Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths

Stocks Don’t Need More QE

By, 08/28/2015
Ratings253.78

In light of recent market volatility, some have suggested not only delaying a Fed rate hike—but bringing back quantitative easing (QE)! The logic? Stocks rose during QE and are now officially flat since it ended, thus markets must need a monetary drip feed—and the central bank should consider bringing it back. This is a case of correlation without causation, in our view. We believe QE is actually an economic depressant, not the stimulant many claim, and resurrecting it would probably do more harm than good.

While it’s true QE coincided with great returns, many drivers (economic, political and sentiment) move markets—not just monetary policy. One theory posits that by lowering long-term interest rates—and squashing yields—QE drove investors from bonds to stocks. Another says the Fed’s funny money went into stocks directly, propping up the bull. We see a couple issues with these hypotheses. The first misunderstands why folks hold fixed income. Most investors generally own stocks for long-term growth purposes and bonds to lessen short-term volatility and provide cash flow (there are exceptions, of course, but overall and on average, this is how investors operate). Most bond investors likely won’t jump to an entirely different (and more volatile) asset class if Treasurys yield next to nothing—they would likely just seek a higher-yielding fixed income security (e.g., corporate bonds). Fund flows since Bernanke introduced QE in November 2008 show equity inflows have trailed bond inflows throughout this bull market. (Exhibit 1)

Exhibit 1: Monthly Net New Cash Flows for Equity and Bond Mutual Funds

Monte Stern
Into Perspective

Income and Wealth Distribution: Overlooked Basics

By, 08/28/2015

(Editors’ Note: Income inequality remains a hot topic, and many wonder how efforts to combat it might impact the economy and markets. We’ve written occasionally on why such efforts would be a solution in search of a problem: Most studies on income distribution fail to account for demographics, taxes and other mitigating factors. Our guest columnist, Monte Stern, has conducted significant research on this topic, and we think his insightful findings present an unusual and fascinating way to think about income distribution—a view you typically won’t get from most major outlets, which we’ve found forsake nuance for sensationalism and soundbites.

For all the bluster in Washington and on the campaign trail, as you’ll see from Mr. Stern’s analysis, very little needs to be done about income distribution from an economic perspective. Hence, that our gridlocked government is unlikely to advance legislation targeting this issue any time soon is actually quite ok for markets. Yet governments of all political stripes have a long history of advancing popular legislation, regardless of the actual economics underpinning it. (See the Tariff Act of 1930, for just one famous example.) If every politician had access to universally correct economic thinking, it still wouldn’t mean they would act on it—an important reason why we believe politics can be a key driver for markets.

As always, MarketMinder endorses no political views and favors no political party. We don’t believe you can analyze markets and economics through a biased lens. The views below are the opinion of the author, not Fisher Investments or the MarketMinder editorial staff. We simply enjoyed the analysis and thought you would, too.)

Fisher Investments Editorial Staff
US Economy

How to Tell False Hope From Rational Optimism

By, 08/27/2015

Investors got some relief Wednesday as the S&P 500 rallied 3.9%, snapping a painful string of declines.[i] Only time will tell whether the correction has turned or another leg down lurks, but if nothing else, the big day provides a good reminder: Stocks move fast, up as well as down, underscoring the importance of staying patient at times like this—particularly when the longer-term outlook for markets remains positive. We believe it does, but not for many of the reasons you might have seen in the financial media this week. Several outlets based their optimism on backward-looking or misinterpreted indicators, like employment or consumer confidence. We don’t want to rain on anyone’s parade, but in our view, these aren’t reasons to be bullish, and overemphasizing them can lead you to a precarious place when this bull market’s end does finally arrive. Again, we think the economic outlook remains strong, but it’s important to discern between false hopes and rational optimism about actual, forward-looking fundamentals.

In the US, pundits seized on consumer confidence (up to a seven-month high in August), July’s rising home sales, rising wages and low unemployment. UK pundits cited Q2’s GDP reacceleration, rising bonuses outside the financial sector, a retail confidence survey and evidence of an August hiring uptick. All good news! But all are either backward-looking (coincident at best) or anecdotal. None predict the economy’s future, in America, Britain or anywhere else.

Let’s take them one by one, starting with employment—the ultimate late-lagging indicator. Conventional wisdom often says hiring boosts consumption, which boosts hiring, creating a virtuous cycle of growth. But the data disprove it. The last recession bottomed in June 2009. GDP resumed growing the next quarter. Yet payrolls continued falling through February 2010. Hiring also continued after the economy peaked in Q4 2007. Some claim an America near “full employment” must be in the driver’s seat, but we were basically at full employment when the last two bear markets began. In the Tech bubble, stocks peaked in March 2000, when US unemployment was 4%. (It fell to 3.8% the next month, setting up a “slope of hope” for investors to buy into.) In October 2007, when the last bear market began, unemployment was at 4.7%, also lower than today’s 5.3%. Growth drives hiring. Hiring doesn’t drive growth.

