“Kee” Points with Jim Kee, Ph.D.

Well, the S&P 500 touched above 2000 for the first time in history. That’s not really important in the grand scheme of things (an upward trending anything will always be periodically hitting new highs), but it is a headline maker. And I think you’ll agree with me that it beats the heck out of hitting new multi-year lows! Most of the market’s enthusiasm has occurred with thin trading volume, meaning that the number of shares of stock traded is low. In general, technical analysts look to volume to confirm a trend or pattern in the market, so market moves accompanied by lower volume are considered to be less meaningful than market moves that are accompanied by higher volume. I think New York Stock Exchange veteran (who is with UBS) Art Cashin summed it up best saying “Volume equals validity. Just as you wouldn’t want the president of the United States elected with only eight people voting, you want to see real volume to get real validity.”


We are also seeing a 14-year high for the tech-heavy NASDAQ composite index. The NASDAQ hit a peak of 5132 back in March of 2000. Today it stands at 4560. That episode capped the brief and euphoric run-up in tech stocks that occurred in the late 1990s. It also lead to the myth, really, that the overall stock market is susceptible to frequent “bubbles” and overshooting. There is a Mckinsey study that I have mentioned before in Kee Points that pointed out that really big market run-ups, as happened from 1967-72 (the “Nifty 50”) and from 1997-01, were concentrated in only a handful of sectors. Full, broad capitulations like the 2007-09 decline are extremely rare. The study then asked how rare individual company stock bubbles are, and found those to be rare as well. That’s pretty striking. What they did was look at 3560 companies that traded above $1 billion market cap any year between 1982 and 2007. Only 123 of those were considered a bubble, which was defined as a P/E (price-to-earnings) ratio double that of the S&P 500, and a share price decline greater than 30% that was not based upon a substantial decline in earnings. Of those 123, 92 were in Information Technology, Telecom, and Media stocks during the tech boom. And of the remaining 31, only 7 ever achieved market cap above $5 billion. Their conclusion was that overall stock market bubbles are extremely rare, as are individual company stock bubbles! It is sector bubbles that are most frequently encountered by investors, and it is sector bubbles that investors should fear or guard against the most. By the way, even though the NASDAQ has yet to recover its 2000 peak, indices like the S&P 500 and the Dow Jones Industrial average did surpass their prior peaks during the subsequent rebound in the early 2000s.


All of this is occurring amidst the backdrop of Fed Chairman Janet Yellen’s and European Central Bank (ECB) President Mario Draghi’s comments in Jackson Hole Wyoming last week. Draghi indicated that more monetary accommodation by the ECB is likely in the future. And as many economists pointed out (e.g. Cornerstone Macro), that tends to be good news for risky assets, and markets are likely to not wait around for this near certainty but rather to start pricing it in advance. That’s apparently some of what we are seeing today. Janet Yellen’s speech talked about labor market dynamics (e.g. participation rates that peaked in 2000, structural versus cyclical unemployment, wage trends, etc.). Her point was really that accurately measuring how much “slack” there is in the labor force is increasingly difficult and hard to quantify, so the Fed has moved beyond using any single indicator like price indices or the unemployment rate when deciding upon the appropriate time to start raising short-term rates. She did state that the Fed intends to complete its asset purchase plans in October, and that rate hikes would in all likelihood wait until “a considerable time afterword.” The language describing what might influence that decision to be moved forward or backward in time is, in my opinion, a comical verbal tap dance well worth reading - and I’ve included it below:


“At the FOMC's most recent meeting, the Committee judged, based on a range of labor market indicators, that "labor market conditions improved." Indeed, as I noted earlier, they have improved more rapidly than the Committee had anticipated. Nevertheless, the Committee judged that underutilization of labor resources still remains significant. Given this assessment and the Committee's expectation that inflation will gradually move up toward its longer-run objective, the Committee reaffirmed its view "that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after our current asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored." But if progress in the labor market continues to be more rapid than anticipated by the Committee or if inflation moves up more rapidly than anticipated, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter. Of course, if economic performance turns out to be disappointing and progress toward our goals proceeds more slowly than we expect, then the future path of interest rates likely would be more accommodative than we currently anticipate. As I have noted many times, monetary policy is not on a preset path. The Committee will be closely monitoring incoming information on the labor market and inflation in determining the appropriate stance of monetary policy” (board of Governors of the Federal Reserve System).