Fisher Investments Editorial Staff
Media Hype/Myths

Tall Tales Your Broker Told You

By, 05/21/2015
Ratings783.942308

It’s a longstanding tradition in the press and investment sales to hawk stocks with a great story—a compelling tale of the future prospects of this business for you to share in. Companies intuitively called “story stocks.” Sometimes those story stocks pan out—the tale is nonfiction. But others, not so much. On a daily basis, we consume oodles of articles from news sources the world over, and we are here to tell you the press does the same thing with market-wide fears. They conjure a narrative, and that narrative exists whether facts support it … or not. Here are two examples: Low P/Es[i] are the bees’ knees and high-dividend stocks rock. Both have existed throughout the bull (sometimes simultaneously), despite being debunked again by the very same bull.[ii] In our view, this is a classic reminder that a good story—no matter how compelling—isn’t a valid investment tactic or thesis absent supporting data.

First, let’s tackle price-to-earnings ratios. The classic P/E narrative says low P/Es are a buy signal. A low price relative to earnings means you are paying a little for your share of a firm’s profits (or expected profits). This seems to make sense, in that stock ownership is fundamentally about sharing in a company’s earnings. So paying fewer dollars for more earnings seems wise and beneficial. Cheap stocks! Big performance ahead! On the flipside, high P/Es, the tale goes, mean investors are too optimistic about a company’s prospects for the future—a warning sign prices will soon collapse. This is basically day one theory taught to newbies when learning about stocks, and it’s also wrong. All it takes is a quick look at P/Es during this bull market to see they aren’t predictive.

The S&P 500 Energy sector’s P/E was below the S&P 500’s for most of the period 2011 through 2014, implying undervalued Energy shares were ready to pop! (If you believe the narrative.) Yet the sector has trailed the S&P 500 for most of this bull market. But starting about halfway through 2014, Energy stocks began getting more expensive—quickly. P/Es since then have more than doubled, surging from 12.2 to 30.6—the richest valuation of any S&P 500 sector. So what happened? Did Energy stocks shoot to the moon? No! They cratered. Earnings just cratered more! Which means not only did Energy stocks fall a good bit, but now they sport rich valuations reality may not support.

Fisher Investments Editorial Staff
Media Hype/Myths

Yesterday’s False Fears Are Still Here

By, 05/20/2015
Ratings344.338235

A Nobel Prize-winning economist’s valuation tool has reached a level hit only in 1929 and the Tech Bubble. A freak computer-related event could rattle high-speed traders. Like headlines about Greece, those previous sentences could have hit the front page at any time during the past few years. Yet they are “breaking” news this week. Though the specific details vary, these are the latest iterations of long-existing false fears in this bull market—a sign euphoria isn’t here. Stocks still have a wall of worry to climb.

Since this bull market dawned, pundits have frequently recycled fears, repackaging and dressing them up to appear “new.” The specifics are slightly different, but the broad fear is the same. Consider the morphing fears surrounding debt. Folks widely feared 2009’s record deficits exceeding $1 trillion. Ditto in 2010. 2011’s debt ceiling fight, the loss of the US’ AAA-debt rating and muni-pocalypse fears followed. In 2012, student-loan debt fears perked. Then the debt ceiling returned![i] More recently, it’s fears the dollar will lose its status as the world’s primary reserve currency.

Consider, also, eurozone fear morph. Our tale starts with Greek debt, but it doesn’t end there.[ii] Portuguese debt. Irish banks. Italian debt. Spanish banks. Greek bailout negotiations. Greek defaultGreek political turmoil. Greece going bankrupt. Greek default. Cyprus banks. Austerity driving recession. Deflation doom spiral. A eurozone version of Japan’s “lost decade”. Greek political turmoil. Greece going bankrupt. And don’t forget China slowdown fears! Its hard landing has allegedly been in the works for years now, with all sorts of catalysts to bring it about. A real estate bubble. Construction crash. Shadow banking. Local debt. Manufacturing slump. Property crash. All the while, the Middle Kingdom has continued growing at a steady, albeit slower, rate.

