"Kee" Points with Jim Kee, PhD.

I thought it would be a good idea for this week’s Kee Points to just take a quick look around the world at economies and markets:

US: PollyVote indicates that Hillary Clinton’s odds have indeed slipped in the past week or so, but she remains the favorite with a 52.8% chance of winning the White House versus 47.2% for Trump. Data in the US continue to point to a struggling manufacturing sector and a decent services (consumer) sector, with 3rd quarter GDP estimates from NowCasting models being in the 3% range. Core inflation at 2.2% is close to the fed’s 2%target (it’s a target, not an official mandate), while headline CPI, which includes the volatile food and energy components, is down to 0.84%. This is a good thing to keep in mind the next time you hear someone say that the fedtalks about the core number more than the headline number because it is tryingto “hide” inflation. It actually focuses on the core number because theheadline number is so volatile!

Europe: Data in Europe so far, like purchasing managers surveys, are surprising to the upside following the June Brexit vote(Wells Securities). The British pound, which had fallen from $1.47 pre-Brexitto $1.28, or down 12%, is now down only about 9%. The euro is also up a bit,trading at $1.12. Basically the euro peaked in April 2014 near $1.40, came downto $1.13 by January of 2015, and has been trading more or less around thatvalue ever since.

China: Official GDP growth numbers in China forthe first and second quarter were 6.7%, right in line with the government’s6.5%-7% growth target for 2016. Of course, the official numbers have well knownproblems: the sum of the output numbers from each providence doesn’t equal thenational total, and the quarterly and annual growth numbers don’t always mesh(Economist). Chinese GDP is reported way too quickly by other developed economystandards. Finally, export data reported by China do not always mesh withimport data provided by other countries. In general, most economists feel thatChina is growing at about half the rate it was 5 or 10 years ago. But China’seconomy is about twice the size as it was 5-10 years ago, so it is generatingas much new output now as it was then. For example, at $11 trillion, if China’seconomy is growing at 6.7%, that means that it is generating about $740 billionin new output every year (i.e. $11 trillion multiplied by 6.7%). Based upon thesize of China’s economy in, say, 2010 ($6 trillion), that same $740 billion inincreased output would be equivalent to a 12% growth rate (i.e. $6 trillionmultiplied by 12% equals $740 billion). That is what economists mean when theysay that China’s growth rate is lower than it used to be. It is, but off of amuch larger base, so the contribution to global GDP is the same. Of course, theglobal economy had a smaller base in the past as well, so China’s $740 billionin increased output has less of an impact on global growth than it did when theglobal economy was smaller.

Japan: The bank of Japan’s big quantitativeeasing (QE) program began in April, 2013, and it was 3 times the size of theUS’s when the Japanese bond purchases are measured relative to Japanese GDP. Ayear later it fell into recession, and Japan has had two negative quarterssince that recession, with the most recent quarterly growth rate coming in at0% (Q2 2016). Japan’s problems (and their solution) in my opinion have littleto do with Bank of Japan policy.

Who’s experiencing negative growth? For the mostrecently reported quarter, it is the commodity-intensive economies: Russia,Canada, Venezuela, Argentina, Brazil, Chile, Mexico, and South Africa. And yetmany of these countries are also experiencing double digit stock market gains.Why? Because prices lead quantities! The economic numbers (quantities) reflectwhat is or has been, while markets (prices) reflect (imperfectly) what will be.Many of these markets have lagged for years, and a lot of the recent moves justreflect commodities’ bounce off of the bottom.

Stocks: So far this year, in the US small-capstocks have outperformed large-caps, and Value stocks have outperformed Growthstocks. US stocks have outperformed International stocks, but withininternational, emerging market stocks have been the best performers. Interestingly,this is the exact opposite of what occurred during the 2007-09 bear market andthe 2011 correction (the last 2 really big stock market drops), the point beingto stay diversified across asset classes and manage your exposure to any singleclass. Finally, Utilities, Energy, and Materials have been the best performingbroad sectors – the latter 2 due to the aforementioned commodities bounce offthe bottom -while Health Care and Financial Services have been the worst.