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

I think everyone will agree that last week was a little too much “excitement” in the stock market. The Dow Jones Industrial Average briefly plunged 1000 points on Monday, ultimately finishing down 588 points. Some of this was no doubt due to trading “algorithms” or “program trading” that initiate automatic sell orders at certain price points, but such indiscriminate selling also creates opportunities on the other side for buyers. Market plunges always try investor resolve, even when investors know it is important not to sell during volatile times. Last week was a good example, as the Dow gained almost 700 points between Wednesday and Thursday, a more than 4 percent gain. I am sure you’ve seen the data before on how missing out on just a handful of big days every year can dramatically reduce your long-term returns. For example, if you missed the one best day each year for the last 15 years (2000-2014) you would end up with only half of the amount of money you would have if you just stayed in the market and left it alone. In fact, over a 30 year period, missing just the one single best day (out of 30 years’ worth of days!) lowers your total returns by 10%, and missing the 5 best days lowers it by over 35%! (Crandall Pierce & Co). Since a lot of the strong days occur around the time of market plunges, these kinds of facts are really important for individuals to keep in mind during volatile markets; that’s when the knee-jerk response is to sell. And nobody knows when the handful of really strong days in the market are going to occur: You don’t want to miss the big days, and you can’t predict them.


Much of the market’s sell-off revolved around China, its growth rate, and its stock market behavior. Wall Street firms like Goldman Sachs are lowering growth forecasts for China down to the 6% range and even into the 5% range a few years hence (Goldman Sachs). I think that’s not only plausible but evident in the data. In the US, we got a positive growth surprise as 2nd quarter real GDP (Gross Domestic Product) growth was revised upwards by 1.4 percentage points, from 2.3% to 3.7%. All of the major components were revised higher, which is good, with the largest coming from increases in government spending and in private inventories. Some analysts are concerned that the build-up of inventories during the first half of the year will slow in the second half, putting downward pressure on second half GDP growth numbers (firm’s won’t have to produce as much because inventories are flush). Others point out that current inventories are just now at average levels. I think growth will be a bit below expectations (e.g. 2.5%+) in the second half, so I think the first view will prove to have the most merit. As an aside, I did some of my first macroeconomic research on business inventories. The question asked was, do inventories rise because businesses are having a hard time selling goods, or do inventories rise because businesses anticipate higher coming sales? I found that both views were valid but at different times. In other words, its “period dependent,” like many of the relationships in financial economics and macroeconomics.

 

Another area that seems to have markets on edge is the timing of the first Federal Reserve rate hike. Indeed our CEO, Jeanie Wyatt, mentioned this last week as a probable source of angst for markets over the next few months. I could not agree more with Jefferies strategist David Zervos that the debate over a September, October, or December rate hike is the most banal in Fed watching history (Jefferies). It doesn’t deserve the attention the press has given it for a long term investor, so try not to get sucked in by the inane 24/7 coverage.