Fisher Investments Editorial Staff
GDP

US Q3 GDP Solid, Media Take Largely Skeptical

By, 10/31/2014
Ratings224.363636

The advance estimate of US Q3 2014 GDP hit Thursday, data showing the world’s largest economy grew at a 3.5% seasonally adjusted annual rate (SAAR) in the quarter. It’s a deceleration from Q2’s 4.6%, but still respectable—and above the US’s post-war average growth rate. It also topped analysts’ estimates of 3.0%. Now, this report will be revised and revised, then probably revised again much later, and revised yet again each and every time the US Bureau of Economic Analysis (BEA) decides to rejigger the tally, which it does every few years.[i] But still, the reading confirms US expansion continued in Q3. And the reaction to this data suggests skepticism remains—showing investors aren’t irrationally celebrating today.

Here is a collection of factoids from the report:

  • Consumer spending rose 1.8% in Q3, adding 1.2 percentage points to growth.
  • Gross private investment—the broad category including business investment in structures, equipment, R&D, residential real estate and inventory change—rose 1%, adding a measly 0.17 percentage point to growth.
    • But before you jump on the “businesses’ aren’t spending” bandwagon consider: business investment in structures, equipment and intellectual property rose 3.8%, 7.2% and 4.2%, respectively—adding a combined 0.68 percentage point to growth.
    • Residential real estate also positively contributed, with its 1.8% SAAR adding 0.06 percentage point to growth.
    • The category’s overall meager 0.17 percentage point contribution to growth was due to inventories falling, which detracted 0.57 percentage point from headline GDP.
  • Government spending was basically flat save for national defense, which rose by 16.0%, contributing two-thirds of a percentage point to growth.
  • Net exports added 1.32 percentage points to growth, though this wasn’t all rosy news.
    • Exports rose 7.8% SAAR in the quarter, but imports fell -1.7%. Falling imports add to GDP but can indicate weakening demand—eek—though we believe there are likely extenuating circumstances here.[ii]

Here is a picture.

Fisher Investments Editorial Staff

RIP, QE

By, 10/30/2014
Ratings204.275

It’s official—quantitative easing (QE) is no more. The Fed announced Wednesday the final round of bond buying will take place in November, sparking a series of grandiose epitaphs. Some suggest QE was a big bull market boost, some call it a lifeline for the economy, and many suggest it was a dud for Main Street but a boost for Wall Street. But in our view, Wall and Main are often one in the same, and QE boosted neither—instead weighing on growth by discouraging lending. Investors and everyday folks alike should cheer its end.

QE will end just shy of its sixth birthday. On November 25, 2008 then-Fed head Ben Bernanke unveiled plans to begin buying up to $500 billion in mortgage-backed securities in an effort to boost liquidity, free up bank balance sheets and drive demand for new loans. Bond buying began in January 2009 and ran through March 31, 2010. But one round wasn’t enough for our fearless Fed: QE 2, which added US Treasurys to the menu, ran from November 3, 2010 to June 30, 2011 and added $600 billion to the Fed’s balance sheet. A weird, wrongheaded interlude called Operation Twist ran from September 2011 to December 2012, as the Fed “twisted” its balance sheet longer term by swapping its shorter-term Treasurys for medium and longer-term. The most recent round, QE3, started September 13, 2012 and became QE-infinity in December 2012, when the Fed decided they would buy however many bonds for however long they wanted until they felt like they didn’t want to buy anymore (based on an ever-shifting set of data points, variables and, we’ll say it, whims).

QE sought to stimulate the economy, by incentivizing borrowing through ultra-low interest rates. So how’d they do? QE1 was alright. It boosted liquidity when credit was frozen and the US risked deflation. The yield curve steepened nicely through most of it, too. But the rest were a drag. They pulled down long-term rates. US 10-year Treasury yields spent much of 2012 and 2013 below 2%—far below historical norms. (Exhibit 1)

Michael Hanson

Ignore Election “Momentum”; Gridlock Is Already the Big Winner

By, 10/30/2014
Ratings174.647059

It’s a truism that investors’ memories are short. We forget too easily. Myopia and shoddy memory are parts of what keep markets less than perfectly rational. But this also is perfectly human—generations come and go, experiences and perceptions vary, not everyone is a historian nor statistician.

