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

  • Uncertainty at the Moment
  • China


Uncertainty at the Moment

The partial government shut-down that began on December 22nd has just exceeded the previous record holder, which was the December 15, 1995-January 6, 1996 shut-down that took place under President Bill Clinton. The current shut-down has occurred because of disagreements between Democrat and Republican leadership on border Wall funding. I don’t think the core constituents of each party are as gung-ho on this issue as their leaders are, but right now there are no obvious signs of a pending compromise. One exception could be in modifications to the Obama-era’s Deferred Action for Childhood Arrivals (DACA) program, which President Trump cancelled in 2017. Democrats have tended to favor deals that help young, even undocumented, immigrants (i.e. “Dreamers”) become citizens, and they have formerly offered border Wall funding in exchange for creating a path to citizenship for these young immigrants (WSJ). If there is a way through this impact I think it will involve a compromise that helps Dreamers gain citizenship (a concession on Trump’s part) in exchange for Wall funding (a concession on the Democrat’s side).



There are plenty of other uncertainties out there, like the on-going votes and debates over the conditions of Britain’s exit from the EU (scheduled for March 29th). Global data indicate slowing growth in the Eurozone, Japan, China, and even the U.S. Of these, China is perhaps the biggest concern, with trade (exports and imports) and manufacturing data indicating that the trade “spat” between the U.S. and China is starting to take a toll on the Chinese economy. The Chinese are expected to lower their GDP growth target from the current 6.5% growth rate to 6%, which is still pretty good for an economy that is almost as large as the United States. Thinking big picture though, I continue to feel that the following quote from consulting firm McKinsey & Co, which I used in our 2013 Market Update, has been the best guide for thinking about China:

“While many economists now project that China’s average annual economic growth will fall to between 5 and 7 percent a year during the next decade, I expect it to slow even more, perhaps to 3 to 4 percent a year. In modern history, no country that has experienced an investment-driven growth “miracle” has avoided a slowdown (such as Japan’s after 1990) that surprised even the pessimists, and it is hard to find good reasons to think China will be an exception.”

That seems to describe what we’ve been seeing since 2013. In the end, I see both the U.S. and China being more interested in getting a trade deal done this year than they were last year, and that would be a positive catalyst for stocks. Looking across the S&P 500 forecasts for 2019 by the top banks (Bank of America, Goldman Sachs, Citi, etc…13 in all), it appears that this “compromise over conflict” is a consensus expectation (although compromise was expected of Trump in 2018 as well). The average expectation for the S&P 500 is 3056 by year’s end, which is about 18% above today’s 2582 level (sounds a little rosy). Credit Suisse is the most bullish, with +30% upside (3350) expected by year’s end, while Morgan Stanley is the most bearish, with +6.5% upside (2750) expected by year’s end.