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

2017 Mid-Year Review

The following is a quick mid-year review of the US and global investment landscape. I discuss these issues in more detail in our Second Quarter STMM Webcast, which will be released this week.

Global View

Forecasts for global growth have come down a bit over the quarter, although the global economy continues to expand at a moderate pace. Numbers coming out of Europe, Japan, and even China have been a bit stronger than expected, while data from the UK has been below expectations – no doubt a delayed effect of last year’s Brexit vote. In emerging or developing markets, the focus on the BRIC countries (Brazil, Russia, India, China) appears to be giving way to a new ICASA acronym (India, China, Africa, Southeast Asia). The population of Africa, for example, is expected to exceed that of China by the year 2040. And China, like India, has a population about four times the size of the United States. The increased urbanization of this majority of the world’s population – the developing world - requires a lot of capital, whereas an excess of capital, mostly held in safe, low-yielding assets, is a defining characteristic of the developed world. The combination of this global demand for capital from the developing world with the global supply of capital from the developed world is one of the more exciting long-term stories for investors to keep in mind.


In the US, second quarter GDP growth rate estimates are generally in the 2%+ (annualized) range, above the first quarter’s 1.4% but below the more optimistic 3%+ numbers expected by some at the beginning of the year. Global financial risk measures, including the recently conducted bank stress tests here in the US, point to a much healthier global financial system now than at the onset of the global financial crisis. That is one of the reasons for the global rebound in equities that has occurred since 2009. This year, US equities have benefited from a pick-up in corporate earnings, but a good portion of the market’s 13%+ gain since the election appears to be based upon expectations of corporate tax rate reductions and regulatory reform. In general, tax reform is much more impactful if it is deemed to be permanent rather than temporary, and the ability to enact permanent changes in the tax code rests upon their expected future impact on budget deficits. That is one of the main reasons for going back to health care reform, i.e. it is a source of potential savings that can be budgeted to offset revenue reductions from tax cuts. Budget debates between now and the end of September could lead to a pick-up in market turbulence as we head into the third quarter.

Interest Rates

As for interest rates, longer-term bond yields have mirrored stocks since the election, with 10-year Treasury yields briefly rising to 2.6% before settling back down to around 2.2% currently. With one more 25 basis point fed rate hike expected this year, and with the fed expected to begin shrinking its balance sheet (i.e. not reinvesting all of the proceeds from the maturing securities that it holds), higher rates by year-end are expected.