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

Quick global narrative: Data in the U.S., from retail sales to housing to credit availability, points to continued expansion. Banks here have largely recapitalized and consolidated (i.e. “mended”), and consumer credit is increasing. U.S. consumers’ balance sheets have also largely been restored, thanks in part to the wealth effects of increased equity and real estate values (Financial Times). Europe appears closer to recovery than many had thought (JP Morgan), as data from Germany (industrial production), France (factory output), and the UK (PMI) have all surprised to the upside. China, which dominates emerging market growth (China is the world’s second largest economy now, but not on a GDP-per-capita basis), appears to be growing at a pace around 7.5 percent. Japan’s first quarter growth rate was revised upward to 4.1 percent (annualized), a number that no one sees as sustainable. Still, bank lending and consumer spending have picked up in Japan. On the inflation front, for most of the developed world, concerns are more for deflation than inflation, a situation totally at odds with the predictions of numerous well known and vocal economists in the press over the past 5 years.

 

Stocks: Stocks in the U.S. are up 22 percent from mid-November (2012) lows (though down about 1.5 percent from their mid-May highs). Year-to-date, the S&P 500 is up about 15 percent. For reference, nine percent is a good “average” annual number. I put average in quotation marks because the market is hardly ever average – it is usually up 17 percent one year, down 3 percent the next, etc., a pattern that goes back to the 1920s. In other words, there is no golden era of consistent, year-to-year gains in the stock market. By comparison, European stocks, as measured by the STOXX Europe 600 (which represents small, mid, and large cap companies across 18 countries in the European Region), are up about 5 percent year-to-date. That’s surprising (to me anyway).  On an annualized basis it is a bit above average…not bad for an economy in recession.  Japanese equities are up about 25 percent year-to-date, a wild ride since the announcement of extraordinary monetary policy by Prime Minister Shinzo Abe.  Japan was by far the cheapest market, based upon just about any metric (price-to-book value, price-to-earnings, etc.). But valuation has not been a reliable buying signal for Japan for over 20 years (it just keeps getting cheaper!). For example, at today’s 13,033, the Nikkei 225 (the most widely quoted Japanese stock index) is still only about one third of its 1989 peak of over 38,916. Finally, stocks in emerging markets, which is where most of the GDP growth in the world is taking place, are down about 10 percent year-to-date.

 

So what? I guess my key takeaway from the above is that global asset market performance is a function of what is happening in the world relative to what was expected. In other words, stocks move a lot when what happens differs from what was priced-in or expected to happen. Knowing what is priced-in is very hard to quantify, which is why there are no global market timing models out there with successful 20-year track records!

 

An important point: All of the stock market return numbers above refer to simple “price return,” or the price appreciation of stocks. That excludes dividends, which when combined with price appreciation, gives the “total return.” Price return on average contributes over twice as much to an investor’s total return as do dividends, and it exceeds the dividend contribution two-thirds of the time. Also, the contribution of dividends to total return has been declining (and more variable) since the 1980s. To put some numbers on it, the average total return per year for the period 1950 to present (63 years), is 12.5%. The dividend portion of that is only 3.8%; the rest (8.7%) is price return (Crandall, Pierce, & Company).