Several days ago, the industry agency reported that May's facility orders had increased by a 2.9 percent. This was well covered by 'the press', as it was to be a clear influence on 'the market' (yes, the quotes are intentional.....you'll see why). The enthusiasm was understandable - the 4 billion in orders of artificial goods is the top level seen since the current calculation formula was adopted. Although being skeptical can be wise, the outline was (and is) a clue that the economy is on a solid footing. However, too many times there's a disconnect in the middle of what 'should' be the follow of a piece of economic data, and what actually occurs. The economy isn't the market. Investors can't buy shares in facility orders......they can only buy (or sell) stocks. Regardless of how strong or weak the economy is, one only makes money by buying low and selling high. So with that, we put together a study of some of the economic indicators that are treated as if they influence stocks, but actually may not.
Gross Domestic Product
The chart below plots a monthly S&P 500 against a quarterly Gross Domestic product growth figure. Keep in mind that we're comparing apples to oranges, at least to a small degree. The S&P index should ordinarily go higher, while the Gdp division growth rate should stay somewhere in in the middle of 0 and 5 percent. In other words, the two won't move in tandem. What we're trying to interpret is the association in the middle of good and bad economic data, and the stock market.
Take a look at the chart first, then read our thoughts immediately below that. By the way, the raw Gdp figures are represented by the thin blue line. It's a petite erratic, so to flat it out, we've applied a 4 duration (one year) involving average of the quarterly Gdp outline - that's the red line.
S&P 500 (monthly) versus Gross Domestic product convert (quarterly) [http://www.bluegrassportfolio.com/images/070705spvsgdp.gif]
Generally speaking, the Gdp outline was a pretty lousy tool, if you were using it to forecast stock shop growth. In area 1, we see a major economic contraction in the early 90's. We saw the S&P 500 pull back by about 50 points while that period, although the dip actually occurred before the Gdp news was released. Interestingly, that 'horrible' Gdp outline led to a full shop recovery, and then another 50 point rally before the uptrend was even tested. In area 2, a Gdp that topped 6 percent in late 1999/early 2000 was going to usher in the new era of stock gains, right? Wrong! Stocks got crushed a few days later....and kept getting crushed for more than a year. In area 3, the fallout from the bear shop meant a negative growth rate by the end of 2001. That could persist for years, right? Wrong again. The shop hit a lowest just after that, and we're well off the lows that occurred in the shadow of that economic contraction.
The point is, just because the media says something doesn't make it true. It might matter for a few minutes, which is great for short-term trades. But it would be inaccurate to say that it even matters in terms of days, and it actually can't matter for long-term charts. If anything, the Gdp outline could be used as a contrarian indicator.....at least when it hits its extremes. This is why more and more folks are abandoning traditional logic when it comes to their portfolios. Paying attention solely to charts is not without its flaws, but technical diagnosis would have gotten you out of the shop in early 2000, and back into the shop in 2003. The ultimate economic indicator (Gdp) would have been well behind the shop trend in most cases.
Unemployment
Let's look at another well covered economic indicator......unemployment. This data is released monthly, instead of quarterly. But like the Gdp data, it's a division that will fluctuate (between 3 and 8). Again, we're not going to look for the shop to mirror the unemployment figure. We just want to see if there's a correlation in the middle of employment and the stock market. Like above, the S&P 500 appears above, while the unemployment rate is in blue. Take a look, then read below for our thoughts here.
S&P 500 (monthly) versus Unemployment rate (monthly) [http://www.bluegrassportfolio.com/images/070705spvsunemp.gif]
See anyone familiar? Employment was at it strongest in area 2, right before stocks nose-dived. Employment was at its recent worst in area 3, right as the shop ended the bear market. I highlighted a high and low unemployment range in area 1, only because neither seemed to influence the shop while that period. Like the Gdp figure, unemployment data is approximately better grand to be a contrarian indicator. There is one thing worth mentioning, though, that is clear with this chart. While the unemployment rates at the 'extreme' ends of spectrum was often a sign of a reversals, there is a nice correlation in the middle of the direction of the unemployment line and the direction of the market. The two typically move in opposite directions, regardless of what the current unemployment level is. In that sense, logic has at least a small role.
Bottom Line
Maybe you're wondering why all the chatter about economic data in the first place. The talk is, plainly to feature the reality that the economy isn't the market. Too many investors assume there's a clear cause-and-effect association in the middle of one and the other. There's a relationship, but it's ordinarily not the one that seems most reasonable. Hopefully the graphs above have helped make that point. That's why we focus so much on charts, and are increasingly hesitant to concentrate economic data in the traditional way. Just something to think about the next time you’re tempted to talk to economic news.
my response The cheaper Is Not The Stock market my response
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