Don’t Follow the Lemmings
Economists often use the Latin phrase ceteris paribus, or “other things being equal.” This disclaimer indicates that your analysis or prediction assumes that everything else remains the same. Unfortunately, the real world follows a Heraclitian logic and rarely stands still for our benefit; change is the only constant in the unceasingly complex global economy. Relationships between economic conditions and the stock, bond, currency and commodity markets aren’t as straightforward and deterministic as some might imagine.
Plenty of people claim to be able to predict the economy’s ups and downs. In the late 1980s, plenty of newsletter editors made their names forecasting the 1987 crash. If I told you their names now, you probably wouldn’t recognize them, but these gurus were once considered infallible.
More recently, plenty of pundits and formerly obscure economists rose to stardom after they “foresaw” the 2008-09 financial crisis. But here’s a dirty, little secret: Most of these supposed clairvoyants have made the same predictions for years. A broken clock is right twice a day; if you make the same call for long enough, you’re bound get lucky at some point.
I won’t lie to you. I don’t have a crystal ball that enables me to infallibly predict the global economy’s fate. As longtime readers can attest, I readily admit when my forecasts are incorrect. I also regularly revisit my assumptions when conditions on the ground change.
To stay ahead of the market, my economic outlook hinges on a handful of economic indicators that have proved their worth time and time again. These indicators aren’t infallible, but I’ve found that a consistent approach to monitoring economic trends is far more effective than cherry-picking data series to support a preconceived notion. Economic forecasting is an exercise in probabilities. The global economy’s interrelationships are too complex to be distilled into any series of equations.
Fortunately, you don’t have to time inflection points in the economy or stock market precisely to succeed as an investor. The market is a forward-looking system that comprises a mass network of human emotions and decisions–needless to say, its outlook is often cloudy.
The recent boom-and-bust cycle is a case in point. If you failed to position your portfolio against the Great Recession until six months after it began in 2008, you still would have avoided the brunt of the subsequent market implosion. If you were three or four months late calling the market bottom and economic rebound in 2009, you still would have caught the meat of the bull-market rally.
In short, the challenge isn’t to predict economic inflection points; the real money is made by recognizing these changes once they occur and positioning your portfolio accordingly.
During this earnings season, management teams from many of the companies we follow have stated that their outlook remains positive–provided that the economy doesn’t slip into recession. Management teams remain cautiously optimistic about their business prospects, but the big picture remains a cause for concern.
Here’s my updated economic outlook.
The
Some of this weakness stems from temporary factors: Oil and commodity prices spiked in early 2011; adverse weather weighed on business conditions in parts of the
Despite the recent spate of weak economic data, there’s only a 10 to 20 percent probability that the
Moreover, many pundits have confused weak economic growth with an outright contraction. Many of these commentators are repeat offenders who in summer 2010 warned that the
In July the Institute for Supply Management’s Purchasing Managers Index (PMI) for Manufacturing slipped to 50.9 percent and the Non-Manufacturing version fell to 52.7, suggesting that activity slowed in both the service and non-service segments of economy. At the same time, PMI readings above 50 suggest expansion. Historically, levels of 45 to 47 have indicated an outright contraction.
Meanwhile, the market ignored the better-than-expected automobile sale data released this week. This rebound in sales suggests that the manufacturing PMI may have bottomed now that the supply-chain constraints stemming from the Tohoku earthquake have abated.
We also continue to monitor the Conference Board’s Index of Leading Economic Indicators (LEI); three consecutive monthly declines usually indicate that the
The Bureau of Labor Statistics’ June Employment Situation report fell well short of analysts’ expectations, and the disappointment weighed heavily on investor sentiment. But initial jobless claims have trended lower since May, and figures from ADP Employer Services estimate that the
Global credit markets remain a concern, though the EU sovereign-debt crisis has yet to affect the
Although
Moreover,
The package calls for reductions to housing and alternative energy-related credits, additional payments for health care services and changes to the retirement age. If
Because
For example,
Meanwhile,
Let’s turn our attention to the hullaballoo surrounding
The recent patch of economic weakness is part and parcel with the halting economic recovery that began in mid-2009. If economic growth picks up in August and September, this is an excellent opportunity to buy well-placed energy stocks.
Elliott Gue is the co-editor of The Energy Strategist and is a regular contributor on Investing Daily.
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