Fisher Investments Editorial Staff
Into Perspective, Emerging Markets

Corporate America’s View of China

By, 08/26/2015
Ratings794.43038

China continues to preoccupy the financial media, with many casting all the economic growth figures in doubt. We have long been skeptical of the precision of Chinese data, and it seems fair to say transparency is lacking—particularly when you consider the occasional mismatch between national and regional numbers. So it was noteworthy that amid yesterday’s panic-driven volatility, one major American executive sent an email to a well-known market analyst stating that their China business was doing a-ok. (Read The New York Times’ coverage of that here.) Additionally, aircraft giant Boeing announced Tuesday its forecast for Chinese jet demand growth is unchanged, even after the volatility. Now, this is a long-term forecast, but the affirmation is interesting nonetheless. This all gave us an idea: While it is rather opaque, China is a very big economy and key cog in the global supply chain. So one way you may get some real insight into China is to study the commentary of US firms transacting in China—you can benefit from their actual experience.

Below is a collection of commentary from all Russell 3000 firms reporting earnings in the last week that have materially discussed China. We’ve omitted ones where the commentary doesn’t provide anything substantive. The conclusion we reach from reviewing these snippets jives with what we’ve long written: Chinese growth is slowing, but little has changed recently relative to the three-year trend.

These quotations, all derived from FactSet’s CallStreet tool, are a compilation of the most directly China-related remarks made by executives during earnings conference calls in the last week. They are unedited by us, except for highlighting and the occasional bolding, so you can see what we believe are particular points of emphasis. It is possible we unintentionally missed some firms’ remarks or a transcript was not available as of this writing. And we aren’t arguing this is hugely scientific. Our intent here is simple: To give you a largely unfiltered snapshot of Corporate America’s take on China without media speculation or angle. Enjoy.

Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths

Reflections on Corrections and China

By, 08/25/2015
Ratings954.41579

Global markets’ selloff continued Monday, and by day’s end, the MCSI World Index, S&P 500 and many other indexes were officially in correction territory, down -10% or more from their prior peak. The rout started in China, where local stocks fell -8.5% for the day, wiping out all year-to-date gains.[i] As fear grew, the selloff traversed the world, hitting the eurozone (-5.4%), UK (-2.7%) and finally the US (-3.9%).[ii] It is impossible for any human, technical indicator or algorithm to know where stocks will go immediately from here. They could rebound Tuesday, they could bounce around sideways, or they could tumble more—short-term moves are always impossible to predict (or time). But this volatility does look like a classic correction panic, with nothing new or surprising that markets haven’t already fretted for a long time. In our view, this is not a time to sell. We believe this is a time to take a deep breath, stay cool and hang on tight so you don’t miss the rebound, whenever it occurs.

Corrections—short, sharp, sentiment-driven drops of -10% or worse—are uncomfortable and scary, but they are normal in bull markets. With the MSCI World Index down -12.2% since May 21 as of Monday’s close, we now have the sixth correction of this bull market (Exhibit 1). Corrections are emotionally difficult to sit through, but they usually end as suddenly as they begin, and the recoveries are often swift and strong. Enduring these gyrations is the price we pay for bull markets’ strong long-term returns. If you’re investing for long-term growth, riding these ups and downs is likely necessary to reach your goals.

Exhibit 1: MSCI World Index Corrections During This Bull Market

Fisher Investments Editorial Staff
Media Hype/Myths

Navigating a Choppy Stock Market

By, 08/24/2015
Ratings934.053763

Keep calm and carry on.

No, we won’t offer any cutesy memes featuring those words and a crown, but that is nevertheless our advice amid a volatile stretch pushing US and global stocks near correction territory. (A correction is a short, sharp, sentiment-driven drop exceeding -10%.) US stocks fell -5.2% Thursday and Friday combined. Global stocks fell slightly less, -4.3%.[i] From their highs, US and global stocks finished last week down -7.2% and -8.5%, respectively. And, Monday morning, stocks opened sharply lower before bouncing. At one point, the S&P 500 Index (price level—not including dividends) registered the first correction since 2012, then bounced back above the threshold.[ii] Whether the S&P or world stocks finish below -10% from their prior peaks or not remains to be seen, but however you measure it, these past few days haven’t been terribly pretty and seem to have unleashed a good solid dose of fear. However, this move has the sharpness, speed and fear-inducing characteristics that typify corrections—not the greedy buy-the-dips, ignore-the-negatives sentiment common when bears begin.