I recall distinctly two years ago the general media feeling the GOP had “momentum” in the last few weeks leading up to the election, and Romney would ride this tide to victory. Here are some quotes from a Wall Street Journal editorial dated November 5, 2012:

Romney’s crowds are building—28,000 in Morrisville, Pa., last night; 30,000 in West Chester, Ohio, Friday. It isn’t only a triumph of advance planning: People came, they got through security and waited for hours in the cold. His rallies look like rallies now, not enactments. In some new way he’s caught his stride. He looks happy and grateful. His closing speech has been positive, future-looking, sweetly patriotic. His closing ads are sharp—the one about what’s going on at the rallies is moving.

Fisher Investments Editorial Staff
Commodities, Into Perspective, Media Hype/Myths

Falling Oil Prices: Consumers’ Boon, Producers’ Bust?

By, 10/29/2014
Ratings323.90625

Yay for consumers, boo for producers? Photo credit: Justin Sullivan/Getty Images.

Gas is under $3 a gallon! Woo-hoo! What a bonanza for the US consumer! But headlines also suggest the sharply falling oil prices responsible for consumers’ allegedly big gain bring producers pain. Particularly, the US shale drillers who have played a big part in driving up supply in recent years. While there is some truth to both the pluses and minuses of recently falling oil, we’d suggest not getting carried away with either. The reality, for both the benefits and threat of low oil prices, is more nuanced.

Fisher Investments Editorial Staff
Across the Atlantic, Into Perspective

ECB Says 25 Banks Were Undercapitalized 10 Months Ago

By, 10/28/2014
Ratings64.083333

The ECB released the long-awaited results of its asset quality review (AQR) and stress tests Sunday, confirming what some documents leaked last week: 25 banks failed, collectively undercapitalized by €24.6 billion. But 12 have already made up their shortfalls, leaving 13 banks on the naughty list. They have two weeks to tell authorities how they’ll raise the remaining €9.5 billion and nine months to raise it, and all the healthy banks have one less axe hanging over their heads. The tests’ completion relieves some of the eurozone’s regulatory uncertainty—a positive—but it probably doesn’t trigger a rapid rise in loan growth.

The tests themselves contained few surprises. Of the 25 failing banks, 17 were from the eurozone periphery—nine from Italy, three from Greece, three from Cyprus, and one apiece from Spain and Portugal. No supersized banks failed—most were small regional lenders. Italy’s oldest (and third-largest) didn’t make the cut—though it has been much maligned for some time now; nor did Portugal’s largest (by market cap). Belgium’s Dexia, already under government administration for failing in real life, failed in the make-believe future, too. One French and one German bank failed, but both have already made up their tiny shortfalls. Here’s a chart:

Exhibit 1: The ECB’s Naughty List

Fisher Investments Editorial Staff

A Nuanced Earnings Season

By, 10/27/2014
Ratings214.571429

Editor's Note: MarketMinder does not recommend individual securities; the below is simply an example of a broader theme we wish to highlight. It is not a recommendation to buy, sell or take any other action regarding the specific securities mentioned.

Earnings season is well underway, with 208 S&P 500 firms reporting as of Friday. So what’s up with Corporate America? Earnings and revenues, that’s what! But while that in and of itself is noteworthy, there is perhaps a more nuanced takeaway we can glean from recent reports. They also put some alleged risks—Ebola, geopolitical turmoil and the many other things dominating headlines—into perspective. Many firms gave their takes on whether current headline-generating risks will impact their bottom lines in Q4 and beyond. The short answer: Most don’t think they will.

Thus far in the season, aggregate S&P 500 Q3 earnings per share are estimated to have grown 5.6% y/y—the 20th straight quarter of growth. Revenues are up 3.7% y/y, the sixth straight quarter sales have gone up. Growth has been broad-based, with all but two sectors in the black—Energy and Consumer Discretionary. As for revenues, Energy was the only sector in the red. (Exhibit 1) Now, a weaker Energy sector isn’t all that shocking—the sector is more price sensitive than volume and the oil supply glut has weighed on prices (a force that doesn’t seem all that likely to change soon). Consumer Discretionary’s dip thus far is largely driven by two firms—Ford and Pulte Homes. Those two are dragging down the headline figure, so this may just be a statistical snafu. Leaving these two categories aside, earnings and revenues are generally growing nicely.

