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

  • US and Global Economies
  • Stocks and Gambling


US and Global Economies

Well, it looks like recession concerns from the brief inverted yield curve we witnessed a few weeks ago are starting to fade. Expectations from the Atlanta Fed’s nowcasting model are for 2.8% first quarter GDP growth, and that number has risen steadily throughout the quarter. The New York Fed’s model is lower at 1.4%, which is near consensus estimates of 1.5%. The important point is that these numbers are not negative, and the first quarter on average is the lowest. I think that is why recession fears are receding, i.e. because the data is not indicating negative growth. Looking globally, Purchasing Manager Indices (PMIs) indicate a mixed bag of accelerating growth (e.g. China and Emerging Markets) and continued decelerating growth (e.g. Europe/UK and Japan). These global indices, like those produced by the research firm IHS Markit, are based upon surveys of over 26,000 companies representing 4-+ countries. Many represent capital or manufacturing-intensive businesses, giving only a partial picture, but they are timely (i.e. monthly), and that counts. In the same way, economists in the US still follow monthly industrial production numbers even though they represent only a partial and declining share of what has increasingly become a service-dominated economy. Their timeliness compensates somewhat for their partial nature.

Stocks and Gambling

I think every economist has their favorite source of agitation, i.e. some economic myth or errant piece of “folk economics” that they come across repeatedly and cannot seem to dispel. In investing, mine is the notion of “The Wall Street Casino,” or the idea that investing in the stock market is like gambling at a Las Vegas casino. In fact, the truth is the exact opposite! The expected value of stock market investing (as opposed to timing) is positive, whereas the expected value of gambling in a casino is negative. In fact, the longer you spend in a casino gambling, the greater the chance that you end up broke and losing all of your money. But the longer you stay in the stock market, the greater the chance that you end up wealthier than when you started. How much so? Well, the Center for Research in Security Prices (CRSP) at the University of Chicago recently looked at data going back to the 1920s. They found that the odds of losing money in any given year are about 25%. But over five-year periods, the odds of losing money fall to just over 12%. And, over an eight-year period those odds fall to about 5.5%! CRSP made the point that the key takeaway is that asset allocation is inefficient if it is based upon a view that is too short-term. Your horizon as an investor is (or should be) longer than the press’s, which is basically until the next data point. So what do CRSP’s numbers show for compound annual returns using their 90+ years of data? For US stocks it is 9.8% per year. For international stocks it is 7.8% per year. Bonds average 5.1%, and short-term Treasury bills (often a proxy for cash) earned 3.7%. These are total returns, which include price appreciation and dividends and interest payments. Most researchers expect returns over the next 5-10 years to be lower than these long-term numbers, but I thought you would like to see the facts.