"Kee" Points with Jim Kee, Ph.D.

Stocks in the US finished the week at fresh all-time highs (S&P 500 up 14%+ for the year) as Friday’s jobs report indicated more new jobs created in November (+321,000) than any month since January 2012. September and October jobs numbers were revised upwards as well. Year-to-date, markets are up in China (7% for the investible Hang Sen) and Japan (11.7% for the Nikkei 225), lower-to-down (depending upon the country) for Europe (Russell Global Europe) and emerging markets are basically flat. Latin America, which is mostly commodities-based, is negative. As I’ve mentioned in prior Kee Points, Latin America seems to be backsliding, and that’s what markets are telling us.

 

Europe: So far this week stocks have been down, largely because of negative data in the rest of the world. I think current issues in Greece are a great example of what’s threatening Europe’s recovery in general: European Central Bank actions to backstop the financial system and credit markets are buying time for the troubled economies there, but many of these economies are using that time to put off long-needed reforms. In Greece, for example, the economy is growing .7% year-to-date, with stronger growth expected in the future and unemployment falling. But recent political uncertainty has been brought about by a revival of populism and calls for increases in government spending, renationalization of private enterprises, and restoring public-sector jobs (The Wall Street Journal). These are some of the issues that were on the table for reform during the early stages of the Greek debt crisis and bailout, and backsliding on them is not a good sign and could threaten Greece’s bailout eligibility. That’s why Greece’s stock market is down over 13% today (The government surprised investors there by announcing a presidential vote next week that was originally scheduled for next year). Most European economies face difficult fiscal reforms similar to those of Greece.

 

In Japan, GDP numbers for last quarter were revised downward (to -1.9% from -1.6%), which is why the Nikkei is selling off. Japanese markets are up for the year and in fact for the past two years based largely on the interaction of Abe optimism and low prior valuations.

 

Data from China continues to point to slowing there, which has gone on for five years now. Again, I think the term “slow fall” is descriptive for China, and investors are looking for a loosening of credit out of the People’s Bank of China even while it tightens certain lending standards. In all of the world’s major economies there is an expectation of accommodative monetary policy. That’s a floor at best but not a growth engine.

 

Interest rates: Economist Alan Reynolds had a piece in today’s Investor’s Business Daily (IBD) on why global interest rates have been so low and synchronized. His conclusion was that rates are low because of low global growth and low global inflation. That’s true, but you also have to factor in the fact that the “global search for yield” began before the 2007-09 crash and amidst the record global growth rates of the mid-2000s. So as long as inflation and growth expectations remain low (like they are) expect bond yields to rise moderately, but not spike. That’s consistent with the futures markets, which are expecting 10-year Treasury yields to be 100 basis points higher by the end of 2015. At today’s 10-year rates of 2.2%, that means 3.2% by the end of 2015. Futures markets aren’t perfect forecasters, but they are an excellent starting point.