Understanding economic data

There’s an old joke that if you put 10 economists in a room and asked them to discuss a topic, you’d wind up with at least 20 different opinions on it.  While this may be a bit unfair, it is reasonable to say that economic data can be notoriously complicated and open to interpretation.  It is also continually subject to change, sometimes at high speed.  So, on the one hand, investors need to be able to seize on relevant economic data and sometimes act on it very quickly, while, on the other hand, they also have to be able to ignore all the “background noise”.

Understanding your own investment goals is a prerequisite to identifying relevant data

In the real world, there are probably very few people who actually have the time to be concerned about all the economic data at their disposal.  It might be interesting, but when time is short, (as it is for most people, even professional investors), then people need to focus on what’s relevant, in other words, what they need to know to meet their investment goals.  That means they need to be specific about what their investment goals actually are and also how they will be measured.  Having this set out clearly, at least in your head if not in writing, allows you to assess the potential relevance of information in the context of your own situation rather than in abstract.

Give more weight to data which is available on a rolling basis

On the one hand, there is certainly a place for ad hoc surveys and their results can be genuinely informative as well as interesting.  On the other hand, by definition, they only occur on a one-off basis which means that however good their data is and however relevant it may be to an investor’s goals, it is only ever going to reflect the situation at one particular moment in time, rather than its development over time.  By contrast, data which is provided on a rolling basis can be a useful means to identify trends over time.

Remember that trends are real but not necessarily logical

There is absolutely nothing new about the concept of stock-market trends, quite the opposite.  We can see evidence of them going back throughout the history of investing although, as is generally the case with history, we generally only remember the more spectacular example of them such as giant bubbles which burst painfully and the deepest of stock market crashes (such as in the 1920s). 

With the benefit of hindsight, it’s often very easy to spot how ludicrous some of these trends were, (such as the tulip bulb mania of the early 17th century, but applying these lessons to the real world can be rather more challenging as demonstrated by the fact that bubbles continue to burst (think the dot com boom of the late 20th Century) and crashes continue to happen (think the aftermath of Brexit).  Possibly one of the reasons for this is that trends can go on for much longer than any form of common sense or logic says they should with the result that investors start second-guessing themselves and deciding that they were wrong and that they’d better “get in/out now” before it’s too late.

Deciding how to deal with trends in general and how to deal with specific trends, in particular, may be the biggest challenge investors have to face, especially since there are now two schools of thought as to the best approach.  One school of thought says that trends are a distraction from fundamentals and should be ignored.  The other is that investors should ride trends mindfully, making the most of them while the last but being prepared to jump ship when the time is right.  The keyword in that sentence, however, is “mindfully”, even when investors decide to make the most of a trend, they should always do because it progresses their investment goals, not just because it is what everyone else is doing.