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Don't
Confuse 'Economy' With 'Stock Market' |
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In
light of Thursday's disappointing (though unsurprising) GDP figure
following Tuesday's record low in consumer confidence, it would be easy
to get discouraged as an investor. And, we have little doubt the echoes
of said news will be heard and felt for a while among the investing community.
However, we'll also remind you of something we verified last week -
that some industries do well in a recession.
 You
may also recall we've long been an opponent of the conventional interpretation
of really poor confidence. Indeed, we've seen that market bottoms
are often made when confidence is worse than awful.
The media, however,
never seems to be able to come up with those facts or data. Add it to the
list of things the media just doesn't quite 'get'
The straw that
broke that camel's back came today though. A couple of different AP stories
regarding the 0.3% contraction in the country's gross domestic product
was the "strongest signal yet the country has hurtled into recession".
Furthermore, the weak GDP number was "sure to buttress the belief of
many economists that the nation is on the throes of a painful downturn."
Seriously?Can
there be any question at this point?
Whether it fits a technical definition or not, we're in a recession.
To belabor the argument now is just a waste of time.
That's not exactly
what we wanted to talk about today. Our message is a little more broad
in its scope; the media's empty banter is just a symptom of the problem.
Our message:
Don't
confuse the economy with the stock market. More than that, don't let
the media (or anyone for that matter) feed you information and tell
you what the outcome will be without at least validating their theory.
Two specific
sets of data support our advice. The first one is the idea of defining
when a recession has officially begun. The second set has to do
with unemployment... a matter mentioned in one of the AP stories that prompted
this op-ed.
We're not sure
who made the National Bureau of Economic Research (or NBER) the
final arbiter of when recessions begin and end. Whoever did may want to
rethink things. It's not that they're wrong - it's that they're months
late in doing so.
 Take
a look at their more recent announcements regarding when the U.S. fell
into - and came out of - recessions.
A not-entirely-rhetorical
question....does it do you any good to be told we're in a recession
6 to 12 months after it's started? That's not even the head-scratcher
though. Take a closer look at the data again...at 2001 specifically.
Does it do you any good to have the NBER tell you in November that a recession
began in March when the expansion/recovery started in the very same month
they got around to announcing the recession?
That's not even
the ridiculous part though.
Like we said
above, if you've mentally synchronized the economy and the market, you
may have done yourself a disservice. Check
out this chart (click the link). The red, downward arrows are where
recessions started. The blue, up arrows are where recessions ended. If
you invested based solely on the NBER's data, you would have been very
late (or way early) getting out, and very late (or way early) getting back
in.
Bottom line
- don't get too consumed by any recession discussion. It means little
to investors, and it's misleading anyway.
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Unfounded
Unemployment Forecast |
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In the very
same AP articles we keyed in on above, one of the analysts interviewed
suggested the unemployment rate could move to as high as 8.0% by the middle
of next year. Great, but why?
We're not saying
it won't happen; unemployment may well be as high as 10% next year.
But, what data and model was the interviewee looking at that would suggest
8.0% was a reasonable inflation forecast? Our suspicion is there was
no real model or basis - it was just an opinion based on what's
been going on over the last two months.
By and large,
the one reality most forecasters, analysts, and reporters don't seem to
grasp is the economy's cyclical nature. Most assume the current
trend or the status quo will remain in place forever more. If it did
though, it would be the first time it's ever happened.
No big deal
- most investors know deep down that nothing lasts forever and that all
things are cyclical. However, an unwillingness to ignore these uninformed
forecasts may mean missed opportunities.
Just for the
record, similar forecasts were being made back in June of 2003 when unemployment
was as high as 6.3%. The so-called experts were talking about unemployment
reaching or even surpassing 7.5% over the following 12 months. As it turns
out, unemployment had fallen to 5.6% by June of 2004. The market gained
17% during that time frame. So no, these guys don't always know
what they're talking about.
That's not to
say we're always right either, because we're not. However, there is one
thing you can always count on from the staff of the Micro Cap Press - all
of our forecasts are data-based or history-based.
In fact, we've
been crystal clear about how we view and interpret unemployment data. It
really is one of the best tools we've ever found to time the longer-term
market. However, we use it in a way nobody else does. (See
our September 10th, 2007 edition for the full details.)
In short, rising
unemployment is bad for the market, and falling unemployment is good for
the market. That's not a novel concept, yet many prognosticators
still seem to struggle to make good use of the data. They're overly-consumed
with trying to figure out where unemployment is going, and they overlook
the current trend. The trend, however, is what's so telling.
But isn't unemployment
data just history like GDP or consumer confidence? Yes, in a sense. However
- though not by design - unemployment is also a leading indicator.
That's right ...unemployment tends to shift before the market (or
the economy) does.
 The
nearby chart tells the tale. When the unemployment rate started to trend
upward, we marked the S&P 500 with an up arrow. When it started to
trend lower, we marked the index with a down arrow. It's not perfect, but
following this simple system would have kept you out of the 1990
debacle, out of most of the 2000/2002 bear market, and would have
gotten you out of stocks in July of 2007...a few months before
the selloff began. (Click
here for a longer-term chart.)
As it stands
right now, the unemployment trend is technically bearish. To assume where
it's going though, that's a dangerous game ...a game not won by very
many. We'll not try and make the information more than what it is.
That said, we've
also been relatively confident that stocks are closer to a bottom than
not. Yes, this is in partial conflict with the unemployment figure/trend.
We're not saying this is the time to go 'all in'. We're just saying
this is a time where it makes sense to start testing the waters. There
will still be plenty of gains left to be made when unemployment turns the
corner.
Anyway, back
to the original point... don't confuse the economy with the stock market.
Stocks may become more or less valuable because of the economy,
but the two aren't synchronized. Stock prices tend to reflect what investors
think they'll be worth 6 to 12 months in the future. That's a big opportunity
if you can out-think the masses.
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Updated: 9:18 am PST (17:18 GMT), January 5, 2009
