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

  • Taking a Step Back
  • How to Invest

Taking a Step Back

Recent stock market price movements, say over the last week or month, are often thought to be short-term reversals from longer-term trends, i.e more noise than signal. Longer-term movements, perhaps over the last 12 to 18 months, are said to more accurately reflect underlying economic conditions. That seems reasonable. No matter what you think of the market’s short-term gyrations (i.e. “irrational,” ‘emotion-driven,” etc.), investing only makes sense if the market ultimately values things at what they are worth. Looking at the world in general, the US growth rate has accelerated slightly over the past year or two, while growth has decelerated in much of the rest of the world. Markets broadly reflect this, with US markets in positive territory over the past two years while international markets, including emerging markets, are actually down slightly over the same period. This Friday, the Bureau of Economic Analysis will issue its first estimate for second quarter GDP growth (the quarter that ended in June). Most nowcasting models are expecting around 1.5% growth, with the Blue Chip Consensus estimates ranging from 1.3% to 2.4%. Given the 3.1% first quarter number, that means the economy is averaging over 2% growth for the first half of this year. That’s not great, but it’s pretty good when compared to the rest of the developed world. And as for inverted yield curves and recessions (the curve is currently pretty flat), I’ll just reiterate that, with all of the monetary policy distortions around the world, I put a little more weight on credit spreads, which are currently not signaling an imminent recession.

How to Invest

Forecasting economies, or really accelerations or decelerations in those economies, and then trying to figure out what is or is not already priced in to various asset classes in those economies, is a tough task. That’s why I’m not a huge fan of global asset allocation strategies that make big asset allocation bets. Earlier in my career I was heavily involved in efforts to do just that, with groups that had access to superb global databases for “backtesting” results against historical data that included thousands of companies, even those that went under (so no "survivorship bias"). We found that most strategies that seemed very intelligent didn’t really work well. Indeed there appeared to be “1001” tested strategies that seemed to work a little bit, but once you allowed for the costs and realities of implementation, they were all pretty much a wash. I don’t know of anyone who has consistently shown the ability to get in and out of markets. Or, to quote the late John Bogle, “I don’t know anybody who knows anybody” who has done it consistently. That’s why we diversify, with a discipline of limiting our exposure to any specific asset class, be it value or growth stocks, small or large companies, or international and emerging market countries. We even constrain ourselves as to how much we will invest in any individual company. That’s a true wealth management strategy.