Fisher Investments Editorial Staff
GDP

US Q4 2014 GDP: About That So-Called Slowdown

By, 02/02/2015
Ratings144.714286

According to one source, “US economic growth retreated to a modest pace in the final months of 2014, underscoring obstacles facing the recovery as troubles mount abroad.” Another proclaimed, “America’s recovery slowed in the fourth quarter as sluggish investment and headwinds from overseas offset a rapid acceleration in consumer spending.”[i] Our advice: Don’t be fooled. The fact US Q4 2014 GDP growth slowed doesn’t indicate a weak economy. For one, this is the advance report of backward-looking data. Two, under the hood, this report wasn’t very weak at all. For investors, we’d suggest not overthinking these data and merely taking them as confirmation the US economy finished 2014 on a solidly growth-y note.

It’s true headline GDP hit a 2.6% seasonally adjusted annual growth rate in Q4 2014, which is basically half Q3’s 5.0%.[ii] But this “slowdown” has some big caveats. Here are the factoids underlying Q4 GDP and their contributions to the headline growth rate.

Exhibit 1: Factoids Underlying Q4 2014 GDP Growth

Fisher Investments Editorial Staff
Media Hype/Myths, Commodities, Currencies, Interest Rates

What to Glean From Contradictory Coverage

By, 01/30/2015
Ratings384.486842

Alright folks, fun Friday trivia time! What do oil, currencies and interest rates have in common? Time’s up! They are all things headlines are trying to have both ways these days. Situation X is bad, but when X flips to Y—the opposite—that’s bad too! Neither perception is quite right. These factors are all basically neutral for stocks fundamentally. But the contradictory coverage shows fear persists and economic expectations remain low—great for stocks.

Take oil. Last decade, folks feared high-and-rising oil prices would crush consumers and cause a crippling recession.[i] Yet now that oil is under $50 per barrel, few are dancing in the streets. Headlines occasionally call cheap gas stimulus, but many see cheap oil as bad. Some fret it will kill the shale boom. Some extrapolate that as an economic negative, pointing to mounting layoffs and shut-down projects in America’s shale fields—a true hardship for the folks impacted, but too localized a problem to disrupt growth nationwide. Particularly since many shale fields remain profitable at today’s prices, giving them an incentive to keep going.[ii]

Many headlines warn plunging oil prices are flashing red lights warning of some impending economic crash stock markets are ignoring. But stocks haven’t ignored anything! All sufficiently liquid markets are equally efficient and adept at pricing in widely known information. In this day and age, it is impossible for oil markets to move on something stocks aren’t aware of—all markets are equally aware. Stocks know oil is down. They know the culprit is sky-high supply, not cratering demand. Energy stocks are down, because falling oil prices hit oil producers’ margins, but other sectors benefit from low energy prices.  

Fisher Investments Editorial Staff
Politics, Taxes, Reality Check

Reason #529 Why Stocks Love Gridlock

By, 01/29/2015
Ratings214.333333

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

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
Ratings314.66129

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
Ratings434.302326

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

“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
Ratings374.081081

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.”

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Recent Commentary

Fisher Investments Editorial Staff
GDP

US Q4 2014 GDP: About That So-Called Slowdown

By, 02/02/2015
Ratings144.714286

While headline growth slowed in Q4’s preliminary read, we would suggest the underlying data confirm the US private sector is quite healthy, indeed.

read more
Fisher Investments Editorial Staff
Media Hype/Myths

What to Glean From Contradictory Coverage

By, 01/30/2015
Ratings384.486842

When all news is bad, it's a sign stocks have more wall of worry to climb. 

read more
Fisher Investments Editorial Staff
Politics

Reason #529 Why Stocks Love Gridlock

By, 01/29/2015
Ratings214.333333

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

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
Ratings314.66129

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

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.