“Kee” Points with Jim Kee, Ph.D.

The US economy: Recall from prior Kee Points that, following a negative quarter of GDP growth, it’s not the next quarter but the following quarter (the one we’re in right now) that’s really important to watch. It will tell us if the second quarter (which registered 4% GDP) was the peak, that is, whether we are heading into recession. Doesn’t look like it!

 

So far the US data continues to look pretty good. The Institute for Supply Chain Management’s Report on Business for manufacturing and non-manufacturing (or “services”) indices both showed continued expansion in July. These are based upon purchasing manager surveys (PMIs) and are often referred to as the “manufacturing and non-manufacturing PMIs.” The 58.7 percent reading of the non-manufacturing index is the highest reading for that index since its inception in January, 2008 (ISM). Interestingly, the 57.1 reading of the manufacturing index was the highest since April of 2011. According to the ISM, based upon historical relationships between this index and the overall economy, a manufacturing PMI in excess of 43.2 percent indicates expansion of the overall economy.

 

Europe: I mentioned that Europe is facing headwinds from a strong Euro, and it is of course also facing headwinds from uncertainty and economic sanctions imposed upon Russia. However, from an investment perspective, it’s the future policy response that often drives asset values. In Europe, it is increasingly believed that further monetary easing, perhaps similar to the Fed’s “QE” programs here, will occur, though perhaps not until well into 2015. Europe’s problems cannot all be solved by monetary policy – nor can the US’s – but aggressive monetary policy in the developed world has been good for risky assets. And that’s why investors are often rewarded not so much for knowing what is going on today, but rather for being able to correctly anticipate the policy responses in individual countries. That’s pretty hard to do, but I think the right forecast is further monetary easing in Europe.

 

Additional comments on wars and stocks: I mentioned previously that I look at wars and conflicts on a continuum between ongoing regional conflicts and all-out global war.  But another interesting point to keep in mind is that risky assets like stocks tend to bounce around prior to conflicts because of the uncertainty. Once actions are taken, even if they involve airstrikes or boots on the ground, markets tend to recover because the uncertainty has diminished. This has led many analysts to argue that it’s not war per se that’s bad for markets, it’s the uncertainty leading up to war. That’s something worth keeping in mind; but it’s overstated when applied to large conflicts, because anything that truly threatens the interdependent web of exchange that characterizes the global economy is going to be bad for stocks.