Daily Commentary

MarketMinder’s View: The Bureau of Economic Analysis’s personal consumption expenditures price index ticked down in June from 2.6% y/y to 2.5%, another data point showing hot inflation is a thing of the past. This is the gauge the Fed targets, so it of course spurs more chatter about a possible rate cut in September. But in our view, this is pretty inconsequential. Stocks and the economy have proven they don’t need cuts—this very report showed real consumer spending also rose 0.2% m/m, continuing to buck fears of rates hitting consumers—and GDP just grew 2.8% in yesterday’s Q2 report. So we think you can tune down the talk of rate cuts and just appreciate the US economy’s resilience amid cooling inflation that has returned to normal rates now. (And no, prices have not fallen back to 2022 levels. But that is a pipe dream, considering it would take a deflation unseen in America since the 1920s. That was a recession byproduct, not exactly a desirable scenario to hope for.)

MarketMinder’s View: “Buffered” and/or covered-call funds offering participation in equity markets and enhanced dividends have grown in popularity in recent years, but there are issues to consider: One, they cap upside quite severely, which is a problem in bull markets, when returns are usually above average. But there is more: The taxation is quirky. This article is an excellent look at just that. How is it strange? Consider: “Under the tax code, most dividends paid by public companies are ‘qualified’ and so are eligible for favorable tax rates of 0, 15% or 20%. This is the case even if they come to investors through a fund. (A 3.8% surtax on net investment income also applies for higher earners.)  However, trading strategies used by covered-call funds can cause the dividends they distribute to become ‘nonqualified.’ This makes them taxable at ordinary-income rates up to 37%.” Furthermore, some of the high quoted yields are actually neither dividends nor gains from the sale of calls. They are a return of capital, a distribution of principal. That isn’t taxed as income, which some may think is great. But, “There’s a hitch: Returns of capital reduce an investor’s cost basis, which is the starting point for measuring taxable capital gains.” These products—high fee, lower returning, not a “safe haven” and with complicated tax consequences—are suboptimal, in our view.

MarketMinder’s View: Opening anecdote aside, this is a fairly good look at the folly of trading on political rhetoric a la the “Trump Trade,” which garnered a lot of hype in 2016 and this summer. It discusses a few individual stocks en route to making the broader point that these trades are often fleeting—if they exist at all—so as you read, please keep in mind it is the broader point we are interested in. (MarketMinder doesn’t make individual security recommendations.) As it notes, “A second Trump administration would presumably be bullish for prison stocks. A similar bet on private prisons paid off in the weeks after Mr. Trump’s election in 2016, as I wrote back then, and, again, as the prisons stocks soared further in his first year in office. Those gains got plenty of coverage. But I’ve looked back at the stock histories, and found that those gains were short-lived: Over the entire Trump administration, [two of them] fell more than 67 percent each, according to FactSet data.” The same holds for guns, fossil fuel and clean energy stocks and more: Aligning a group of stocks with an administration based on rhetoric is a folly. Now, we don’t think this is all because fundamentals overwhelm politics. That likely is part of it. But also, some of this just gets cause and effect backwards. Easing drilling standards on Energy firms doesn’t make them more profitable. It could increase oil supply—lowering prices. Because oil firms’ profits are more aligned with oil prices than production volumes, a pro-oil president could be bad for Energy stocks. The same holds for some of the other categories, too. So chuck the Trump Trade (and all of its ilk). This kind of short-term, first-order thinking is unlikely to yield lasting investment success, in our view.