Daily Commentary

MarketMinder’s View: We have seen much ado about deglobalization and protectionist policy lately, with many now (wrongly, in our view) sweating the Biden administration’s plans to increase tariffs on imported Chinese steel. But as we have written before, the global trade system is incredibly adaptive, and this piece showcases an illustrative example (which reminds us, this piece centers on a specific company, and MarketMinder doesn’t make individual security recommendations). “Man Wah is one of scores of Chinese companies to relocate to industrial parks in northern Mexico in recent years, to bring production closer to the US market. As well as saving on shipping, their final product is considered completely Mexican - meaning Chinese firms can avoid the US tariffs and sanctions imposed on Chinese goods amid the continuing trade war between the two countries.” This practice, called nearshoring, has become increasingly popular in recent years as the piece notes: “In just two months of this year, there were announcements of capital investment in Mexico of almost half of the annual total back in 2020.” That comparison is skewed by COVID disruptions, but the point stands. Nearshoring isn’t the only way around government trade barriers, either. Consider “transshipping” (i.e., reexporting from third-party countries), which has allowed US corporations to import Chinese goods through Vietnam while skirting 2018’s tariffs. Or Russia’s response to Western sanctions on its oil. Altogether, we see little evidence of an unraveling global trade system. Instead, multinational corporations continue finding solutions and loopholes to keep cross-border business activity robust, a reason government diktats don’t automatically hinder commerce.

MarketMinder’s View: This short piece highlights an important investing concept: There is no such thing as an “average” year in the stock market. Yes, stocks’ long-term average annualized return is around 10%, but that doesn’t mean investors should expect that performance year in, year out. The article’s final graph shows this. That roughly 10% figure is the aggregate of huge up years, big down ones, frustratingly flat periods and everything in between. The variance—the titular evil here—is simply part of owning stocks. Short-term volatility in particular is the unavoidable tradeoff for stocks’ expected long-term return, and its unpredictable nature can be understandably daunting for investors. However, for those with longer-term investment horizons, it is important to accept volatility as part of owning stocks. We don’t think buying and holding forever is the solution, because bear markets (long declines of -20% or worse with a fundamental cause) are slow-moving enough that they are possible to avoid partially if you see one unfolding early enough. But when it comes to shorter pullbacks and corrections (sharp, sentiment-fueled drops of -10% to -20%), those who can remain calm during the bumpy periods, avoid emotional portfolio decisions and stick to a long-term plan are more likely to capture stocks’ long-term expected return—which we find helps most people achieve their investing goals and objectives.

MarketMinder’s View: Just a month after the Bank of Japan (BoJ) raised its benchmark interest rate for the first time in eight years, one survey found Japanese consumers are becoming more tolerant of rising prices and expect higher inflation ahead. “The survey showed for the third-year running that more than half of respondents would continue to buy a product at the same supermarket even if prices rose by 10% … Japanese households expect annual price growth of 5% over the next five years, marking the highest rate for eight straight quarters, the longest streak in data going back to 2006, according to a quarterly BOJ survey released on April 12.” The article argues this raises the likelihood of BoJ rate hikes, though we have some issues with this. For one, Japanese CPI slowed from January 2023’s 4.4% y/y high to 2.1% a year later as supply chains improved and energy prices eased (it has since ticked up to 2.7% as of March). Now, Japan is in a different situation than the US, UK and eurozone, because it maintained negative rates and long-term interest rate pegs, which are inherently contractionary, and a lot of its cost pressures come from the weak yen’s impact on imported prices—particularly imported energy prices. Higher rates might attract more capital to the yen, pushing its value up. But that is a maybe, and predicting any central bank’s policy is a fruitless endeavor. The BoJ’s Policy Board, which votes on monetary policy, consists of nine members, each with their own views and interpretation of data—making it near-impossible to predict central bankers’ decisions.