Fisher Investments Editorial Staff
Reality Check

Why Stocks Keep Rallying

By, 02/22/2017
Ratings1683.934524


Rarely do headlines blare things are okay. (Photo by DNY59/iStock.)

The political circus in Washington has kicked it up a notch lately, yet stocks in the US and globally are calmly ticking up. Skeptics say the quiet rise is a sign of investors’ complacency, presuming chaotic politics should bring chaotic markets. Yet that’s a misnomer. In our view, markets are doing what they regularly do in bull markets: Looking past political noise and sociological bluster, and focusing on a growing global economy and improving corporate earnings.

Volatility is indeed down. February 17 was the 49th straight trading day the S&P 500 moved less than 1% up or down.[i] The VIX, which measures expected market volatility (based on options prices), is currently 11.5,[ii] which is about the lowest it has been in years. The old saw says “when the VIX is high it’s time to buy,” so the low reading—using faulty opposite logic—means it’s time to sell. However, none of this says anything about investors’ actual mindset. Nor is it predictive.

Fisher Investments Editorial Staff
Into Perspective, Investor Sentiment

Checking in on Greece

By, 02/17/2017
Ratings423.714286

Greece, known for historic landmarks, beautiful beaches and perennially contending for the Sick Man of Europe title, is back in the hot seat. If this were 2011, markets would be manic. Yet this time, while Greece’s latest bailout standoff stirred some headlines, markets are rather calm. People are getting over Greece, and once this latest episode sunsets, uncertainty should fall further. This echoes the broader theme of falling uncertainty in Europe this year, which stocks should enjoy.

When Greece gets bailouts—three since 2010—the EU and IMF dole out aid in installments, contingent on Greece fulfilling various reform and deficit conditions. When a tranche is due, the suits descend on Athens to check progress and negotiate with Greek leadership, which is usually behind the pace and loath to cut more, lest they anger the (already angry) populace. Cue a stalemate, jawboning, “Grexit” threats and a ticking clock, before they ultimately kick the can.

Past deadline days fell in mid-summer, and while it’s no different this year—Greece has a €6.3 billion payment due in July—the fireworks started earlier this round. Eurocrats want this all wrapped up soon, before the Dutch parliamentary election in March and ideally at a meeting this Monday. The EU reps want the IMF’s support, too,[i] but as usual, all sides remain far apart.

Fisher Investments Editorial Staff
GDP

The GDP Lightning Round

By, 02/17/2017
Ratings544.240741

Get ready  GDP fans—we have a data deluge for you! Though these backward-looking numbers say nothing about future economic growth, they’re still relevant. The media’s reporting shows the prevailing sentiment towards the global economy—useful information for investors. Here are some recent GDP reports, what the media is saying and how, in our view, an investor can best make sense of it all. 

Note: All GDP figures are for Q4 unless otherwise noted.

Eurozone (19-member bloc): 0.4% q/q (second estimate), slower than preliminary estimate of 0.5% 

Fisher Investments Editorial Staff
Others

Downgrading Sell-side Research

By, 02/16/2017
Ratings884.0625

Editor's Note: MarketMinder does NOT recommend individual securities; companies referenced herein are merely cited as examples of a broader theme we wish to highlight.

Here is a headline that may soon become endangered: “Big-Name Analyst Lowers Price Target for Widgets-R-Us, Cuts Rating to Sell.” With new regulations coming down the pike and firms increasingly questioning whether these reports are worth the cost, banks and brokerage houses are starting to slash their armies of analysts. You might think this robs investors of informative analysis, but we wouldn’t mourn the loss. While some genuinely good analysis makes the rounds now and then, a lot of it is marketing fluff, and very few reports are actionable for investors—even when the analysis is spot-on, markets usually discount them quickly.

The reports in question are what’s known as “sell-side research”—research produced by financial firms that sell securities, as opposed to “buy side,” which consists of investment managers, hedge funds and other outfits that put investors’ money to work. Buy-side firms generally do research in-house and keep it close to the vest, lest they surrender a competitive edge. Sell-side reports, however, circulate far and wide, often for free—by design.

Fisher Investments Editorial Staff
Reality Check

Treasurys in Demand

By, 02/16/2017
Ratings673.985075


“There can be no time, no state of things, in which Credit is not essential to a Nation.” —Alexander Hamilton, Report on a Plan for the Further Support of Public Credit, 1795. (Photo by steinphoto/iStock.)

