Fisher Investments Editorial Staff
Politics, Taxes, Reality Check

Reason #529 Why Stocks Love Gridlock

By, 01/29/2015
Ratings154.533333

Stocks like it when Congress looks like this (figuratively). Photo by Keystone/Stringer/Getty Images.

As a reminder, our political commentary is intended to assess potential market impact. We favor neither party, and ideological bias is dangerous in investing.

Fisher Investments Editorial Staff
Developed Markets, US Economy, Across the Atlantic, Media Hype/Myths, GDP

Economic Growth Seems Plenty Durable

By, 01/28/2015
Ratings114.590909

Should investors worry the developed world’s economic stalwarts seem to be slowing? Headlines think so. US December durable goods orders fell -3.4% m/m, “stirring growth concerns.” Q4 UK GDP grew 0.5% q/q, closing 2014 with “waning momentum.” But in our view, neither of these reports supports the notion the US and the UK are weakening—their underappreciated strength should still help drive this bull market.

Yes, on the surface, this was a yucky durable goods report. Excluding volatile transportation orders, orders were down -0.8% m/m. “Core” capital goods orders—non-defense capital goods orders excluding aircraft—fell -0.6% m/m. And since core capital goods are considered a leading indicator of business investment, some experts downgraded their estimates for Q4 GDP.

But context, as ever, is key. Durable goods data can be noisy, making it dangerous to infer much from one month’s movement. This bull market and expansion have seen many durable goods drops, but growth overall continued and markets marched higher (Exhibit 1). Heck, even the present four-month slide in core capital goods orders isn’t wonderful, but consider: Core capital goods orders fell in eight of nine months from December 2011 to September 2012—yet the US kept growing. This latest slide doesn’t automatically indicate a worrisome long-term trend.

Fisher Investments Editorial Staff
Emerging Markets, Politics

Greek Government Theatrics and Other Reruns

By, 01/27/2015
Ratings204.725

Greek stocks plunged Monday and Tuesday as markets digested the anti-austerity Syriza party’s triumph in Sunday’s elections. With Syriza winning 149 of Parliament’s 300 seats, leader Alexis Tsipras was sworn in as Prime Minister Monday. His cabinet—a coalition with the Independent Greeks—took their seats Tuesday. Together, they have 162 seats—a workable anti-austerity majority. Perhaps that is why other eurozone leaders have already started digging in against Tsipras’ pledges to abandon the prior government’s austerity commitments—driving renewed fears of a disorderly Greek euro exit. Outside Greece, however, stocks largely sighed. Perhaps markets are used to this after five years of stalemates between eurozone leaders and Greece. Moderation and compromise prevailed each time, which seems likely this time, too. Anything is possible, but markets move most on probabilities, and a disorderly Grexit remains unlikely.

Tsipras has a lofty wish-list, including abandoning tax hikes and spending cuts pledged by prior administrations, rehiring fired public sector workers, writing off a chunk of debt currently owed to the ECB, IMF and other official-sector creditors, and using funds earmarked for IMF and ECB debt service this year to fund a big social spending package. Creditors, predictably, aren’t too keen. They’re willing to talk, but they consistently say debt forgiveness is a non-starter—a message EU finance ministers reiterated Monday. Many believe the apparent stalemate, and the fact Greek banks can’t continue receiving ECB support after February unless a new “memorandum” (lingo for reform commitment) is signed, will force Greece to leave the euro and print drachmas to fund banks and spending.

Now, that probably sounds dire, perhaps plausible, too. But we’ve seen this movie before: The IMF/ECB/EU “troika” demands full debt repayment and tough austerity, or they won’t give Greece money. Greece grumbles and waffles. EU leaders remember they want to keep Greece. Greece remembers it wants to keep the euro. The troika redraws its lines in the sand. Greece’s government abandons its pledges and ignores voter backlash. They compromise. Lather, rinse, repeat.

Fisher Investments Editorial Staff
Commodities

Blinded by Shiny Objects?

By, 01/26/2015
Ratings304.383333

Gold and silver are up a wee bit off their November 2014 bear market lows, and here is what some people have to say about it:

There’s a competitive currency devaluation coming. … Gold is your natural hedge against that.”

Gold, traditionally seen as maintaining its value against floating currencies, has prospered with markets on edge as central banks have attempted to deal with deflation in the wake of falling oil prices.”

