerns rise about US economy,” said one headline. “Consumer spending cooled in December as Americans padded savings,” said another. Manufacturing “continued to contract,” and the Institute of Supply Management’s report had a “weak tone.” It all left folks wondering how worried we should be and if the long-feared recession is nigh. None of these headlines really give you the full scoop. As it happens, ISM’s survey showed manufacturing output and new orders rose, and when adjusted for inflation, so did consumer spending. But the widespread effort to find a cloud in a silver lining shows where sentiment is: still in the doldrums. It shouldn’t take much for US growth to beat expectations and give stocks some positive surprise.

Consider manufacturing. The headline Purchasing Managers’ Index (PMI) hit 48.2 in January—higher than December’s 48.0, but still below 50, therefore indicating contraction for the fourth straight month. That fed the long-running narrative of a manufacturing recession that’s poised to take down the US economy. But if you look at the PMI’s components, it doesn’t exactly look recessionary. New orders and production moved back into expansion at 51.5 and 50.2, respectively. New orders’ rise is particularly noteworthy, as today’s orders are tomorrow’s production—it’s the most forward-looking component. The biggest detractors were inventories—always open to interpretation—and employment, which is always and everywhere a late-lagging indicator. While one month doesn’t make a trend, January’s report has plenty of reasons for optimism.

Plus, for all the handwringing about this being the longest contractionary streak since the recession ended in 2009, the actual decline is small—much smaller than you usually get in a recession. As Exhibit 1 shows, it looks much more like the 10 or so false reads since 1948. There were deeper, longer declines in the 1980s and 1990s. But last we checked, there were no recessions in 1985, 1995 or 1998. ISM’s report even says that while manufacturing has hit a soft patch, the numbers are still consistent with a broad economic expansion.

Fisher Investments Editorial Staff
GDP, Media Hype/Myths

Drilling Deep: How Did Energy Influence US Q4 GDP’s Slowdown?

By, 01/29/2016
Ratings974.103093

Friday morning, the US Bureau of Economic Analysis (BEA) announced US Q4 2015 GDP grew a meager 0.7% annualized, slowing from Q3’s 2.0%. With this seemingly jiving with fears of a slowdown or worse, the deceleration stole headlines in short order. The Wall Street Journal dubbed it “anemic.” The New York Times said, “The American economy barely grew last quarter, finishing the year much as it had started and stoking concern about its momentum in 2016.” And many blame Energy, suggesting oil’s drop is hamstringing the US economy. While the report is indeed a slowdown, we’d suggest that the details allude to an economy that was on fine footing at 2015’s close—and that Energy isn’t likely to derail growth looking forward.

First, to be clear, this report isn’t stellar. But it also isn’t a surprise. Wall Street analysts’ forecasts ranged from 0.0% to 2.3%, with the consensus being +0.9%. So this isn’t shocking anyone. And before you figure this raises doubts about the US economy’s “momentum,” consider that laws of physics do not really apply in econometrics. The simple fact of the matter is this is a backward-looking reflection of one slightly wonky, incomplete attempt to tally US economic performance. It is also one quarter—annual 2015 GDP data, also published Friday, showed GDP grew 2.4%, matching 2014’s rate.

Exhibit 1: US GDP Growth, Quarterly and Annual Rates

Fisher Investments Editorial Staff
Into Perspective

Don’t Be Afraid of Rating Agency Downgrades

By, 01/29/2016
Ratings453.644444

Credit-ratings agency analysts have been a busy bunch lately. And not with upgrades. Last year, Standard & Poor’s downgraded more issuers than they have in six years. Separately, Moody’s placed 120 oil and gas firms and dozens of mining companies on review for possible downgrades. Fitch—the third major rating agency—has been relatively quiet thus far, but given the three agencies tend to move in lockstep, it wouldn’t surprise us if they joined the party. But while these moves took headlines recently, with many quoting Moody’s statement that this is a huge “fundamental shift” for commodities firms, these downgrades really aren’t even news. They only confirm what markets have long known: The global commodities slump has pressured many indebted resource producers. Which is par for the course for credit-rating agencies’ decisions. They have a rich history of forecasting what just finished happening, and that appears to be the case here. Investors should categorize their blanket commodities industry downgrades as noise, not news.