Fisher Investments Editorial Staff
Corporate Earnings, Currencies, Media Hype/Myths

Earnings 1, Strong Dollar Doom Mongers 0

By, 05/19/2015
Ratings404.6125

Here is a funny thing about economic narratives: They often aren’t true. Take the one about the strong dollar, which we are told has hammered US earnings by making exports less profitable. When Q1 ended, analysts penciled in a -4.6% y/y S&P 500 earnings decline. Yet here we are, with 465 of the index’s constituents reporting, and Q1 earnings are up 0.2% y/y. Yes, up. As in not down. And stocks are back at all-time highs. Looks like that strong dollar isn’t so bearish after all.

This shouldn’t surprise, considering US stocks and earnings did great in the late 1990s, when the dollar was even stronger than today. It also makes logical sense: US firms doing business abroad—those theoretically super-vulnerable to the dollar’s swings—have overseas costs as well as revenues. A stronger dollar makes foreign sales worth less when converted to dollars, but it also reduces foreign costs, including shipping, imported components and labor. These lower costs can offset much of the dollar’s impact on sales. That appears to be the case in Q1, considering revenues fell -2.8% y/y, and some firms offered anecdotal evidence of strong-dollar give and take during their conference calls. Diverging earnings and revenues will probably inspire some whining about firms relying overly on cost cuts, but we wouldn’t make much of that. It’s not like firms are out there slashing production, payrolls and inventories to brace for recession. They’re just dealing with the twin impacts of a stronger currency. Nothing to grouse about here.

Exclude the Energy sector, where earnings and revenues remain under fire from low oil prices, and things look even better. Together, the remaining nine sectors enjoyed 7.8% y/y earnings growth and 2.5% y/y revenue growth. Sectors with big international exposure, like Consumer Staples, Discretionary, Health Care and Technology, did a-ok. Here is a table:

Fisher Investments Editorial Staff
Media Hype/Myths

How to (Actually) Shield Your Retirement From the Threat of Low Yields

By, 05/18/2015
Ratings593.855932

Raise your hand if you love today’s super-duper low interest rates: ultra-cheap mortgage and car loans! Refinancing boomed in this cycle! Businesses borrow cheaply! Even some student loans are getting cheaper. But on the flip side, bond investors are getting squeezed by the same low interest rates. Given fixed income is a widespread staple of retirees’ investment portfolios, some suggest it’s time retirees materially alter their investment approach to boost yields and reduce risk they run out of money. Proponents posit you should invest less in traditional fixed income and more in alternate asset classes that either have higher yields or generate guaranteed income. Some of this discussion is fine and more or less sensible. But in our view, much of the angst and resulting recommendations stem from an incorrect focus on how to generate income and construct portfolios for retirement in the first place. None of that is brought to you by low rates.

Much of the trouble seems to stem from conflating two investment terms: Income and cash flow. Cash flows are withdrawals to cover expenses, while income is a piece of investment return (dividend, interest payment, etc.). You can earn income and never withdraw a penny. You can take cash flow and never earn income. Income is one way to generate cash flow, but it is not a requirement.

Yet some believe otherwise, a misperception creating this whole low-interest-rate-squeeze concern by limiting the universe you are picking from. If you free yourself from the shackles of investing for cash flow with income-producing securities—instead correctly focusing on price movement and income (total return)—the universe of investible securities is wide open. When a total return-focused investor needs cash flow, he or she can sell securities. In taxable accounts, it can easily be a more tax efficient means of doing so, no less.

Fisher Investments Editorial Staff
Media Hype/Myths

The Fed Isn’t Fueling This Typical Bull Market

By, 05/15/2015
Ratings654.523077

Quite high.” That is how Fed chair Janet Yellen described stock valuations last week. Cue the usual Fed rate hike speculation. One camp thinks a hike is overdue—that the Fed has been too accommodating, inflating  asset bubbles across the land. Others fret a hike and argue the US economy needs continued “Fed support.” So who is right?  Neither! In our view, Fed monetary policy has neither overinflated investible assets like stocks, nor has it artificially propped up the bull. This debate shows skepticism and fears are alive and well—bullish for stocks.