From Brexit to Trump, 2016 was a year of change—and another big one recently came to light, when the US Treasury’s latest data showed foreign investors were net sellers of Treasury bonds for the first time in over a decade. Not only did China sell off a boodle in an effort to prop up the yuan, the UK, Japan and others reduced their holdings as well. We’re inclined to call this an “interesting observation” and move on, as US investors’ abundant delight to pick up the slack kept yields in check, proving once again that demand is multifaceted and for every seller, there is a buyer. Yet some worry this is only temporary and further reductions in foreign holdings—not just Chinese—will cause yields to spike. However, recent history has repeatedly argued otherwise. Regardless of the source, overall demand for Treasurys remains robust.

Yields Benign While Foreigners Sell

Fisher Investments Editorial Staff
Inflation

Mathflation

By, 02/15/2017
Ratings524.605769

It’s baaaaaaaaaaaack! The US inflation rate hit 2.5% y/y in January, the fastest since 2012 and a big jump from December’s 2.1%. Much of the media coverage took the news in stride, a refreshing sign of sentiment’s continued thaw. But there was still a bit of handwringing, with some articles warning of mounting inflation pressures and others fretting the Fed is behind the curve, setting stocks up to suffer as inflation erodes future earnings. We think the more measured commentary has it right. January’s jump isn’t the sinister erosion of purchasing power—it’s just math, an aftereffect of what oil prices did early last year.

At its core, the inflation calculation is pretty simple: Divide current prices by prices a year ago, then subtract 1 and multiply by 100 to convert to percent. When people think about inflation, they tend to overemphasize current prices, while forgetting the denominator is volatile, too—and that sometimes it can have a lot more influence on the inflation rate than current prices. In the UK, for example, January’s CPI actually fell -0.5% from December, but the annual inflation rate sped to 1.8% from December’s 1.6%, because CPI was really low in January 2016. Econ nerd-types call this a distorted base effect.

The quirks behind US inflation in January aren’t quite that extreme, but there is a similar base effect at work. It’s most visible in energy prices, which were the primary force behind January’s jump. Exhibits 1 and 2 show two ways of viewing this—WTI Crude Oil Prices and the energy component of CPI, respectively. Both hit new lows in January and bottomed out in February (colored orange and light blue, respectively), making the denominator for January 2017’s year-over-year calculation very low.

Michael Hanson
Trade

Trade Pacts Are Mercantilist

By, 02/15/2017
Ratings804.35

We’ve long said markets love free trade, and we’ll say it again: We’re über pro-trade. But genuine free trade and trade pacts aren’t equivalent. Over time, much of the public has bought into the notion that trade pacts are inherently bullish. They aren’t. They aren’t even essential for free trade. Why anyone believes you need the government to negotiate trade at all is something of a mystery and anachronism to me. International trade isn’t a bulk transaction between nation-states. It is the aggregation of billions of transactions, big and small, from you buying something from a foreign website to manufacturers and retailers sourcing merchandise from abroad. Genuine “free” trade would imply liberation from the machinations of governments, yet it seems headlines and pundits can only muster talk of governments negotiating (read: bickering).

Think back to classical economics, before the days when people fetishized abstract math equations as reality. One of the central issues of the time was Mercantilism: “the economic theory that trade generates wealth and is stimulated by the accumulation of profitable balances, which a government should encourage by means of protectionism.”

That last bit is what matters most for this discussion: “which a government should encourage by means of protectionism.” Ask yourself: what exactly is a trade pact, even if its intention is to promote trade? Why, it’s mercantilism! All a trade pact does is create special relationships between one country and another (or sometimes several). By definition, that favors some nations over others. Many trade pacts have loopholes for “national champions” and sensitive local industries like agriculture and auto manufacturing. Basic mercantilism. Real free trade would be an environment where all countries have a shot to do business with each other, free from government meddling and favoritism.

Fisher Investments Editorial Staff
Developed Markets, Politics

Are French Politics Trumpeting Concerning Change?

By, 02/10/2017
Ratings604.116667

All right folks, we interrupt your regularly scheduled media dissection of US politics with a bulletin from overseas: French politics are now rattling investors, too.  With the presidential election about two months away, the far-right Front National’s (FN) Marine Le Pen currently leads polls while pro-euro candidates are in disarray. Her vow to take France out of the eurozone has sparked some nervousness now showing up in bond yields. The gap between 10-year French and German yields has soared in recent days, leading many to fear trouble awaits. Yet it’s fairly normal for volatility to escalate in the run-up to a widely discussed event like this—particularly one that, like the French election, fosters uncertainty. It isn’t a sign of definite approaching trouble. Often, it means stocks have more wall of worry to climb.