Credit-rating agencies base their decisions on recent and current events and other widely known information. They adjust an issuer’s credit rating only when it’s apparent fundamental conditions have actually changed—e.g., when oil prices fall far, it’s fairly clear Energy firms’ profits will  drop, but the raters wait to actually get that report. Markets, however are forward-looking. If things start looking dicey, they usually begin discounting it right away. If certain developments make it likely a firm won’t be able to service its debt in the foreseeable future, yields don’t wait for some formal announcement to start rising. They move first.

Credit markets began discounting Energy firms’ troubles long ago. Energy junk bond yields first spiked in late 2014. They recovered some in early 2015, while oil prices dead-cat-bounced, then soared—far outstripping broader high-yield bond yields. Ditto for the metals & mining industry’s junk bond yields. This was a sign markets knew oil and commodities’ sharp declines spelled trouble for many resource firms. 

Fisher Investments Editorial Staff
Media Hype/Myths, Into Perspective

Industry Isn’t Producing a Recession

By, 01/29/2016
Ratings474.010638

As the global expansion nears its seventh birthday, many folks see worrisome signs that the “r” word—recession—looms. As evidence of weakness, they point to contracting industrial production, now down in 10 of the past 12 months—presuming industrial production is a forward-looking economic indicator. Spoiler alert: It isn’t. And that isn’t the only shortcoming to this theory. A closer look at the data reveals some other big caveats. In our view, recession doesn’t look likely.  

First, the stats behind the fear. According to one pundit, when industrial production falls at least 8 months in a 12-month period, it’s a surefire sign a recession will occur. Here is the messy chart allegedly supporting this thesis (Exhibit 1).

Exhibit 1: Does Industrial Production Foresee Recession?

Fisher Investments Editorial Staff
Monetary Policy, Media Hype/Myths

The Folly of Dissecting Fedspeak

By, 01/28/2016
Ratings824.262195

Here is a big fear you might have seen recently: The Fed jumped the gun by hiking rates last December, and unless they back off from plans to hike four times this year, the economy and stocks are doomed. Well, they met Tuesday and Wednesday, didn’t hike rates, and didn’t change their forward guidance. Markets tumbled after Wednesday’s statement release, and headlines blamed the Fed for not ruling out a March rate hike, even though it had a slightly dimmer view of the economy. As ever, it’s impossible to pin any day’s stock price movements on any one thing. But the broader obsession with the Fed allegedly penciling in four rate hikes this year seems blown out of proportion. One, a Fed that doesn’t make knee-jerk reactions to market volatility is probably a more measured, thoughtful, confidence-inspiring Fed. Two, the Fed hasn’t penciled in a darn thing.

The Fed did make some adjustments to its statement. Where December’s statement described growth as “moderate,” this one said it “slowed late last year.” Consumer spending and business investment are now “moderate” instead of “solid.” Gone was a statement calling risks to the economy and labor markets “balanced.” In its place: “The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market inflation, and for the balance of risks to the outlook.” Most headlines interpreted this as a souring outlook. One called it a mea culpa for projecting four rate hikes this year. But it seems awfully presumptuous to speculate about the Fed’s motivations when no one on the FOMC has actually said anything. Janet Yellen didn’t give a press conference. We have zero interviews or soundbites. Reading between the lines thus strikes us as a fool’s errand. For all we know, maybe the Fed just didn’t want to sound tone deaf.

Parsing Fed statements and guidance won’t get you anywhere, ever. Every move they make depends on data. Not forecasts, not internal projections, not a reading of the public mood. Just the FOMC’s collective interpretation of the latest readings of economic growth, job growth, inflation and signals from global markets. (OK, maybe with a smattering of politics—as we’ll explain.) This has always been true, and Janet Yellen and her Fed-head predecessors have always taken great pains to emphasize it.

Fisher Investments Editorial Staff
Commodities, Media Hype/Myths

Oil and Stocks, Hand in Hand?

By, 01/25/2016
Ratings2304.258696


Is oil driving stocks? Photo by Seth Joel/Getty Images.

Oil! Got your attention? Headlines are blaring about an alleged link between oil and stock prices, with several noting a near-perfect correlation over the last few weeks—and saying high correlation is common during recessions or periods of “financial stress.” One prominent article pronounced the correlation over the last month to be the highest since 1990. Many take the link one step further, warning cheap oil is about to cause a recession. Texas jobless claims are now considered a key national indicator. But we’ve crunched the numbers, and frankly, we don’t get the hype. Oil’s recent tight relationship with stocks is an interesting observation, but its predictive powers are about nil. And fundamentally speaking, oil’s economic impact, for good or ill, just isn’t big enough to move the needle in the US or globally.

