If you looked at last week from the
perspective of the children’s book, If
You Give a Mouse a Cookie, it might have gone like this:
If you give the United States a positive
employment report,
Investors are going to ask whether interest
rates will move higher.
When they conclude the Federal Reserve may
increase rates sooner rather than later,
American stock markets may dip lower…
Yes, last week was one of those weeks: When good news triggered not-so-good
news. According to Barron’s:
“The February jobs report, showing a 295,000
gain in nonfarm payrolls, about 60,000 more than predicted by economists, plus
a dip in the unemployment rate to 5.5 percent from 5.7 percent in January,
evidently was enough to convince the markets that a June Fed rate hike is now
likely. The June fed-funds futures contract was pricing in a 70 percent
probability of a move to 0.25 percent to 0.5 percent at Friday’s settlement, up
from 48 percent the day before, according to the CME.”
Reuters reported the good news: A stronger U.S.
economy is better for U.S. stock markets over the long term. It also gave the not-so-good
news: Investors’ worries the Fed could choke economic growth by raising rates
too soon led to a market selloff.
As investors agitate, it may prove worthwhile
to spend some time thinking about economic indicators. The Conference Board produces leading, coincident, and lagging
economic indices which are comprised of individual leading, coincident, or
lagging indicators. These indices are intended to provide insight to U.S.
economic change and help identify turning points in economic data. For example:
·
The leading
index is an early indicator. It is intended to mark turning points before economic
change occurs.
·
The
coincident index tends to mirror current economic performance, turning up or
down along with GDP (gross domestic product) growth. One component of the
coincident index is the number of employees on nonfarm payrolls.
·
The lagging index
tends to reflect what has already happened.
In its most recent report, The Conference
Board Leading Economic Index increased which suggests a positive short-term
outlook for 2015. However, the pace of increase slowed month-to-month which indicates
downside risks remain.
do you
know who irving fisher was? The Library
of Economics and Liberty
described him as:
“…one of America’s greatest mathematical
economists and one of the clearest economics writers of all time. He had the
intellect to use mathematics in virtually all his theories and the good sense
to introduce it only after he had clearly explained the central principles in
words. And he explained very well. Fisher’s Theory
of Interest is written so clearly that graduate economics students can read
– and understand – half the book in one sitting, something unheard of in
technical economics.”
Unfortunately, he is also known for saying,
“Stocks have reached what looks like a permanently high plateau,” on October
15, 1929. Just a few weeks later, the market crashed along with Fisher’s
credibility.
This is but one tale of our dismal ability to
forecast. Regardless, we continue to try. Consider 2014. The Wall Street Journal’s survey of economists predicted 10-year
Treasury rates would move higher (a unanimous opinion). There was good reason
for analysts to forecast higher rates, but markets are complex and rates fell
during the year. Survey participants predicted 10-year Treasury rates would
finish at 3.52 percent. They finished at 2.17 percent.
Survey participants also anticipated crude
oil would finish the year at about $95 a barrel. There was little reason for
anyone to suspect a significant drop in oil prices when demand for energy is relatively
strong around the world. Regardless, the final closing price per barrel was about
$53.
So, when people whose jobs involve tracking
economic events and financial markets find it difficult to interpret how
markets may perform, what are investors supposed to do? It is felt they should
remain committed to investing best practices, which include prioritizing
financial goals, maintaining well-allocated portfolios, managing risk, and
talking with financial advisors.
Weekly Focus – Think About It
“Start with what is right rather
than what is acceptable.”
--Franz Kafka, Novelist
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