What data or indicators comes to mind when you hear the words like “economic data”? We certainly have no shortage hitting our daily screens. Indicators that range from:
- high frequency to low frequency (weekly or quarterly?)
- lagging to contemporaneous to leading (rearview or windshield?)
- collection methods (estimated or “real”)
=> Ultimately, this means they range from the useful to the useless.
Over the last 20 years, I have boiled down to just a few that I formally incorporate into my process and evaluate on a regular basis. This small list of indicators got an addition in 2020 with a data set I didn’t even know existed before the crisis. Perhaps that is because the Fed did not begin releasing it to the public until then. First, a little background.
The biggest of all economic releases is the Gross Domestic Product (GDP) because it is a gigantic aggregation of all factors into the state of our economy. While extremely important as a yard stick of our overall economy – its usefulness to investing is minimal. At best. After all, we are getting the initial estimate for the prior quarter – 30 days after it ended. Additionally, it is heavily revised after that. That doesn’t mean that markets won’t react to GDP releases, but I find it more relevant for Govt statistics and the history books than for making asset allocation decisions.
However, the Federal Reserve’s Weekly Economic Indicator is the new data set I added to my routine and just happens to be GDP based. The difference is that it is a weekly indicator that is continually updated based on a set incoming data. Data that has been found to be reasonably indicative of the level and direction of the economy and where the GDP will wind up. Does the indicator accurately record data for the history books to report our GDP? No, not really. However, it does give us a real time meter for which way the economy is heading ….and importantly when it may be turning.
For instance, its helpfulness can be seen during the recovery of 2020 as it never really wavered during its recovery.
Looking back, that continued recovery is obvious and set in stone, but at the time, a ton of uncertainty was slowly chipped away. There were fits and starts, but this key indicator just kept chugging along – week after week as our economy (our GDP) healed. Even when the virus entered its harshest winter season, things simply stalled. The fact that it didn’t decline speaks volumes.
For the most part our FEG investment team maintains a pretty clear distinction between economic direction and stock market direction. Accordingly, for data like this, we will be extra careful in guarding against the compulsion to translate into a forecast for the S & P 500 going up or going down. But a solid economic read can be an excellent input for the characterization of the market and which areas should do well. I would argue this continually strengthening economy meant a ton for broadening out the rally in later 2020 and so far in 2021. By broadening out, I mean the more stocks going up as opposed to small handful.
Through late last year, the Russell 3000 was up 5% as shown on the chart below. Yet, taking a broader view revealed that the median stock was still down 15%.
Since that time frame, that median stock has been on fire. I believe the economy’s continued recovery helped foster this condition. And the Fed’s Weekly Economic Indicator was quite helpful in viewing this in real time. Some of our bigger companies can be positioned to do well despite the economic environment, but a large number of smaller ones need a vibrant economy.
While we can see a tremendous separation of stocks and the economy…. there is far less room for nuance in bonds. Stocks have widely variable outcomes, boards of directors and many other factors that can lead them to detach from the economy around them. Bonds are contained to a more discrete and finite environment. You know their death date, their income levels, etc. In reality, the economy is their chairman of the board. So, this continually improving economy, seen in real time through this weekly economic index was invaluable in protecting against the rapidly rising rates they produced.
As with any indicator, we want to be careful about giving it too much weight and recognizing it for what it is; one input. But it has proven helpful in this widely variable environment. And, unless you were at the right place at the right time, you may not have even heard it is out there.