Some pundits claim low interest rates and other policies like quantitative easing (QE) have driven investors to forsake low-yielding assets and pile into higher-yielding, “riskier” securities (e.g., corporate and junk bonds and stocks)—inflating prices. While we’re sure this has happened in individual cases, as a broad thesis, there are big holes. First, evidence suggests Fed policy has actually been more “tight” than “loose.” Traditionally, when the Fed has sought to boost liquidity, it has kept the discount rate below the fed-funds rate, allowing banks to borrow directly from the Fed cheap and profit by lending at the higher fed-funds rates—the profit is an incentive to pump cash. Today’s Fed has held the discount rate above fed-funds throughout the bull—suggesting policy wasn’t easy. As for QE, if it were truly a weapon of mass stimulation, why was loan growth anemic while it ran? QE’s long-term bond buying lowered long rates and flattened the yield curve—discouraging banks from lending, as loan profitability relies on low short-term rates (banks’ funding costs) and higher long-term rates (interest revenue).

Data also show bubble worries are overwrought. In a frothy environment, valuations should be stratospheric—but they aren’t. They are modestly above average, suggesting optimism, but far from bubble-like 2000 levels. (Exhibit 1)

Fisher Investments Editorial Staff
GDP

Eight Straight and Counting: The Eurozone’s Underappreciated Growth Streak

By, 05/14/2015
Ratings124.541667

It’s now eight straight, folks. That’s right—the eurozone has grown for eight straight quarters following this week’s report, which clocked Q1 growth at +0.4% q/q. Headlines lauded the acceleration from Q4’s +0.3%—but they were quick to add caveats, like Finland’s contraction and Greece’s return to recession ,  high government debt levels, still-elevated unemployment or Germany’s slower growth   rate. For investors, the data themselves don’t mean a whole lot—stocks are forward-looking and GDP looks backwards. But reactions to the report say a lot about sentiment—a key market driver—towards the region today.

Overall, the report was pretty positive. Twelve of the 16 reporting nations grew, and troubled Cyprus came in first at 1.6%—its first quarter of growth since 2011[i]. Spain led the major economies at 0.9%, continuing its solid run. France resumed growing and came in second among the core four at 0.6%. Italy grew (0.3%) for the first time since Q4 2013. Only Germany disappointed, slowing to 0.3%.

Exhibit 1: Eurozone GDP Growth (Q/Q, Seasonally Adjusted)

Fisher Investments Editorial Staff
Across the Atlantic, Politics

UK Election Results Surprise but Aren’t a Gamechanger

By, 05/12/2015
Ratings234.456522

In the wee hours of the morning last Friday, a sweeping tide swept over the UK—a tide of soul-searching pollsters and introspective politicians, all flummoxed by the Conservative Party’s shock general election win. No hung Parliament. No coalition negotiating. No horse-trading. Scottish nationalists in 56 of their country’s 59 seats. Frontline politicians from the Conservatives, Labour and Liberal Democrats out of a job. Three party leaders resigned. One later un-resigned. Two veteran pols reneged on pledges to eat items of clothing if early exit polls predicting a Conservative victory ended up correct.[i] Four days later, with the first Conservative cabinet in 18 years ensconced at Whitehall, the post-mortem isn’t slowing down—including questions on what the outcome means for stocks. In our view, it doesn’t mean terribly much, good or bad. While a majority government may loosen political gridlock somewhat, it seems premature to conclude sweeping, fast-moving legislative change looms. While some aspects of the outcome are worth watching, political risk for both UK and global stocks remains low for the foreseeable future.

UK markets initially cheered the outcome, perhaps out of relief over a clean, concise result—hung parliament jitters had clearly dampened sentiment as the contest approached. Some have suggested stocks are also cheering the arrival of a pro-business government, but that’s bias talking. No party is inherently good or bad for stocks. Nor is either party inherently pro- or anti-business. Perhaps stocks are relieved some of the iffier items on Labour’s agenda—namely, heavier bank regulation and price controls—are now far less likely. But the last five years are riddled with evidence the Tories aren’t innately business-friendly—like the bank balance sheet tax, the UK’s version of the Volcker Rule, and several ineffectual public/private lending programs. Our advice: Set aside opinions for and against all parties, and always bear in mind both parties have presided over bull and bear markets alike (Exhibit 1). And look at the whole history—not just the big rise in the Thatcher/Major era or the twin boom/busts in the Blair/Brown years. All were global events, not driven solely by UK politics.