As Brexit and Trump taught the world, polls aren’t infallible. Le Pen currently leads a field of 10 candidates, which probably gets her through the first round on April 23, but it doesn’t guarantee her the presidency. If no candidate secures 50% of the vote, the top two finishers have a decisive run-off on May 7. This is where Le Pen—whose 144 presidential commitments include leaving the euro and holding a referendum to Frexit[i] the EU—likely hits trouble.

In local elections last year, many FN candidates sailed through round 1 as the opposition split the vote. In round 2, however, the mainstream Socialists (center-left) and Republicans (center-right) joined forces, and the FN didn’t win a single regional government. Chances are high something similar happens this time, even though Le Pen’s challengers seem disjointed. The Socialists nominated leftist Benoît Hamon, who isn’t expected to contend. Republican candidate François Fillon, a former prime minister and the early favorite, is mired in a scandal over employing his wife when he was a lawmaker. With Fillon doing damage control, independent centrist Emmanuel Macron has picked up support, but many worry his popularity is peaking too early and that the lack of a strong party apparatus behind him will hurt.

Fisher Investments Editorial Staff
Trade

Trade Deficits Are Great for America

By, 02/10/2017
Ratings1074.17757


40% of US container traffic moves through Los Angeles’ ports; traffic we can get behind. (Photo by wpd911/iStock.)

We’ve spilled a lot of ink over the years debunking trade deficit myths, but since they don’t go away—and because trade policy is back in the news—once more unto the breach! The ever-present false fear is that trade “imbalances” are bad and unsustainable. But this completely misunderstands trade. It isn’t as if countries that export more than they import—net exporters—are stockpiling IOUs to put countries that import more—like the US—in a disadvantageous position.[i] Both are doing what’s in their best interests, i.e. trade. Besides, those IOUs are US dollars, and the only things US dollars are good for are buying US products, services, investments and paying US taxes. Countries with which the US runs a trade deficit aren’t bleeding America dry. Rather, they’re investing a ton here, supporting future growth and earnings for US firms. Everyone wins.

At its core, foreign trade is really no different from interstate commerce. No one bats an eye about free trade between Texas and California (or between any other states). If one state runs a consistent trade surplus with another state, it isn’t like the exporting state is somehow draining the economic vitality of the importing state. It’s just trading more goods and services for cash. Why? Because the net-exporter state wanted[ii] to sell more and the net-importer state wanted to buy more. That is all! No nefariousness needed or involved. Putting up trade barriers to stop these “imbalances” from occurring would just be silly.

Fisher Investments Editorial Staff
GDP

Meanwhile, in Non-Politics …

By, 02/08/2017
Ratings924.201087

Have you heard the one about how global politics are going topsy turvy, creating massive uncertainty for stocks? So did we. Yet after all the Executive Orders, tweets, polls and scandals, markets finished last week up a smidge, looking past the noise—and, based on all the data that have come out these last couple weeks—at a growing global economy. Yes, while headlines dwelled on sociology, plenty of good economic news flew under the radar, providing a timely reminder that investors shouldn’t overemphasize presidential politics as a market driver. Hence, we present a brief tour of recent data you may have missed.

US

Q4 GDP expanded 1.9% annualized, down from Q3’s 3.5% and missing expectations for 2.2%. Growth is growth, and Q4 happened to be the second-fastest growth of the year, but the miss caused many to look for clouds in the silver lining. They found it in exports, which fell -4.3%, causing pundits to fear the strong dollar is finally taking a toll. Dig a bit deeper, however, and exports’ plunge amounts to a hill of beans … soybeans, that is. Soybean exports surged in Q3, as poor weather wrecked harvests in South America, artificially inflating Q3 GDP. That normalized in Q4, creating some drag.

Fisher Investments Editorial Staff
Personal Finance, Into Perspective

What Dividends Don’t Deliver

By, 02/07/2017
Ratings1103.763636

Editor's Note: MarketMinder does NOT recommend individual securities; companies referenced herein are merely cited as examples of a broader theme we wish to highlight.