Exhibit 1 shows why everyone is very excited about oil.

Todd Bliman
Into Perspective, Personal Finance

Rational Thoughts for Irrational Times

By, 01/22/2016
Ratings2683.95709

Have you heard? The stock market is off to a not-so-wonderful start this year. And, unlike this past summer, when a similar-sized drop had many personal finance pundits preaching passive peace, now headlines shriek of big drops ahead. Many who suggested a “stay cool” approach to your retirement portfolio earlier now suggest stocks are in for a world of hurt. Instead of the sage advice they offered then, many now ask a litany of questions that could easily skew readers off their investing course. They ask if recession is near; wonder if the bottom is in. They tell you just how many trillions the correction has thus far dinged.

Here is the thing: These thoughts can easily skew you from what matters.

I’ve been in this industry ever since I graduated college—depending how you measure them, that’s nine corrections and two bear markets ago. I’m not the most experienced person in the world, by any stretch, but I have been through this rodeo a few times before and understand how investors tend to react. When times get rocky, it is human to feel losses sharply and wonder if some form of action is requisite. That human urge will seek justification in virtually any headline.

Fisher Investments Editorial Staff
Emerging Markets, Media Hype/Myths

The Debt Mountain and Other Chinese Ghost Stories

By, 01/22/2016
Ratings1133.769912


Not quite an insurmountable mountain. Photo by SeongJoonCho/Bloomberg via Getty Images.  

China has dominated headlines this month, from bouncy markets and hijinks with circuit breakers to the return of yuan devaluation worries. All are riffs on one overarching fear: that China’s oft-predicted “hard landing” is happening now. After five years of waiting. Yet Godot hasn’t arrived, and he doesn’t seem likely to. China’s growth is slowing, yes, but not dramatically, and the latest GDP figures beat expectations. But fear didn’t fade. Instead, it morphed to another old worry: a foreboding “debt mountain” that threatens to bury China. We don’t think this iteration of hard-landing fears is any more valid than its predecessors. Resurgent fears may weigh on investor sentiment in the short term, but China still shouldn’t derail the global economy or bull market.

First, the GDP numbers: China grew 6.8% y/y in Q4 and 6.9% y/y in 2015—in line with the government’s target of “about 7%” for the year. Yet headlines found reasons to mope, bemoaning the slowest growth in a generation[i] and questioning the data’s accuracy. [ii] While we, too, are skeptical, we hold that standard to all data, China or no—no one gauge or provider is perfectly accurate. More importantly, nothing in recent Chinese data suggest anything out of the ordinary: Growth is still slowing modestly as the government shifts the economy’s focus from heavy industry to services and consumption. December industrial production slowed a bit from November, from 6.2% y/y to 5.9% y/y,[iii] as did fixed asset investment, which eased to 10.0% YTD December 2015 vs. 15.7% over the same period in December 2014.[iv] However, retail sales rose 11.1% y/y in December 2015, a tad slower than November’s 11.2% y/y, but still darned fast on an absolute basis.[v] And, for the first time, services comprise more than half of the economy, up from 48.1% to 50.5% in 2015. Manufacturing’s share of GDP fell two percentage points to 40.5%. In short: The biggest chunk of China’s economy is growing the fastest. Plus, despite all the fretting about slower growth, China still adds significantly to the global economy. Per Bloomberg, China’s $10 trillion economy—more than two Japans—grew by about $645 billion in 2015, essentially adding another Sweden or nearly three Greeces[vi] to the global economy.

Fisher Investments Editorial Staff
Into Perspective, The Global View

Some Friendly Facts on Wednesday’s Wild Ride

By, 01/20/2016
Ratings1254.088

Ouch. That’s about the only word we can use to sum up Wednesday’s volatility, which saw many indexes globally hit new lows. Some—namely the UK’s FTSE 100 and Japan’s Nikkei 225—breached -20% from their prior highs when measured in local currencies, prompting shouts of “bear market!” in their home countries. Fear and gloom are everywhere. But don’t give in. During corrections, it is fairly normal for some narrow benchmarks to enter “bear territory.” It doesn’t mean world stocks are actually in a bear market—and even after Wednesday, they aren’t[i]. It just illustrates the importance of global diversification.

