What doesn’t matter: the non-drivers of the economy
In a world where a constant stream of economic data and commentary is the norm, it’s crucial to be able to sift through what really matters (see my post from last week for those insights) to make better-informed investment decisions. Now, let’s look at what doesn’t really matter when assessing the driving forces of the economy. We’ll assess why “Fed Talk” and high frequency economic data are oftentimes deemed important, yet have very little relevance.
The Federal Open Market Committee‡ (FOMC) consists of 12 members. All of them have their own opinions on the state of the economy. As the old joke goes, if you have 12 economists in a room you will get 14 opinions.
The Fed develops forecasts like many Wall Street prognosticators, and their track record is very similar: not better, but not worse. One would think since they hold the cards, their track record should be superior. However, you don’t need to be glued to your computer waiting for the next Fed press conference. Watch what they actually do, not what they say.
High-Frequency Economic Data
The high-frequency weekly indicators are meant to be accurate in observing economic trends in real time. However, these data points can be misleading when observed point-to-point.
Take mortgage applications in 2015 for example; this data is released every Wednesday. Looking at one week in January, it indicates mortgage applications were up 49 percent. Then, a week in February recorded applications down 13 percent. The point is that just because you can track the data, doesn’t mean it is a helpful economic indicator.
The variety of data points we have at our fingertips today is nearly unfathomable. As investors look for more efficient ways to use the data at hand, remember to track the U.S. dollar, employment and global GDP. Take what the Fed says with a grain of salt and rather, watch what they do. And if you have high-frequency economic data in front of you, remember – just because it can be tracked, doesn’t mean it’s delivering information that should be used.
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K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.