Fisher Investments Editorial Staff
Media Hype/Myths

The Great Global Disconnect: Headlines Versus Data

By, 10/24/2014
Ratings784.410256

While many headlines and sentiment have shown their skeptical streak lately, the data just don’t seem to want to cooperate and collapse. In fact, what we see in comparing sentiment and recent data seems much more like what we’ve seen during the five-plus year course of this big bull market.

First, let’s take a trip around the World Wide Web and assess the economic headlines grabbing eyeballs. All these headlines hit in the last two weeks:

Most of the theses underpinning these articles are very well known to investors: China faces a big slowdown—a hard landing—which will ripple globally; the eurozone is an economic quagmire; the US can’t grow alone; global growth is faltering; did we mention the eurozone is an economic quagmire? Economists have their standard prescriptions: Fiscal stimulus; don’t hike rates yet!; more (misguided) quantitative easing; weaker currencies; debt forgiveness.

Fisher Investments Editorial Staff

Misinterpreting Volatility, Economic Edition

By, 10/23/2014
Ratings1023.97549

The recent volatility has not only given some investors pause, it caused economists and academics to speculate and ruminate on what it might foretell about the economy. Which the media has now picked up on, spinning the yarn that investors’ concerns about volatility would beget a weaker economy, in turn creating more volatility for markets. While stocks are a forward-looking economic indicator, they aren’t perfectly rational in the short-term. Volatility is often just markets being markets. It doesn’t necessarily reflect economic conditions, much less create them.

Many see the latest round of swinging stocks as evidence the weak global economy is entering a new and more uncertain stage, including monetary policy shifts that might conflict, slowing growth in pockets of the globe and even health fears. They point to recent sharp shifts in the Chicago Board Options Exchange’s Volatility Index (VIX)—which surged to a 28-month high last week, then plummeted at least 10% per day on October 16, 17 and 18—then rose the same amount the following trading day.[i] Many see the VIX as the uncertainty index—“The Fear Gauge.” (Nevermind that this is a fallacy, because the VIX merely attempts to measure the magnitude of future moves, not the direction.) The presumption is that with rising uncertainty/fear/VIX comes a near-inability for businesses to plan for the future.

The Kansas City Fed added some academic firepower to the issue, too. They published a paper September 4, suggesting spikes in uncertainty slow growth and hiring. The VIX is their uncertainty gauge, and they wag an accusatory finger at the sharply rising readings in 2011, 2012 and 2013. Hiring, they found, slowed during the volatility. They argue the effect didn’t go away as fast as the VIX fell, suggesting to them a lingering fear that weighed on the economy. In theory, uncertainty is bad for business and stocks. So you might presume there is some underlying truth to the notion today.

Fisher Investments Editorial Staff

Moving Averages Don’t Move Stocks

By, 10/22/2014
Ratings424.119048

After a big surge to close Tuesday at 1941.28, the S&P 500 Price Index easily surpassed an average of its closing prices over the last 200 trading days, 1908.[i] To many, that’s trivia. But to bullish technical analysts, it’s confirmation—time to breathe a sigh of relief—the market’s bounce back is real! The 200-day moving average is a widely watched gauge for chart-lovers, and since the S&P fell through it recently, it has been a source of great consternation for some. But in our view, using stocks’ 200- (or any period, really) day moving average to predict future direction is pure folly. Past performance—whether smoothed, averaged or other—does not dictate the future, as the S&P’s recent ride (again) shows.   

For the unfamiliar, the 200-day moving average is a very common technical indicator. Broadly speaking, proponents argue if the S&P 500 is above its 200-day moving average, it should continue rising. If it falls through this average, look out below. Many cite instances when the 200-day moving average was broken during bear markets and, sometimes, corrections. But that is just kind of a function of longer-term average meeting shorter-term sharp move. It isn’t predictive, just a result.

