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


Quick Thoughts on the Market


Pullbacks (>5% declines), corrections (>10% declines), and bear markets (>20% declines) are a normal part of investing. I call them “expected but not predictable,” and while I know that doesn’t make environments like the current near-20% decline any more comfortable, it probably should. The bigger danger to investors is to either not expect them, which causes panic selling, or to expect them and believe them to be predictable, which causes endless market-timing errors. In the words of Jack Bogle, “I don’t even know anybody who knows anybody who can successfully time the market!” And the stock market is much more volatile than the economy, which is why it is not that useful for forecasting the economy or recessions. Paul Samuelson’s 1966 quip, “the stock market has predicted nine of the past five recessions,” continues to be a fairly accurate statement of the market’s ability in this regard. Newer automated trading systems are probably adding to the market’s volatility. Looking at the past week, the recent government shutdown that began on Saturday over border security funding (the third shutdown this year – WSJ) appears to be the main headline event. But government shutdowns, as economists Art Laffer pointed out recently, don’t really change or reduce government spending, they just delay it. So they have little real economic content, and that is why markets on average tend to produce positive gains during shutdowns. Other negatives weighing on the market include President Trump’s ongoing criticism of the Federal Reserve, which raised rates last week, and ongoing uncertainty over trade with China. Positives include strong consumer spending helped by stronger wage growth and low unemployment. I am still somewhat optimistic that progress on trade policy will lead to a turnaround in stocks. Finally, next week I will be attending the American Economic Association’s Annual Meeting in Atlanta, so we’ll take the week off from Kee Points. But on Monday, January 7th, I promise to share with you what I thought were the best insights from some of the brightest minds in economics.