Michael Hanson
Capitalism, Into Perspective

Upside Risks Are the Riskiest

By, 01/23/2015
Ratings464.423913

“Man is dragged kicking and screaming toward his destiny.” – Carl Jung

We’ve figured out a way to worry about low oil prices. Low oil prices…bad! In the last decade, I spent a good portion of my life trying to talk folks off an investing cliff tied to high oil prices. Now we’ve gotten our wish—cheap and abundant oil tied to rapid technological advancements few foresaw—and many seem to hate it. Sure, cheaper oil is trouble for some energy companies and their employees, but on net, low oil prices tied to innovation driving up supply creates winners, too, and are an overall boon to the world economy by magnitudes.

We’ll surely lament many more “surprise” developments that will do the world great good: widespread natural gas use for vehicles (both cheaper and cleaner than today); water desalination technology changing the game for agriculture and general human access to water as we know it; laser technology advancements transforming a variety of fields from the armed forces to aviation; robotic automation lessening forever sheer human toil; breakthroughs all over the place in medicine from neurodegenerative diseases to nanotechnology to preventative systems.

Fisher Investments Editorial Staff
Monetary Policy, Across the Atlantic, Media Hype/Myths

The ECB Will Buy Some Bonds

By, 01/23/2015
Ratings254.56


The ECB may consider putting a big Q to the left of this. Photo by Hannelore Foster/Getty Images

Breaking News out of Frankfurt: The ECB held interest rates stable! Just kidding, they actually cut their rate on four-year loans. Oh and announced the full-scale quantitative easing (QE) program pundits have long salivated over, which we guess is bigger news. Now that QE is reality, we fully expect headlines will laud it for stimulating growth, fret its potential end, argue over whether it will cause hyperinflation, fear it isn’t big enough, and so on. All happened in the US, UK and Japan, and we have little reason to expect different in the eurozone. We also don’t expect QE’s impact to differ: The ECB’s interference with long-rates should keep the yield curve flat, discourage bank lending and slow growth. But, though negative, ECB QE is too widely discussed and too small to flip this bull into a bear.

First, the details. The ECB will buy €60 billion of sovereign, agency and private debt monthly from March through September 2016 (although officials indicated the end isn’t set in stone). The aim, as has been widely reported for months, is to add just over €1 trillion to the bank’s balance sheet, bringing it back up near 2012 levels. National central banks will do 80% of the buying to get around EU treaty restrictions on the ECB financing governments (not the aim, but a concern some raised). No Greek debt will be purchased until at least July—probably wise, considering Greece has asked to default on ECB-held debt.  Like other QE doers, the ECB seeks to lower long-term interest rates to stimulate loan demand, increase lending and grease the eurozone economy’s wheels. The ECB theorizes this will boost inflation toward its 2% y/y target (it is presently -0.2%) and goose GDP by a few tenths of a percentage point.

Fisher Investments Editorial Staff
Finance Theory

The Happy Medium

By, 01/22/2015
Ratings413.621951

In the 1989 movie Back to the Future II, Americans in 2015 drove flying cars and rode hover boards—but still used dot-matrix printers. Now, this movie was never meant as a forecast, so it can’t technically be considered wrong. Heck, a Delorean reaching 88 mph was a time machine, your cue to shut off the fact-o-meter. But that cars and skateboards are still earth-bound while printers use lasers (and some print in 3D) teaches a simple lesson: No one can accurately foresee what will happen in 10, 20 or 30 years. Today’s trends and hot frontiers don’t foretell what the world will look like decades from now—investing based on such factors is folly.

But that doesn’t stop some folks from trying. Recent advances in immunotherapy are driving excitement over the chance to cure cancer—and driving some folks into upstart Biotech stocks now. Frontier and smaller Emerging Markets are projected to have sky-high population growth, attracting demographic trend-chasers. A potential “drone revolution” has folks scouring for hotshot robo-stocks. Some say Energy’s recent sell-off is a can’t-miss opportunity to pile in and wait for an eventual glorious rebound.

We’ve no doubt the future will be amazing in unfathomable ways, with wondrous new technologies and investment opportunities. That has always been true. But trying to pick the eventual winners now is a fool’s errand. Things might play differently than you imagine! And even if you’re eventually right, it could take ages to play out, causing you to miss opportunities (and better returns) in the meantime.

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

China's Great Miss?

By, 01/21/2015
Ratings364.111111

It’s official: China grew 7.4% last year—its slowest growth rate in 24 years. Growth missed the official target and could drag down the global economy. And it’s only going to get worse. At least, that’s how headlines portrayed China’s latest slowdown. As ever, some perspective is in order. Despite the handwringing, slower growth isn’t a global expansion-killer or bull-market-ending nasty shock—a slower-growing China still contributes a ton to global GDP.

