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

I am pleased to let you know that our first quarter webcast is now posted on our website here: http://www.brainshark.com/stmmltd/1Q2016W. I encourage you to listen in if you have not yet had the chance.


A weak start in the US is expected to give way to slightly stronger rest-of-the year performance, while in Europe a stronger than expected start is expected to give way to a weaker rest-of-the year. That seems to be the view of many proprietary research shops, for example Capital Economics. US first quarter GDP growth came in at an annual rate of 0.5%, close to the Atlanta Fed’s GDPNow final estimate of 0.4%. That model is currently indicating a 1.8% GDP growth number for the second quarter, an acceleration that is consistent with consensus estimates of 2%+ growth for all of 2016 (e.g. Wall Street Journal’s Economic Forecasting Survey).  Expectations for Europe for all of 2016 seem to be centered around the 1% range, as resurgent debt problems, current refugee problems, and terrorist issues add to uncertainty there. Elsewhere in the world, “encouraging signs, and lingering concerns” offers an apt description of China (ChinaDaily.com), while Japan continues its low-to-no growth pattern.


In my career as a researcher I’ve always found support for the assertion of Standard & Poor’s strategist Sam Stovall that while most people look at the economic data for clues about future stock market performance, it makes more sense to look at the stock market for clues about future economic performance. “Prices lead quantities,” and stock indices are prices while economic data are quantities. Unfortunately (and I’ve mentioned this before), the market is way too volatile for practical forecasting purposes. A recent Vanguard study states this well: “global equity market corrections tend to produce false recession signals, and we believe the current market volatility was such an occurrence. History shows a mixed track record for the market in predicting recessions, with as many hits as misses since 1960.” So the study shows that forecasting recessions with the stock market is no better than forecasting recessions by flipping a coin.


I talked a little on our current webcast that PollyVote has the Democrats winning the White House (though interestingly, the odds have recently narrowed slightly). Here are some election-year market facts: The market has usually been positive during election years, with slightly above average returns. Years in which Republicans won have been a bit stronger, but the real issue seems to be whether or not the incumbent party won or lost. Going back to 1948, the Standard & Poor’s 500 averaged 13.6% returns during election years in which the incumbent party won, versus 5.98% during years in which the incumbent party lost. The best election-year return in the post-WWII era was 1980 (Reagan) in which the S&P 500 returned 32.5%. The worst election year was 2008 (Obama) in which the S&P 500 returned -37%. The strongest stock market returns have tended to occur when Republicans control Congress, regardless of who controls the White House. From an investing standpoint there are nowhere near enough data points here to make decisions that deviate from your long-term investment plan. Also, markets tend to price in what’s knowable, so in order to be opportunistic you would have to (1) know in advance who will win and (2) know how much of that is already priced into the market. I am aware of no evidence that anyone has that kind of knowledge. 


Finally, last week I mentioned that a lot of the dollar’s strength relative to other currencies has to do with the safe-haven effect of dollar-denominated assets (bidding up the price of the dollar), a point missing in some of the “global currency war” rhetoric. So it is interesting that the US Treasury department issued the following statement on Friday regarding its report on the Foreign Exchange Policies of Major Trading Partners of the United States:


"Based on the analysis in this report, the Treasury Department has also concluded that no major trading partner of the United States met the standard of manipulating the rate of exchange between its currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade as identified in Section 3004 of the Act during the period covered in the Report.”