When the financial news sites discuss international returns, they usually cite legacy benchmarks in local currency. For UK markets, we get the FTSE 100 in sterling. For Germany, we get the DAX in euro. The Nikkei is always quoted in yen. If you’re investing in those countries using any other currency, those returns aren’t relevant to you, as currency translation would impact your results. For example, the Nikkei 225 is down -21.7% since 6/24/2015 in yen.[ii] In dollars, it is down less, -16.4%.[iii] Some articles will compare a bunch of benchmarks, each in their local currency. Yet any proper comparison must also account for currency moves. All are big reasons why we think much of Wednesday’s sensationalism missed the target. It shunned measured analysis for eye-popping numbers.

In doing so, it also overemphasized some very small pieces of the global stock market. Indexes like the FTSE 100, Germany’s DAX and the Nikkei 225 are, to varying degrees[iv], loosely fair representations of their countries’ broad stock markets. But compared to global markets, they are very, very narrow. They represent blue chip stocks in countries that are 7.3%, 3.4% and 9.0% of the MSCI World Index by market cap, respectively.[v] A general rule of thumb is that the narrower the index, the wilder the ride. During corrections and “normal” bull market stretches, individual countries regularly diverge from broader global returns. Particularly those whose markets have only a few companies or sectors, like Norway, Ireland and Denmark. During this correction, some countries have held up far better than the world. Others, especially those with heavy Energy and Materials exposure, have done far worse.

Fisher Investments Editorial Staff
GDP, US Economy, The Global View

A Dose of (Mostly) Growthy Data

By, 01/20/2016
Ratings1514.245033

Amid the sound and fury of market volatility and global recession fears, something is strangely absent: meaningful economic data supporting these fears. It has been a fairly slow two weeks for economic releases, which have included plenty of good news. Most releases underscore the long-running trend of moderate global growth, with strong countries outweighing pockets of weakness. Meanwhile, forward-looking indicators suggest the global expansion remains alive and well. This is some pretty compelling evidence this decline is sentiment-driven, a classic correction. Sentiment can rock stocks in the short term, but over longer stretches stocks weigh fundamentals. With plenty of positive fundamentals to weigh, we think the bull market likely has further room to run.

Here is a list of every meaningful data point from major countries year to date. The data is sorted by region and then by date within each country. You’ll see some good, some not so good, some big metrics (GDP) and small ones (Japanese auto sales, anyone?). Most of it is backward-looking, but it still underscores the broader point: There is a big gap between this very benign economic reality and the -8.5% market drop that started the year.

Exhibit 1: Global Economic Data since 1/1/2016 (Click to Enlarge)

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Recent Commentary

Fisher Investments Editorial Staff
Personal Finance

Are Markets Retesting Your Mettle?

By, 02/09/2016

Some tips on outsmarting your emotions when markets get rocky.

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Elisabeth Dellinger
The Global View

About That ‘Brexit’ Pounding

By, 02/05/2016
Ratings194.131579

Making sense of doom-and-gloom Brexit warnings.

read more
Fisher Investments Editorial Staff
Into Perspective

Survey Says … Growth!

By, 02/04/2016
Ratings973.845361

You might not know it from the media coverage, but January PMI surveys show the US and UK services sector grew.

read more
Fisher Investments Editorial Staff
Politics

That Raucous Iowa Caucus

By, 02/03/2016
Ratings284.232143

Some candidates won, the polls lost, and it’s still too early to handicap November’s race. 

read more
Fisher Investments Editorial Staff
Into Perspective

Did the US Economy Have a Case of the Mondays?

By, 02/02/2016
Ratings1024.117647

Never judge a book by its cover, or an economy by headline data.

read more

Global Market Update

Market Wrap-Up, Friday, February 5, 2016

Below is a market summary as of market close Friday, February 5, 2016:

  • Global Equities: MSCI World (-1.6%)
  • US Equities: S&P 500 (-1.8%)
  • UK Equities: MSCI UK (-1.4%)
  • Best Country: Singapore (+2.1%)
  • Worst Country: Italy (-2.4%)
  • Best Sector: Materials (-0.4%)
  • Worst Sector: Information Technology (-3.5%)

Bond Yields: 10-year US Treasury yields fell -0.01 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.