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

  • Global Summary
  • Trader’s Gotta Trade
  • Markets Reflect Risks
  • Interest Rates

Global Summary

Looking broadly at things, global economic growth continues apace, with the US in particular appearing to strengthen, while Europe and Japan have hit a bit of a soft patch. China’s recent PMI (Purchasing Managers Index) numbers were surprisingly strong, but underneath the economy there, it appears they are hitting a soft patch as well. Global stock market returns appear to be reflecting all of this, with US indices positive year-to-date, while global indices (Europe, Japan, China) are negative.

Trader’s Gotta Trade

“Fish gotta swim, bird’s gotta fly, trader’s gotta trade”. That was how Ben Stein recently described the hoopla surrounding the sell-off last week over Italy concerns, describing it as a “wild overreaction” and calling US exposure to Italy (and Spain) essentially trivial. What Stein was getting at was the fact that the press needs a daily story or headline, while an investor’s main job is to figure out what to ignore and what not to ignore. Acting on the daily news turns many investors into mere traders, and I know of no evidence that concludes anything other than the fact that long-term disappointment tends to follow such a short-term focus.

Markets Reflect Risks

Almost daily you will hear global investors talking about this or that market being cheap, without any suggestion that markets tend to look cheap, on whatever metric, because they have higher risks. For example, Europe has a lot of political churning going on, and it would be odd if that weren’t reflected in market valuations (i.e., “Europe’s cheap”). That’s even more true of emerging markets, stock markets which had a strong bounce last year but are back in negative territory this year. It is always worthwhile, by the way, to recognize that emerging markets are far from homogeneous. They are made up of countries that are a mix of developed and developing, with that mix often going back and forth from year-to-year. They also have very different drivers, with some essentially driven by global commodity prices, others more contingent upon global growth, and others being driven by country-specific political change.

Interest Rates

As for global interest rates, here too we see more a reflection of reality than any sort of obvious “play.” Borrowing from a summary provided by our Director of Fixed Income, Josh Hudson, CFA, US rates are basically higher across the yield curve (i.e. across maturities) while rates in the rest of the world are relatively flat. That reflects, I think, the global growth characteristics summarized above, along with a more accommodating stance by global central banks relative to the US Federal Reserve. The European Central Bank continues “QE” or asset purchases there, which helps keep rates low and benefits European borrowers. Higher country-specific rates in Europe, like Italy’s, reflect higher risks. I would add that global financial stress indices have moved up a bit in 2018, but only towards normal or average levels from what were below average levels a year ago. In this they reflect the return of volatility seen in stocks, which I view more as normalization. Looking at these stress indices broadly, like those constructed by the Kansas City and St. Louis Federal Reserve Banks, one sees almost no sense of elevated global financial risks. And these indices contain just about every type of warning signal that economists look at.