We Trade Stocks, Not the Economy
- Posted by JC Parets
- on November 12th, 2012
This is a conversation that I seem to have way too often. When talking about going long S&Ps or Crude Oil or anything that is “supposed to” do well with a growing economy, the questions are usually, “But what about unemployment?” and “But the president is destroying this economy, don’t you see?”. Yes I do see. I unfortunately have to hear/read about this all the time. It’s tough to get away from (trust me, I’ve tried).
But we don’t trade who the President is. And the Stock market hit 52-week highs in September, decade highs in some averages. All while our “president was destroying the economy” and “unemployment was through the roof”. Clearly the stock market doesn’t give a damn about these economic data points. So why should we? Besides, most of this stuff is going to get revised a million times anyway.
The fact is, most economists are totally useless at predicting recessions. According to Variant Perception (I recommend reading their leading indicator economic research), “in the past four US recessions consensus forecasts did not recognise the recession even when recessions had already started.” The problem with economists and other academics is that they simply extrapolate data trends, as seen in the chart above. Variant Perception goes onto argue that the reason 9 out of 10 economists have failed to forecast the last several recessions is because economists focus on the wrong things. The two major reasons are:
- Focusing on lagging economic indicators (e.g. no use in tracking employment data)
- Focusing on incomplete / untrue data (e.g. almost all data is revised 3 & 12 months later)
So if the market doesn’t care, if you can’t trust the numbers due to all of the revisions, and if the economists looking at this stuff can’t get it right anyway, then why should we pay attention?
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J.C. Parets is the Founder & President of Eagle Bay Capital, LLC. He earned the Chartered Market Technician designation (CMT) in 2008 and now actively manages money incorporating Technical Analysis and Behavioral Finance into his practice More
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