This week’s “Headline Risk” focuses on the outdated way the Old Institution evaluates economic data. One of our three core principles is to focus on the slopes (rate-of-change, or ROC) across economic and financial market data, writes Landon Whaley Thursday.
Headline risks are everywhere, much like the number of times the TNT network plays It’s a Wonderful Life between December 22 and December 25 each year. As an investor you must keep your head on a swivel and human reactions in check so that you’re not drawn into well-written narratives that promise to unveil the mystery of financial markets.
In contrast, most investors (professionals and retail alike), media gurus and other market participants focus almost exclusively on averages. For this reason, you can garner a true edge and subsequent ability to outperform other investors over long periods by focusing on the ROC.
When an economic data point is released, the first thing most analysts and talking heads do is judge how that number stacks up against “expectations.”
Those expectations are simply the consensus of what a group of economists thought would happen; the consensus is essentially an average of their forecasts.
Last week gave us a classic example of how misleading it is to compare data points to expectations. The November U.S. retail sales report showed that sales grew +0.2% month-over-month from October. Media folk compared this to the expected +0.2% month-over-month growth rate that was the consensus of 83 economists and declared that “meeting expectations” means the data point was a “good” one.
What does this type of analysis tell us? Nothing. Does that information give us an edge? Absolutely not!
We already know that forecasting is foolhardy and that no one predicts as inaccurately as economists, except for maybe meteorologists. We also know there is a danger in using averages of any kind. This means that an average of forecasts is the worst possible tool to use when trying to evaluate economies and markets.
In addition to this consensus obsession, the other way the Old Institution screws up economic analysis is by focusing on the monthly (or quarterly) growth rate of an economic data series. A misplaced focus on the monthly growth rate of last month’s retail sales is what led CNBC to state “Strong November retail data lowers concerns of an economic slowdown.” It’s no wonder their viewership continues to lurk in a multi-year bear market.
By far the most critical and informative aspect of any economic data series is the slope, or trend, in the annual growth rate — not the month-to-month (or Q-o-Q) change. November’s retail sales annual growth rate wasn’t “strong”; in fact November’s retail sales annual growth rate slowed to +4.2% from October’s +4.8%. This is the fourth month of slowing retail sales data in the last seven, and growth continues to slide further and further from July’s peak of +6.6%.
In addition, when it comes to retail sales, by far the most important aspect of the report is the “control group.” Why? Because the control group is the component of retail sales that is used in the actual calculation of U.S. GDP.
On this front, the brakes were also coming on, as November’s CG growth rate slowed to +4.4%. Here again, since peaking in May, control group sales growth has slowed in four of the last six months.
That evaluation of the annual growth rate paints a much clearer picture than whether a bunch of economists managed to guess the monthly growth rate. The U.S. consumer is languishing and has been for months now. Rather than “[lowering] concerns of an economic slowdown,” this latest retail sales report is just one more U.S. data set confirming the FG4-in-Q4 environment.
No matter what you’ve been led to believe, it doesn’t matter if a data point meets, beats or disappoints what Wall Street expected. Economic data is not “good” or “bad,” and it certainly can’t exceed your expectations or disappoint you; it’s not your friend or family. Describing data as “good” or “bad” is an opinion. Economic data is either accelerating or slowing; those are facts.
Measuring and mapping the slopes of economic data is how we nailed the global growth-slowing call nine months before everyone else. It’s also how we nailed the current U.S. “FG4 in Q4” environment before the markets tattooed unsuspecting investors in the last three months of the year.
The headline risk bottom line is that as an allocator of capital, it is far more critical for you to understand the context of an economic data point rather than whether that data point met, exceeded or missed the expectations of a roomful of economists.
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Watch Landon Whaley’s 3 Ideas for Investing and the meaning of coddiwomple in a short video here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:42.
Watch Landon Whaley discuss When Markets Cycle in a short video here.
Landon Whaley: We have a generation of investors and asset managers who know only one market. The reality is markets and economies cycle and catch people off guard.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:51.
Landon Whaley interviews Adrian Manz: How I approach stocks here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 7:48.
Landon Whaley interviews trader Jackie Ann Patterson: How I got started trading and how I approach it with my Truth about ETF Rotation here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:14.
Landon Whaley interviews John Carter: How I started trading here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:37.