Overall, the rule that breaking the 200-day moving average predicts bad times ahead doesn’t pass the logic test. If the S&P 500 staying above its 200-day moving average indicates future gains, stocks should never fall. Likewise, the S&P falling below its 200-day moving average would mean stocks would never rise. Both statements are quite obviously faulty, but when the S&P fell towards—and ultimately breached—its 200-day moving average last week, many technical analysts saw stocks entering a longer-term downtrend. However, unless you define “longer-term downtrend” as seven trading sessions, we’d say those concerns were a teensy bit off. (Exhibit 1)

Fisher Investments Editorial Staff
Commodities, Media Hype/Myths

About Those Falling Commodity Prices

By, 10/21/2014
Ratings674.097015

Here is a scary story you may have heard this month: Commodity prices are tanking as Asia’s demand for crude oil and industrial metals dives, signaling a global economic slowdown. It has appeared, with varying degrees of detail and hyperbole, here, here, here, here, here, here and here. Some infer bad things from charts like Exhibit 1. Others use anecdotal evidence and rhetoric. We don’t think either approach—or the thesis—matches reality, however. Take a deep data dive, and you’ll see a far more boring, benign reason for falling prices: Supply is up way more than demand, which isn’t plummeting (contrary to widespread belief).

Exhibit 1: Select Commodity Prices Year-to-Date

Fisher Investments Editorial Staff
Behavioral Finance

Amid Volatility, Beware Your Inner Investing Demons

By, 10/20/2014
Ratings504.56

Ebola, deflation, the Fed (!), bond market liquidity, technical indicators and more. The media seems obsessed with hunting down larger explanation for recent volatility. The more obsessive they get, the more likely investors get caught up in all the noise, increasing the risk their brains get the best of them. Take note: Now is a time to be conscious of your inner investing demons—the kind that can cause you to act counter to your long-term goals. Recognizing these pitfalls is a key step to keeping them in check.

Year to date, the MSCI World Total Return Index has closed more than 1% up or down 18 days.[i] Of those 18, five came in October’s 13 trading sessions, and two had intraday swings of greater than 1% (one was greater than 2%) this tally doesn’t capture.[ii] Friday continued October’s choppy start, with the MSCI World jumping +1.3% (yes, big up is still volatility). At one point, the global gauge had fallen -9.3% from its peak.[iii] After Friday’s big bounce, global stocks were -8.1% below the peak.[iv] Will they fall further? No one can know, in our view. There is no way to tell if Friday’s bounce marked the end of the short-term dip. We’ll know if markets avoided the first technical correction since 2012 only in hindsight.[v] But we do know when volatility runs higher, it often triggers humans’ innate fight-or-flight instinct. This is a useful evolutionary reaction when you are trying to avoid being a wild animal’s lunch, but it isn’t helpful in markets, which require rationality. Maybe you’re above making such errors. That’s possible. But at the same time, it doesn’t hurt to review some typical mental errors so you can learn from others’ mistakes and hopefully avoid making them.

Recency bias is one pitfall many investors succumb to when markets get rocky. Recency bias is the tendency to take very recent market behavior and extrapolate it forward, sometimes to degrees most people would think irrational when coolheaded. It’s easy to see how you might get engulfed by this today, as headlines proclaim, “October’s Wild Ride Isn’t Over Yet” and attempt to explain “Why All This Market Volatility Is Here to Stay.”

Fisher Investments Editorial Staff
Media Hype/Myths

Did a Fed Waffle Cause Thursday’s Rebound?

By, 10/17/2014
Ratings324.328125

This investor is putting Thursday’s market action under a magnifying glass. Photo by Comstock.

We have to make sure that inflation and inflation expectations remain near our target. And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December.…

Christopher Wong

Four Tips for Retirement Investing

By, 10/16/2014
Ratings1254.204

Retirement should mean more time to relax, not worry. Photo credit: Guillermo Murcia/Getty Images.