The way headlines tell it, you’d think 7.4% growth was a giant disappointment for China’s growth-obsessed government. Yet GDP didn’t really miss the target. Officially, the target was “about 7.5%.” “About” is a nebulous word, and most headlines skipped it and went straight for the 7.5%. Yet officials were always clear the target was a range. Days after Premier Li Keqiang announced the target last March, he and China’s Finance Minister said 7.3% or even 7.2% annual growth would qualify. So 7.4% isn’t a surprise or a miss—it’s in the target range. And just 0.3 percentage point slower than 2013. Status quo, folks.

Slower growth is also somewhat intentional. Officials didn’t set a lower target simply to keep expectations down. They realize slower growth is a byproduct of their ongoing shift from export-led growth to domestic consumption—their effort to keep China advancing long-term and curb recent excess. Last decade’s eye-popping growth was the fruit of a government-engineered, export and factory-led boom. It worked great when wages and Chinese manufacturing costs were low. But it couldn’t last forever. Wages and shipping costs rose. Labor became scarce, thanks to the one-child rule. Factories overshot to meet lofty local growth targets, creating oversupply in several industries. Polluted skies and rivers made the locals antsy. Citizens craved better working conditions and higher income potential—service-sector jobs. So, officials decided to overhaul their model, promoting services and deliberately dialing back manufacturing. They want high-quality growth, not just fast growth for fast’s sake. The slowdown is a tradeoff.

Fisher Investments Editorial Staff
Currencies, Media Hype/Myths

The Swiss Miss: Media’s Take on the Franc’s Fallout

By, 01/20/2015
Ratings664.234848

Headlines globally remained stuck on Switzerland Friday, spouting nonstop warnings, lessons and overall hype. To us, it all seems fairly out of proportion. Switzerland is tiny, and the franc’s wild ride is a textbook case of a currency peg gone bust. The writing was on the wall, and the global implications here are miniscule—this is nowhere near enough to end the bull market. Nor is it evidence of festering global weakness.

Here’s a roundup of the major stories, which we read and analyzed so you don’t have to.

Francs, Fear and Folly
Paul Krugman, The New York Times

Fisher Investments Editorial Staff

Switzerland Declares Currency Neutrality

By, 01/16/2015
Ratings384.118421

Fancy metalwork adorns the edifice of the Swiss Central Bank. Photo by Bloomberg/Getty Images.

The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro. At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to −0.75%. It is moving the target range for the three-month Libor further into negative territory, to between -1.25% and −0.25%, from the current range of between −0.75% and 0.25%.

Fisher Investments Editorial Staff
GDP

Do Investors Fear Faster Growth?

By, 01/15/2015
Ratings364.569445

The World Bank slashed its 2015 global forecast Tuesday evening, and markets globally wobbled hard on Wednesday—leading many media outlets to connect the dots  and presume the World Bank’s move is Very Bad News . As always, it’s impossible to say what drives any day’s volatility. Maybe slow-growth fears did cause Wednesday’s wiggles, in which 10-year Treasury yields shed a few basis points[i], 10-year German yields dipped to 0.47%, global stocks fell -0.8% and copper dropped -5.2%! Or maybe not. Either way, the connection suffers a logic problem: The World Bank’s report isn’t bearish or even really slow-growthy.

The World Bank expects global GDP to accelerate. Grow faster. Not slower. Not shrink, stagnate or slump. Headlines focused on the fact the bank cut its 2015 growth estimate from 3.4% to 3.0%, but that 3.0% is higher than 2014’s 2.6%. It would also be the biggest bump in global growth since 2010. The World Bank is apparently darned bullish, folks—not warning of a weaker world.

Sure, one could argue the reduced forecast means expectations before were too high, and the sentiment adjustment will weigh on stocks. But we have piles of evidence otherwise. The World Bank, IMF, OECD and others have consistently revised their growth forecasts down throughout this bull market. Stocks shrugged and kept climbing. We guess markets have long since figured out supranationals’ forecasts are often wrong, constantly revised and not reliable blueprints of what actually happens over the next year, two or three.

Michael Hanson
Into Perspective, Reality Check, Media Hype/Myths

How Wearable Gadgets Describe Economic Data

By, 01/15/2015
Ratings294.172414


Cool technology, questionable accuracy. Photo by Automatt/Getty Images.

So, for the holidays my wife received one of these newfangled wearable fitness devices, touted to spout customized daily data about her fitness. Feel better! Get fitter! Improve your life with a plethora of data! Within a couple days, something was obviously way off—she would run a couple miles and the device said she’d barely moved!