Our next piece of advice: Turn off the financial media.

Fisher Investments Editorial Staff
Media Hype/Myths, Market Cycles

Are Recession Rescuers Tapped Out?

By, 08/21/2015
Ratings963.895833

Will the US have the necessary firepower to defend against the next economic crisis? Many have doubts, suggesting policymakers face a “persistent munitions shortage,[i] hamstringing them when the next recession comes. How can the Fed cut interest rates when they’re already near zero? How can they do more quantitative easing (QE) when their balance sheet already has $4.5 trillion? How can Congress pass fiscal stimulus when they’re so gridlocked? How can we even afford it, when debt is at 81% of GDP? Who will rescue us? On the one hand, this says a lot about sentiment: Investors remain preoccupied with fiscal and monetary policy, forgetting business cycles turn naturally and economies can grow organically, without external lifelines—that’s bullish today. But it also makes some pretty big, off-base assumptions about the role and necessity of stimulus when times get tough, needlessly sowing fear.

Fiscal and monetary stimulus can help at a recession’s nadir, when liquidity tightens and demand could use a jump start, but it’s a stretch to say economies need government intervention to return to growth. We reckon the obsession with the Fed and feds comes from the massive wall of fiscal and monetary stimulus enacted in early 2009, which perhaps helped the economic recovery begin faster than it otherwise might have. Chopping interest rates down to zero in December 2008, when interbank lending was all but nonexistent, arguably boosted liquidity and helped credit unfreeze. So did the first round of QE, launched in January 2009, which massively boosted not just bank reserves, but the quantity of money in circulation (unlike successive QE rounds, which largely remained on bank balance sheets). At that time, the financial system had all but stopped, and the Fed helped things get moving again. And Congress’s 2009 American Recovery and Reinvestment Act (ARRA) aimed to create new jobs through fiscal spending. While we can debate how effectively the money was spent, getting money to circulate through a recovering economy is a positive, even if it takes a few spends to find its best use. If demand isn’t coming from the private sector, public spending can help fill the void until households and businesses rediscover their animal spirits.

But all of these, at best, merely accelerated the inevitable recovery. Cycles always turn. Buyers return to financial markets, smelling an opportunity to make a killing when there is blood in the streets. An appetite for risk-taking returns, too—banks feel it and resume lending. Businesses that overcorrected during the downturn, slashing production and inventories, have to raise output to meet even the most modest demand uptick. ARRA, for all its hundreds of billions, didn’t touch vast swaths of the private economy—yet demand returned. A lack of aid doesn’t result in perpetual recession: See the eurozone, which exited recession in Q2 2013. At that point, the ECB had its main deposit rate at zero for a year already, Southern European banks were still deleveraging, and QE was a pipe dream. The 19-member bloc didn’t implement a big fiscal stimulus program to goose growth, either. Indeed, weaker peripheral countries—see Spain and Ireland—actually imposed fiscal contractions. Yet today, they’re now among the eurozone’s top-performing economies. Even Greece resumed growing, without a drop of new public investment. Many called on Germany to put its budget surplus to work and boost public investment to import more from the periphery, but Angela Merkel demurred. Southern Europe grew anyway. Would fiscal stimulus have helped the periphery? Possibly! But these countries clawed their way back without it.

Fisher Investments Editorial Staff
Into Perspective, Politics

Greece Is Having a Good Week

By, 08/20/2015
Ratings174.588235

German Chancellor Angela Merkel and her Vice Chancellor were presumably not giggling over Greek portmanteaus during the German Parliament’s debate on Greece’s bailout Wednesday. Photo by Adam Berry/Getty Images.

Well, don’t look now, but Greece finalized its bailout Wednesday, when Germany’s parliament ratified the deal and the Dutch government defeated an attempt to block it. Eurozone finance ministers gave it one last rubberstamp, and a tidy sum of €23 billion—the first tranche of an €86 billion loan—is on its way to Athens, which will use the money to repay the ECB and IMF, clear government arrears and recapitalize banks. Elsewhere in this Greek week, bank deposits began trickling back in, capital controls eased a tad, and the government (sort of) privatized 14 airports, another key step to meeting bailout terms. So things are going well! For now, that is. We, like most of the world, would love it to be all quiet on the Grecian front, giving markets a break from perpetual crisis mentality.[i] But we aren’t quite there yet, as there are a few speedbumps ahead, any of which could cause another flare-up and perhaps roil investors a bit.