Exhibit 1: UK Stocks by Party

Fisher Investments Editorial Staff
Media Hype/Myths

Resistance Is Futile

By, 05/12/2015
Ratings664.560606

2118. This is the number the S&P 500 Price Index has struggled in vain to cross since mid-February. It came close on March 2, closing at 2117.393. It got even closer on April 24, closing at 2117.69. But no dice. One analyst calls it the “iron ceiling.”[i] Technical analysts would call it resistance. We shun jargon and prefer to draw a picture:

Exhibit 1: The S&P 500 Meets a Dotted Line

Fisher Investments Editorial Staff
Media Hype/Myths

Pundits Search For Meaning in Bumpy Bond Yields

By, 05/11/2015
Ratings264.365385

Here is a fun factoid: Since April 20, German 10-year bond yields have risen 1100%. Yes, we know “percent of a percent” calculations are ridiculous, and “German bond yields rose over 55 bps or about a half a percentage point” is a far better way to say it. But the extreme has so much flair—just like all those headlines warning the oft-feared, rarely seen bond bubble has popped, ushering in a fixed income bear market. And hey, anything is possible, though the handwringing seems a tad hasty. Bond markets are subject to volatility, just like stocks—for any or no reason—and yields can swing wildly in the short term. But longer term, bonds move on supply and demand, and current fundamentals don’t point to a sustained, significant rise in long-term rates. We suspect the latest wobbles are just part of the bouncy, directionless drift we’ve seen year to date.

Yes, bonds have sold off across the Western world, and most yields are up sharply. When yields rise, bond prices fall, and Bloomberg estimates that falling amounts to about  $430 billion in price declines globally since the bloodletting began. Exhibit 1 has a picture.

Exhibit 1: 10-Year Yields Over the Last Month

Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths

Why Greece Isn’t the Bull Market’s Achilles Heel—in Pictures!

By, 05/08/2015
Ratings524.413462

Five years ago this week, the EU, IMF and ECB unveiled a €110 billion euro Greek bailout intended to avert default and shock and awe then-volatile markets into quietude. So much for that plan. After five years, the development of two additional euro-area wide bailout mechanisms, a second Greek bailout and two debt defaults, Greece remains the eurozone’s sore thumb. Lately, developments have gotten increasingly bizarre. Greek leadership seems to flip-flop near daily, even shifting who is doing the negotiating with their creditors. A deal is claimed near, then the expected arrival date is postponed. We could document all these theatrics here, which would entertain us to no end[i] but probably do you little good. Instead, let’s look at some charts that help illustrate why whatever happens in Greece—compromise, default within the euro, Grexit—doesn’t pose much of a threat to the bull market.

Greece, on its own, is simply too small to inflict much harm. If Greece were a US metropolitan area, its GDP of roughly $200 billion would rank it roughly 15th nationally, about $13 billion behind Detroit, whose 2013 default didn’t so cause as much as a blip in financial markets. Its debt load is bigger than Greece is itself—about the size of Boston—but very little of this is held by the private sector. (Exhibits 1, 2 and 3) A big slice of the privately held debt is owned by vulture funds—funds that intentionally buy distressed debt on the cheap, seeking a settlement or payout later.[ii]

Exhibit 1: Scaling Greece Against US Metro Area GDP

Fisher Investments Editorial Staff
Trade, GDP

Why US Q1 GDP’s Potential Negative Flip Is Positive

By, 05/07/2015
Ratings233.869565

After the Census Bureau released March trade numbers, headlines highlighted the US’ trade deficit, which surged to its highest level since 2008. Since Q1’s preliminary GDP estimate used a wild guesstimate for March trade, this news triggered fears Q1 GDP growth will be revised to a contraction. And hey, maybe! But a closer look at March trade gores those economic slowdown fears—and serves as an apt reminder to not rely on GDP (or any one measurement) as the definitive gauge of the economy’s health.