All right dear MarketMinder reader, true or false: Stocks with high dividend yields are safer than regular common stocks. If you answered true, read on. If you answered false, you are correct, but still, read on so you can confirm why you were right. We frequently hear and read about investors who seek dividend stocks solely because of their yield. They seem “safer” because you seemingly get the best of both worlds: the stock’s growth plus a payment back to you. However, this is a derivation of the capital preservation and growth myth, which unfortunately doesn’t exist.[i] Neither, in the investment world, does true “safety.” There is nothing magical about stocks with high dividends—believing they are a “safer” option can be a damaging mistake.

The myth behind high-dividend stocks’ “safety” is alluring. A dividend can feel like a buffer against daily market volatility, for even if stocks are flat or drop a bit, you still receive the dividend. If the stock goes up, it may feel like a bonus. Moreover, dividends are seemingly logical candidates to provide cash flow. So why not load up on them?

Fisher Investments Editorial Staff
MarketMinder Minute, Politics, US Economy

Market Insights: Trump's First 100 Days

By, 02/01/2017
Ratings2713.350554

In this Market Insights video we take a closer look at Trump's first 100 days as president and what it means for the US economy.

Fisher Investments Editorial Staff
Politics

Executive Disorder?

By, 01/31/2017
Ratings1253.784

This post wades into some tumultuous waters, so before we begin, please understand: Nothing we write here is an endorsement or a rejection of any policy measure taken. We are merely assessing the market impact of President Donald Trump’s executive orders, pure and simple. As ever, we favor no politician nor any party and advise investors to set politics aside to the greatest degree possible.

One of the toughest things to do as an investor is budget your time. There is a huge array of information: Some good, some bad, some merely opinion and forecast. Knowing where to spend time and where you are likely to get caught up in needless noise is crucial. Right now, given all the attention paid to President Trump and his first week—which was likely either chaotic or courageous, depending on your political views—this has even greater importance. The raft of executive actions (executive orders, presidential memoranda and proclamations[i])  he signed last week is stirring big emotions, protests and a slew of headlines, but investors should realize: The scope of executive actions is limited; they are usually sociological and rarely (if ever) have a big or lasting market impact.

Markets taught this same lesson throughout President Obama’s tenure, when he used executive actions in an effort to push through favored policy ideas. Most of these (his 2012 and 2014 immigration-related actions, for example) are pure sociology. That doesn’t mean they are unimportant. But stocks don’t move materially on sociological factors, so from the standpoint of thinking about your investments, don’t weight these heavily. Those that were economy-related—like the increase to the Federal minimum wage—were much too small and narrow in nature to impact stocks.

Fisher Investments Editorial Staff
MarketMinder Minute, Media Hype/Myths

Market Insights: The January Effect

By, 01/27/2017
Ratings743.898649

This Market Insights video explains why January is just another month for stocks.

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Recent Commentary

Fisher Investments Editorial Staff
Reality Check

Why Stocks Keep Rallying

By, 02/22/2017
Ratings1683.934524

The market is far from complacent, never mind euphoric.

read more
Fisher Investments Editorial Staff
Into Perspective

Checking in on Greece

By, 02/17/2017
Ratings423.714286

After a brief intermission, the Grexit drama continues.

read more
Fisher Investments Editorial Staff
GDP

The GDP Lightning Round

By, 02/17/2017
Ratings544.240741

Quick hits on GDP reports around the world.

read more
Fisher Investments Editorial Staff
Others

Downgrading Sell-side Research

By, 02/16/2017
Ratings884.0625

Investment firms are cutting back on sell-side research, but this won’t leave investors lacking crucial information.

read more
Fisher Investments Editorial Staff
Reality Check

Treasurys in Demand

By, 02/16/2017
Ratings673.985075

Even as foreign investors sell US Treasurys, buyers abound.

read more

Global Market Update

Market Wrap-Up, Thursday, February 23, 2017

Below is a market summary as of market close Thursday, February 23, 2017:

  • Global Equities: MSCI World (+0.2%)
  • US Equities: S&P 500 (+0.5%)
  • UK Equities: MSCI UK (+0.7%)
  • Best Country: New Zealand (+1.9%)
  • Worst Country: Ireland (-0.9%)
  • Best Sector: Telecommunication Services (+0.8%)
  • Worst Sector: Materials (-0.4%)

Bond Yields: 10-year US Treasury yields fell 0.04 percentage point to 2.38%.

 

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. S&P 500 returns are presented including gross dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.