Turns out, these things are not nearly as accurate as widely believed. They are probably inaccurate to the point of not being particularly useful. Spokespersons representing these companies are now saying things like “…for many people, they’re inspirational, and if using one gets someone to move more, then as far as I’m concerned, it’s serving a good purpose.”

Fisher Investments Editorial Staff
Monetary Policy, Inflation, Media Hype/Myths

Data-Dependent Forward Guidance

By, 01/14/2015

Entering 2015, many forecast the Fed would start hiking rates mid-year. But only nine trading days in, folks are already singing a different tune, venturing the Fed may push back its rate increase a bit later. What gives? Well, what gave are inflation rates, which data show are down. As are oil prices, suggesting headline inflation rates may move further away from central bankers’ target rates, not toward them. And hey, central bankers from both sides of the pond say policy is data-dependent! But the timing of a hike isn’t any clearer now than it was entering the year. You see, data may reverse course; central bankers might interpret the data differently; and it could all just be jawboning anyway. This game of gaming a non-gameable body—central bankers—is fruitless for investors. We suggest you opt out.

The Fed and BoE have recently told anyone who’d listen monetary policy would be “data dependent”—rate hikes or policy shifts rely on economic data justifying moves. The inflation rate is just such data. Both central banks target a 2% y/y inflation rate, and the latest readings are below the mark. In the US, the November PCE Price Index—the Fed’s preferred inflation gaugerose 1.2% y/y, a bit lower than October’s 1.4% y/y increase. UK CPI slowed to 0.5% y/y in December, further south of the target than November’s 1.0% y/y change. As a result, BoE governor Mark Carney has to write a letter explaining why inflation is so low, a reversal from his predecessor Mervyn King, who more often had to explain above-target inflation.

Yet a major reason for this miss is pretty evident: falling oil prices. Excluding volatile food and energy costs, the US PCE Price index rose 1.4% y/y in November, which isn’t that much below the target (October was 1.5% y/y). Similarly, UK core CPI rose 1.3% y/y in December, up from November’s 1.2% increase. Now, to us, there is nothing magical about reaching 2% inflation. The US and UK have done just fine at current “low” inflation levels. But some rate hike forecasters presume these data will cause central bankers to pause a bit before making any policy changes and conclude a delayed rate hike, from mid-2015 to perhaps a bit later. Some even suggest bankers should consider additional measures to boost CPI.

Fisher Investments Editorial Staff
Personal Finance, Finance Theory, Market Cycles, The Global View

It’s a Big World After All

By, 01/13/2015
Ratings824.292683

It's a big world, folks—own it! Photo by Buyenlarge/Getty Images.

New research says international investors own more US stocks than ever. America outperformed all but one developed-world market last year. A certain index-fund guru says he “wouldn’t invest outside the US.” US economic growth is leading the developed world. Perhaps this has you wondering: Should I forget foreign and own US stocks only? But tempting as that might be, we think it’s unwise. Diversification matters, and leadership flip-flops.

Subscribe

Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.

Recent Commentary

Fisher Investments Editorial Staff
Politics

Reason #529 Why Stocks Love Gridlock

By, 01/29/2015
Ratings154.533333

President Obama's decision to scrap plans to tax 529 savings plan distributions probably won't have a direct market impact, but it illustrates why stocks like gridlock. 

read more
Fisher Investments Editorial Staff
Developed Markets

Economic Growth Seems Plenty Durable

By, 01/28/2015
Ratings114.590909

Do recent US and UK economic data show weakening growth?  

read more
Fisher Investments Editorial Staff
Emerging Markets

Greek Government Theatrics and Other Reruns

By, 01/27/2015
Ratings204.725

Greece has a new anti-austerity government, but a disorderly euro exit is as unlikely as ever.

read more
Fisher Investments Editorial Staff
Commodities

Blinded by Shiny Objects?

By, 01/26/2015
Ratings304.383333

Is this time different for gold and silver?

read more
Michael Hanson
Capitalism

Upside Risks Are the Riskiest

By, 01/23/2015
Ratings464.423913

For long-term investors, upside market risk has forever been the most dangerous risk.

read more

Global Market Update

Market Wrap-Up, Thursday Jan 29 2015

Below is a market summary as of market close Thursday, 1/29/2015:

  • Global Equities: MSCI World (+0.3%)
  • US Equities: S&P 500 (+1.0%)
  • UK Equities: MSCI UK (-1.0%)
  • Best Country: USA (+1.0%)
  • Worst Country: New Zealand (-3.8%)
  • Best Sector: Information Technology (+0.8%)
  • Worst Sector: Energy (-1.0%)
  • Bond Yields: 10-year US Treasury yields rose 0.03 percentage point to 1.75%.

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.