Retirement: the word strikes both joy and fear in the hearts of many long-term investors. Joy over the possibilities of post-working life: traveling, pursuing new hobbies and/or spending more time with family and friends. Fear due to all the unknowns: How much should I be saving?; Will I have enough to retire when I want?; What if I run out of money during retirement? The media exacerbates the fear with headlines screaming how unprepared Americans are for their golden years. But retirement investment needn’t intimidate. Now, ask most financial professionals how to prepare, and you’ll probably get a cliché answer—Save More! But here are four less-often-shared tips to get you started—tips equally applicable if you’re far from retirement or already in it.

Fisher Investments Editorial Staff
Inflation, Media Hype/Myths

Why We Don’t Fear Deflationary Doom Is Here

By, 10/16/2014
Ratings474.404255

Stocks had a wild ride Wednesday, with the S&P 500 Price Index down as much as -3% before climbing back to finish the day down just -0.8%.  Perhaps the correction many have long awaited is here—at one point, the S&P 500 Price Index was about one percentage point removed from correction territory (10% lower than a prior high point)—but it’s only clear in hindsight. Such moves are sentiment-driven and tend to come and go fast. There is usually a host of negative headlines, surrounding a spooky story or stories. But corrections can be caused by virtually anything. Or nothing. Such headlines abound today.

Let’s consider one of the day’s big fears: global deflation. To many observers, the evidence prices are about to spiral downward is stacking up. Chinese consumer inflation slowed to just 1.6% y/y in September—the lowest since 2009—and Chinese producer prices slid faster, hitting -1.8% y/y. September US producer prices fell -0.1% m/m. UK CPI slowed to 1.2% y/y, also the slowest since 2009. 10-year US Treasury yields briefly dipped below 2%. Oil prices continued tanking.[i] Market-driven future inflation gauges, including five-year US TIPS spreads and the eurozone’s five-year/five-year inflation swap, are falling. German inflation is stuck at 0.8% y/y. The eurozone’s final September inflation estimate hits Thursday, and no one expects improvement from the 0.3% y/y first read. 

Two primary interpretations emerged from this data bonanza. One, the slow ebb in prices will be a self-fulfilling prophecy, and deflation will choke off the global expansion. Two, low inflation/deflation will make debt more burdensome—another growth headwind. These are big, popular, scary stories, but we don’t think either carries much weight—problematic deflation doesn’t appear to be in the cards.

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Recent Commentary

Fisher Investments Editorial Staff
GDP

US Q3 GDP Solid, Media Take Largely Skeptical

By, 10/31/2014
Ratings224.363636

The advance estimate of US GDP showed growth exceeded analysts’ estimates and continued at a respectable clip—yet media skepticism was easy to find.

read more
Fisher Investments Editorial Staff

RIP, QE

By, 10/30/2014
Ratings204.275

Ding, dong, QE is dead. What now?

read more
Michael Hanson

Ignore Election “Momentum”; Gridlock Is Already the Big Winner

By, 10/30/2014
Ratings174.647059

Expect a lot of talk about which party has the "momentum" heading into Election Day. Ignore itgridlock is already the winner, a good thing for the stock market.

 

 

read more
Fisher Investments Editorial Staff
Commodities

Falling Oil Prices: Consumers’ Boon, Producers’ Bust?

By, 10/29/2014
Ratings323.90625

Working through some misperceptions surrounding lower oil prices.  

read more
Fisher Investments Editorial Staff
Across the Atlantic

ECB Says 25 Banks Were Undercapitalized 10 Months Ago

By, 10/28/2014
Ratings64.083333

We dissect the ECB’s stress test results so you don’t have to.

read more

Global Market Update

Market Wrap-Up, Thurs Oct 30 2014

Below is a market summary (as of market close Thursday, 10/30/2014):

  • Global Equities: MSCI World (+0.2%)
  • US Equities: S&P 500 (+0.6%)
  • UK Equities: MSCI UK (-0.7%)
  • Best Country: Denmark (+2.0%)
  • Worst Country: Portugal (-3.1%)
  • Best Sector: Health Care (+1.3%)
  • Worst Sector: Materials (-0.9%)
  • Bond Yields: 10-year US Treasurys fell .01 to 2.31%

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.