Fisher Investments Editorial Staff
Media Hype/Myths, Into Perspective

Flat Year Yields Flat Fear

By, 08/18/2015
Ratings1023.647059

Are stocks stuck? Through Friday’s close—155 trading days in—the S&P 500 was up 1.6% year-to-date. Its trading range—percentage difference between the year-to-date high and year-to-date-low—was just 6.9%, the second-lowest on record. The Dow’s range was 6.7%, the lowest in its 100-plus-year history, leading many to decry it as setting a “record for futility.” One firm declared “flat is the new up” and warned the world to be satisfied with another 0.4% in gains this year. Our take? These are just a bunch of interesting observations with no predictive power. Wherever stocks go over the rest of the year has nothing to do with the past 155 trading days.

We’re great fans of history, but the history of similarly range-bound years tells you nothing. Since 1929, we’ve had just seven other years whose range in the first 155 trading days was below 10%: 1981, 1992, 1993, 1994, 2004, 2005 and 2006.[i] There is no pattern, rhyme or reason to returns over the rest of the year:

Exhibit 1: Some Arbitrary Factoids About Range-Bound Years

Fisher Investments Editorial Staff
MarketMinder Minute, Media Hype/Myths

MarketMinder Minute - Assessing the Greek Debt Crisis

By, 08/18/2015
Ratings154.366667

This MarketMinder Minute evaluates the pending Greek bailout and what it means for global stocks.

Fisher Investments Editorial Staff
Commodities, Forecasting

Energy Stocks Are Running on Empty

By, 08/18/2015
Ratings834.150602

After rebounding to $61.43 per barrel on June 10, West Texas Intermediate (WTI) crude oil resumed its slide, hitting a six-year low, $41.81, on August 17. Energy firms are bleeding cash left and right. Their earnings and revenues are down big, and a few weaker players are beginning to sell assets or enter bankruptcy. All year long we’ve warned you it is too early to bottom fish in Energy, despite plentiful assertions otherwise. Now, with Energy stocks down double digits year-to-date amid flattish broad US markets, some again suggest it’s time to hunt for cheap value in Energy. But fundamentals suggest bottom fishing still isn’t wise.

Energy bulls primarily argue low prices will cause firms to slash production. Before long, they posit, growing demand will burn off the excess supply, reversing the current glut, and causing prices to rise. This, they claim, is not discounted into plunging Energy stock prices. Oil bulls cite the fact active US oil rigs have more than halved since oil’s price slide, falling from 1,573 in August 2014 to 672 now. It’s a matter of time, they claim, while watching rig counts and weekly output estimates religiously.

However, despite declining rig count, US oil production hasn’t dropped. US oil output rose from 8.6 million barrels per day (mb/d) in August 2014 to 9.5 mb/d in May 2015, the latest available data point. Production peaked at 9.7 mb/d in March. It is only down a measly 1.9% since.

Fisher Investments Editorial Staff
GDP, Across the Atlantic

Nine Straight Quarters of Eurozone Growth

By, 08/17/2015
Ratings163.75

The eurozone grew at a seasonally adjusted rate of 0.3% q/q in Q2—its ninth straight quarter of growth. However, many expressed disappointment since the reading slowed from Q1’s 0.4% and missed expectations for a repeat. Some focused on France’s flat reading and diverging growth rates as signs of the region’s “deep-rooted fragility.” In our view, this highlights how skeptical sentiment towards the 19-member bloc remains, suggesting the eurozone’s continued uneven, choppy growth likely exceeds low expectations—a bullish scenario.

Despite the dour reaction, the eurozone grew at around the same rate it has over the past two years. (Exhibit 1)

Exhibit 1: Eurozone GDP Growth Since 2010

Fisher Investments Editorial Staff
Currencies, Emerging Markets, Media Hype/Myths

China Devalues the Yuan

By, 08/14/2015
Ratings674.641791

On Tuesday, China’s yuan suffered its biggest one-day drop in 20 years  as the central bank sort of stopped propping up the exchange rate , surprising the world and knocking global markets. Volatility continued into Wednesday as headlines pondered the potential motivation and ramifications. Some speculated China is desperate to boost growth and out of stimulus tricks, leaving officials no choice but to devalue the currency and hope for an export boost. Many fear it will knock America and Europe by hurting multinationals’ Chinese sales or complicate the Fed’s rate hike plans by “exporting deflation.”    