The trade deficit soared because imports rose 7.7% m/m, while exports rose just 0.9% m/m. Judging by recent trends, this is near-entirely due to the resolution of the West Coast Ports labor dispute. Excluding Energy products (to remove oil prices’ skew), imports grew 0.7% m/m, on average, in 2014.[i] But in January, container ship unloading slowed as the longshoremen’s dispute with shipping companies escalated, and imports fell -1.5%. In February, when intermittent work stoppages began, imports fell another -4.0%. In March, when everything was finally hunky dory, dockworkers started unloading a backlog of container ships anchored along the west coast, and imports jumped. Now for any dataset, we caution against reading too much into any single month, but here is some striking evidence the big wobbles stemmed from the West Coast Ports labor dispute. Total goods imported through 26 West Coast ports jumped from $24.9 billion in February to $38.1 billion in March.[ii] That difference accounts for more than 75% of total imports’ $17.1 billion March rise. Despite the grand GDP conclusions of some, this report says little about the economy, and much more about work stoppages’ temporary impacts and math.

Pundits have long focused on the alleged big negatives trade deficits present—a misguided take, in our view.[iii] In GDP math, exports are counted as positive while imports are subtracted. The result—net trade—is then applied to headline GDP. This is all well and good for arbitrary calculations, but it also misconstrues what imports represent. High imports suggest domestic demand is healthy and consumers are, well, consuming. US firms selling imported goods benefit. Heck, some US imports are components, later assembled, sold and shipped out as US exports. The trade balance doesn’t take that into account and presents a simplified, black-and-white picture. A country could export a ton of goods and services and still run a deficit if it imports more. Even though the US has run a trade deficit for 40 years, it has remained one of the world’s strongest economies. Interestingly, during recessions, the trade deficit often shrinks—domestic demand weakens, so we import less. But few would argue what we need is a good, big, fat recession to cure our nasty trade deficit. In our view, a country’s total trade (exports plus imports) is a more meaningful measure. With exports and imports both up in March, demand seems healthy here and abroad.

Fisher Investments Editorial Staff
Media Hype/Myths

A Stock Market Correction Is Never “Due”

By, 05/06/2015
Ratings574.421052

Welp, looks like volatility is back! While US markets are bobbing around all-time highs, eurozone stocks are down -6.5% since April 13.[i] In euro, that is. Eurozone bond yields popped up, too, with German 10-year yields jumping from 0.08% on April 20 to 0.52% on May 5—and most other nations following suit. Absent a clear fundamental reason for the slide, some are saying eurozone stocks and bonds were just “due” for a pullback given their rapid rise in recent months. We’ve seen similar statements about US stocks, too, and sorry but we just don’t buy it. While markets never move in a straight line, there is no “due” when it comes to corrections.

Though corrections (quick, steep, sentiment-based drops between -10% and -20% or so) happen about once a year on average during bull markets, they don’t follow schedules. Nor does a given magnitude of near-uninterrupted rises require stocks to pull back. If this were true, US stocks probably would have corrected shortly after 2013’s 32.4% rise—they didn’t.[ii]

Corrections define random. This bull market, so far, had two in 2010, two in 2011, one in 2012—and nada since. The 1990s bull had its first begin on 4/17/1991—six and a half months after the bull began. That one ran through 8/12/1991, and the next began mere months later on 1/6/1992. Correction number two ended on 4/8/1992, and five years passed until the next, which ran from 10/7/1997 to 11/12/1997.[iii] That bull’s final correction came in 1998, when stocks fell between 7/20/1998 and 10/5/1998.

Fisher Investments Editorial Staff
Media Hype/Myths

The Mysterious Evaporating Bond Liquidity?

By, 05/05/2015
Ratings324.09375

Every so often, pundits get in a lather over some arcane technical issue they are just sure will roil markets sometime in the future if it isn’t fixed right now! In the late 1990s, it was Y2K. Today it is allegedly low liquidity in bond markets, which luminaries from bankers to economists to fund managers and the IMF warn could cause big problems the next time investors rush to sell in a crisis. And, well, not to be Pollyanna, but this all smacks of Y2K for bond markets. We don’t see much evidence bond markets have broken down.

