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

Markets seemed a little surprised and disappointed by Friday’s jobs report which indicated that payroll employment rose by 151,000 in January. December’s 292,000 number was revised downward to 252,000, but nevertheless I think that if one of these numbers was surprising, it was the strong December number, not the January number released in Friday’s report. Think of anything over 200,000 as a good number (over 250,000 as very good), and anything below 150,000 as a disappointing number (under 100,000 being very disappointing). But payrolls are very “noisy.” If you just stare at payroll data by month and year you would conclude that you shouldn’t draw any inference from one month’s number. For example, in November of 2013 payrolls grew by 291,000, only to be followed by a mere 45,000 in December of that year. Econometricians point out that it is the average of the last three months that is the best indicator of what the next month’s data point will be. The current average for the last three months is pretty strong at 231,000. In fact, the payroll report actually boosted the Atlanta Fed’s first quarter 2016 GDP growth estimate from 1.2% to 2.2%.


The other thing weighing on markets is of course continued oil price instability. I’ve mentioned previously that over the past year any price below $40 seemed to produce market sell-offs and higher volatility, and right now with oil in the $30 dollar range we are seeing a lot of both. Again, expectations are for oil price stabilization at somewhat higher prices in the second half of the year, but with far less certainty in the interim. Keep in mind that pull-backs and corrections are a normal part of markets, serene stability is not. As always, volatility will lead to a lot of “buy now” and “sell now” headlines in the press, but remember that STMM clients are invested in an extremely well diversified portfolio of individual companies chosen with a view beyond the current ups and downs.


Another item in the press lately has been the rise in corporate debt or “leverage,” with current measures of corporate indebtedness above 2007 levels. As an economist my knee-jerk response is that with borrowing rates as low as they have been, it would be odd of it were otherwise. Companies in the aggregate tend to converge to more rational levels of debt than individuals in the aggregate. And the optimal level of debt for companies is never zero or 100% debt financing, but some number in between. And itis always moving because interest rates (borrowing costs), earnings, and assets (things that influence debt) are always changing. Academic research bears this out: a strong rise in household debt-to-GDP ratio correlates with (but doesn’t necessarily cause) a decline in subsequent economic growth, but there is no such correlation with company (non-financial companies) debt-to-GDP ratios and growth (NBER: “Household Debt and Business Cycles Worldwide”).


Finally, on stocks and Presidential election years, there are a few interesting patterns, but they are loaded with exceptions in specific elections (so I’d take them with a grain of salt). Here are the most common observations: (1) As far as the stock market goes, who controls Congress seems to be much more important than who controls the White House. Markets have generally been stronger when Republicans controlled Congress,. (2)Stocks tend to do better during the 3rd year of a President’s term; it’s a pretty distinct pattern, but wasn’t true last year – a third year in President Obama’s second term - when the market was flat. (3) Presidential election years tend to be positive but slightly below average years for stocks. (4) Markets tend to produce better returns during years in which Republicans win the White House, only to underperform the following year; the opposite tends to occur for Democrats. (5) People’s spending is little affected by how their candidate is doing in the polls according to research. It’s this latter result, (#5) that is, in my opinion, the most important and useful one for investors.