As ever, a little perspective is in order. A -1.9% one-day drop is hardly big. It is abnormal in China’s tightly controlled markets, but for most countries, it would be considered normal volatility. It isn’t like officials slashed a third of the yuan’s value to undercut competitors, and most Chinese economic indicators confirm such a move would be wholly unnecessary. Nor should a slightly weaker yuan disrupt trade flows globally or cause a dreaded “currency war.” China is simply moving to a somewhat more market-oriented system. Volatility might continue as markets try to determine just how hands-on China will be from now on, but the shift isn’t a sweeping fundamental change for global stocks.  

Since 2005, China has officially used a managed float against a basket of currencies, setting a daily reference rate for the yuan and allowing it to trade within a 2% bandwidth (in either direction). The next day, they’d set a new rate that may or may not have anything to do with the prior day’s movement. Practically, officials have used this system to manage the RMB/USD exchange rate. From 2005 to mid-2008, they allowed the yuan to strengthen against the dollar, then held the rate steady until mid-2010. It then appreciated on and off through early 2014, depreciated intermittently through mid-March 2015, then appeared to peg back to the dollar in mid-March. (Exhibit 1)

Fisher Investments Editorial Staff
Emerging Markets, Currencies

China Devalues the Yuan

By, 08/14/2015

On Tuesday, China’s yuan suffered its biggest one-day drop in 20 years  as the central bank sort of stopped propping up the exchange rate , surprising the world and knocking global markets. Volatility continued into Wednesday as headlines pondered the potential motivation and ramifications. Some speculated China is desperate to boost growth and out of stimulus tricks, leaving officials no choice but to devalue the currency and hope for an export boost. Many fear it will knock America and Europe by hurting multinationals’ Chinese sales or complicate the Fed’s rate hike plans by “exporting deflation.”    

As ever, a little perspective is in order. A -1.9% one-day drop is hardly big. It is abnormal in China’s tightly controlled markets, but for most countries, it would be considered normal volatility. It isn’t like officials slashed a third of the yuan’s value to undercut competitors, and most Chinese economic indicators confirm such a move would be wholly unnecessary. Nor should a slightly weaker yuan disrupt trade flows globally or cause a dreaded “currency war.” China is simply moving to a somewhat more market-oriented system. Volatility might continue as markets try to determine just how hands-on China will be from now on, but the shift isn’t a sweeping fundamental change for global stocks.  

Since 2005, China has officially used a managed float against a basket of currencies, setting a daily reference rate for the yuan and allowing it to trade within a 2% bandwidth (in either direction). The next day, they’d set a new rate that may or may not have anything to do with the prior day’s movement. Practically, officials have used this system to manage the RMB/USD exchange rate. From 2005 to mid-2008, they allowed the yuan to strengthen against the dollar, then held the rate steady until mid-2010. It then appreciated on and off through early 2014, depreciated intermittently through mid-March 2015, then appeared to peg back to the dollar in mid-March.  (Exhibit 1)

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Recent Commentary

Fisher Investments Editorial Staff
Into Perspective

Stocks Don’t Need More QE

By, 08/28/2015
Ratings253.78

Bringing back quantitative easing (QE) would be more harmful than beneficial.

read more
Monte Stern
Into Perspective

Income and Wealth Distribution: Overlooked Basics

By, 08/28/2015

Our guest columnist provides an in-depth look at income inequality.

read more
Fisher Investments Editorial Staff
US Economy

How to Tell False Hope From Rational Optimism

By, 08/27/2015

We’re optimistic about the US and global economies’ prospects, but not for the reasons hogging headlines Wednesday.

read more
Fisher Investments Editorial Staff
Into Perspective

Corporate America’s View of China

By, 08/26/2015
Ratings794.43038

A roundup of unfiltered US corporate leaders’ comments on China from earnings conference calls in the last week.

read more
Fisher Investments Editorial Staff
Into Perspective

Reflections on Corrections and China

By, 08/25/2015
Ratings954.41579

Corrections are trying, but markets usually reward patience. 

read more

Global Market Update

Market Wrap-Up, Thursday August 27, 2015

Below is a market summary as of market close Thursday, 8/27/2015:

  • Global Equities: MSCI World (+2.1%)
  • US Equities: S&P 500 (+2.4%)
  • UK Equities: MSCI UK (+2.5%)
  • Best Country: Canada (+3.4%)
  • Worst Country: Japan (+0.2%)
  • Best Sector: Energy (+4.8%)
  • Worst Sector: Consumer Staples (+1.3%)

Bond Yields: 10-year US Treasury yields rose 0.01 percentage point to 2.19%.

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.