The fears rest on factoids like the $1 trillion fall in traditional market makers’ (banks and dealers) inventories since 2007, a fall in market depth (the average of the best three buy and sell offers), the vast amount of US Treasurys locked up on the Fed’s and banks’ balance sheets, and stricter regulatory requirements as evidence bond markets have dried up, making prices subject to sharp swings. Their sole piece of evidence this is actually an issue is the so-called US Treasury “flash crash ” of October 15, 2014, when  10-Year Treasury yields fell from 2.19% to 1.86%, then jumped to 2.13%—in mere minutes.[i] That the move was preceded by abnormally low bond liquidity, pundits argue, shows bond markets are extra vulnerable.

In Tuesday’s New York Times, Peter Eavis provides an excellent summary of the feared implications, their inherent misperceptions and some insightful counterpoints to all those warning of bond bloodbaths. As he writes:

Fisher Investments Editorial Staff
Into Perspective

The SEC’s Shot Heard ‘Round the World Turns 40

By, 05/01/2015
Ratings363.902778


Forty years ago, Wall Street reforms made it much more of a two-way street. Photo by Image Source/Getty Images.

Happy anniversary, lower commissions! Friday marks 40 years since the SEC enacted 1975’s May Day reforms eliminating fixed commissions on Wall Street. A shot heard ‘round the investment world unleashing an industry revolution that made Wall Street more investor-friendly than ever before. You dear readers, are the direct beneficiaries, and from a market access standpoint, you have never had it better. But, easier access simply doesn’t mean easier success.

For the roughly 180 years between 1792’s Buttonwood Agreement and May Day, brokerage firms acted as a virtual cartel—agreeing not to compete on price on trades ranging between $2,000 and $300,000 in total value.[i] Trading costs, therefore, were astronomically high by today’s standards. For example, if you purchased 100 shares of a $50 stock (a total of $5,000) based on the final fixed commission schedule that lasted from 1973 through May Day, the commission alone would run you $71.50 (1.4% of the value and $346 in 2015 dollars[ii]). That doesn’t even include other costs, like bid-ask spreads, which were far higher then and drove total costs above 2% of transaction value or more. The rule ending all that, technically known as SEC Rule 19b-3, was adopted January 23, 1975, with implementation slated for May 1.

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Recent Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

Tall Tales Your Broker Told You

By, 05/21/2015
Ratings783.942308

This bull market holds some valuable lessons for investors who base investment decisions on P/Es or dividends alone.

read more
Fisher Investments Editorial Staff
Media Hype/Myths

Yesterday’s False Fears Are Still Here

By, 05/20/2015
Ratings344.338235

False fears still run rampant in this bull market.

read more
Fisher Investments Editorial Staff
Corporate Earnings

Earnings 1, Strong Dollar Doom Mongers 0

By, 05/19/2015
Ratings404.6125

Q1 earnings defied the strong-dollar doomsayers.

read more
Fisher Investments Editorial Staff
Media Hype/Myths

How to (Actually) Shield Your Retirement From the Threat of Low Yields

By, 05/18/2015
Ratings593.855932

Worried about funding your retirement in an era of low yields? The solution is changed thinking. 

read more
Fisher Investments Editorial Staff
Media Hype/Myths

The Fed Isn’t Fueling This Typical Bull Market

By, 05/15/2015
Ratings654.523077

This typical bull market isn’t brought to you by the Fed.

read more

Global Market Update

Market Wrap-Up, Friday May 22, 2015

Below is a market summary as of market close Friday, 5/22/2015:

  • Global Equities: MSCI World (-0.4%)
  • US Equities: S&P 500 (-0.2%)
  • UK Equities: MSCI UK (-0.8%)
  • Best Country: Hong Kong (+1.2%)
  • Worst Country: Germany (-1.3%)
  • Best Sector: Information Technology (-0.1%)
  • Worst Sector:  Energy (-0.7%)
  • Bond Yields: 10-year US Treasury yields rose 0.02 percentage point to 2.21%.

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.