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

Outlook 2013: This is both a combination of what I hope to see and of what I expect to see.

Fiscal Cliff: As of right now there is still hope of a last-minute deal to avoid the full expiration of the Bush-era tax cuts and an enactment of automatic spending cuts slated to take place in 2013. As I’ve mentioned before, as interesting as that is, the most important thing from an investment perspective is what the market is already expecting (“what’s priced in?”). That’s impossible to know precisely but plausible to ball-bark (gauge), and right now I’d say the market is expecting neither a full fiscal cliff effect nor a full extension of the status quo, even if negotiations go into 2013. I’ve shared in the past a bit of wisdom that I have found helpful in times like this. A well-known Wall Street “quant” once wrote in the 1990s that, when investing in stocks, know that at least once a year an event is going to happen that’s going to make you want to go to all cash. That was written before the tech bust, 9-11, 2007-09 financial crisis, European debt crisis, U.S. debt-downgrade, and the fiscal cliff debates. Such prescience tends to come from people who really know their history.  


Quick facts: I’ve mentioned before that the long-term (150+ year) average annual growth rate for the U.S. economy is around three percent. That’s an average-sometimes it’s more; sometimes it’s less. The average growth rate for economic expansions (that is, between recessions) is around four percent. The average growth rate for the current expansion is around two percent. Some economists have claimed that we are on a permanently lower growth path going forward (due to things like the winding down of or “diminishing returns” to major technological breakthroughs), while others have argued that normal growth should resume following the completion of some de-levering (lowering debt-to-income) in the private sector and from declining policy uncertainty. Here’s a more specific take on why I expect more normal growth in the U.S. in 2013:


Post WWII, most (9 out of 11) recessions have been led by expansions in autos and housing, the two big consumer discretionary spending sectors. During the most recent expansion, these two sectors have remained largely on their backs, but fortunately exports and business spending were more robust than average, taking up some of the slack. Then over the past year we saw export growth and business spending growth slow, only to be offset by emerging recoveries in housing and autos!


My expectation for all of 2013 is that the housing and auto recovery will continue. And with global business activity rebounding following last year’s slump (JP Morgan), I expect export growth to improve. Finally, with fiscal policy uncertainty lower post “fiscal cliff” and “debt ceiling debate” deadlines, I expect business spending to pick up somewhat. None of these four – housing, autos, exports, and business spending – should be expected to exhibit robust or outsized growth rates, just improving growth rates. And that, in my opinion, will push us towards (1) 2.5%-3% real GDP growth, (2) at least average (9%+) stock market performance, and (3) lower stock market volatility in the U.S. as we end 2013.


Aside: There will probably be some “tax border effect,” that is, higher growth this quarter (Q4, 2012) as income is shifted forward or borrowed from the first quarter of 2013 in anticipation of higher tax rates after the first of the year. That, combined with the fact that first quarter GDP is normally the lowest anyway because of the “holiday hangover effect” on spending (a “holiday border effect” as it were), means that first quarter 2013 will be more misleading than enlightening.