How economic data works

Sometimes economic data trends, and trends in the same direction for a long time. And sometimes it peaks (or bottoms) and begins trending in a new direction – up or down.

But turning points in long-term trends are rare, and there are still other times during which there is no trend at all.

And it is during these long-term trends or trendless trends that people mistake ebbs and flows for being meaningful. And, worse still, they convince themselves or others that one of these ebbs or flows ought to be acted upon in the context of an investing portfolio.

But here’s the game – the less one reacts to the regular ebbing and flowing of ongoing data releases, the better one typically fares as an investor. Because an ebb can quickly become replaced by a flow on the next release. Or a flow could become an ebb. This is called oscillation, back and forth, forth and back. Just as not every snap of a twig in the forest represents a predator stalking the campground, not every newly announced piece of economic information contains anything meaningful.

Economic data is always discussed in the context of whether or not it is coming out above or below a market consensus of some sort. This is important because the media uses terms like “beat” or “missed” to describe the latest data point. Which is perfectly reasonable; people want to know if something is surprising. But one very important thing that gets lost in all this scorekeeping is the fact that the data isn’t the only thing moving and changing! The expectations are constantly changing too.

So it’s a moving target forecasting a moving target.

This explains why the Citi Economic Surprise Index (CESI) never stays moving in one direction forever. If the economic data being tracked repeatedly “beats” the consensus forecasts, month after month, eventually the forecasters get more aggressive with their targets and predictions. And then, eventually, when the forecasts have “gotten ahead of themselves” to the upside, the next data point eventually “disappoints” or “misses.”

And then, perhaps, the forecasters begin to understate their calls on the future. And then they get even more negative. And then, eventually, a data point comes out and “beats,” which shows the crowd that they have maybe gotten a bit too negative. Which chastens their negativity and leads to a slight uptick in their forecasts. Thus, the cycle begins anew.

This is the ebb and flow nature of economic data. It is only when you pull back the chart and start looking at 90-day rolling periods, 180-day rolling periods, quarterly data, annual data, that a meaningful trend can be observed. But by the time these trends are observably and objectively in force, we are often deep, deep into them – and the length of a trend can no more point the way toward calculating its demise than can the temperature of the ocean tell you anything about the speed of the wind above it. Observing where something has come from in order to definitively say where it’s going – and when – is always a non sequitur conversation.

And even if I could hand you the information about economic trends one year from now, what would you do with it? One doesn’t invest in data points, one invests in securities, and securities prices are always being acted upon by that second moving target, the consensus opinion of the crowd. The economy expanded in 2018, the stock market fell. The economy is growing in 2019, but interest rates are falling. You’re not playing against the data. You’re playing against the opinions that others hold about the data, and those opinions change constantly. Ebb and flow.

Does this sound exhausting to keep track of? To be constantly guessing and then trying to handicap the behavioral biases of the other guessers. Well, it is. But the good news is that there is no sign hanging over the New York Stock Exchange demanding that all market participants play along. You aren’t forced to be in this game. The game can just be something you remain peripherally aware of as you play your game, the longer game that blunts the impact of any twists and turns happening during the course of the shorter game next door.


The longer you are doing this, the more apparent it should become to you that the interplay between the economy and the stock market, on a short-term basis, is not at all intuitive, and at many times it is counterintuitive.

Look at data on a rolling basis, rather than seizing upon a single release in a vacuum.

Context is more valuable to most investors than reaction time or a successful prediction here and there.

There are people who have been doing this longer than you who have not yet reached these conclusions. This is often because their job depends upon their not reaching them.

Opinions are not positions. Positions represent risk being taken. Opinions are conversation. Both are valid. Not every opinion needs to result in a position or the repudiation of a position.

Trends can persist for much longer or shorter periods of time than what you may have gotten into your head is reasonable or rational. They can also reverse at any time or dematerialize into trendlessness. There are no formulas to determine these turning points in advance. If there were, we’d all use them.

Just because someone is knowledgeable and extremely focused on a particular data series, that doesn’t mean that they will be any more successful at predicting its future than the rest of the crowd. In fact, their relentless attention to it and constant proximity to this information could become a hindrance to their ability to contextualize it and grasp the bigger picture.

The data will ebb and flow. The opinions about the data will also ebb and flow. No one is good enough to reliably be ahead of both in an actionable way at all times.

Invest accordingly.

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