When economic data is reported with great fanfare, the implication is that it’s important and should be taken into account when making investment decisions. The only thing the constant flow of economic data does is add complexity to your investment decisions, which could result in investing behaviors that are detrimental to your portfolio performance
Last month the Conference Board announced that the consumer confidence index declined to its lowest level since September 2017. For people who actually follow such things, the consumer confidence index is said to be a key measure used as an assessment of the current U.S. economic climate, as well as consumer expectations for the coming six months. Investors responded by driving the Dow Jones Industrial Average (DJIA) down nearly 200 points on the news. Within a week the DJIA went on to reach a new record high. So, what does that tell you about the significance of economic data for investors?
In a digitally wired world with 24/7 access to financial media, many investors have been conditioned to watch for and digest economic news as if it could boost their prescient power. The problem is the “economic calendar” churns out data like a firehose, such as jobless claims (weekly), consumer price index (monthly), gross national product (quarterly), Fed meeting notes (every six weeks), among dozens of other “critical” economic indicators. So, which ones should investors follow or should they follow any of them?
Can Following Economic Data Actually Improve Investment Results?
Imagine trying to use these indicators to guide your investment decisions. How would you “tweak” your portfolio when the weekly jobless claims number suddenly spikes? Or worse, would you follow the herd when the gross national product comes in an entire point under expectations? How frequently would you be willing to make adjustments to your portfolio in response to economic news or events? Would you even bother to make portfolio adjustments when you realize the information you think might give you some advantage has long been disseminated in the market which instantly prices securities accordingly?
More importantly, how much of an impact would an economic event occurring today have on your portfolio over a 20- or 30-year time frame? There have been 12 recessions since the Great Depression, yet the stock market has continuously gone on to record highs. Unless you have uncovered the secret to always buying low and selling high, there’s not much you can do to improve your investment performance over the long term.
What do Economists Really Know?
Who sets all those economic expectations in the first place? That would be the economists – academics who have a tendency to present their findings with the certainty of the language of science but are only right less than 10% of the time. Never mind that, according to a study by the International Monetary Fund, economists have failed to predict 99% of all recessions. Following Donald Trump’s election, Nobel-winning economist Paul Krugman predicted that “we are very probably looking at a global recession, with no end in sight.” If you had heeded Krugman’s warning and sold your positions, you would have missed out on a 35% gain since he became president.
Before following the guidance of any economist, you need to ask yourself “how many economists have become ultra-wealthy from applying their expertise to investing?” You won’t find many. As legendary investor Warren Buffett once said, “If you look at the whole history of [economists], they don’t make a lot of money buying and selling stocks, but people who buy and sell stocks listen to them. I have a little trouble with that.”
Stay Focused on What Matters Most
While gathering information and educating yourself is important, it should be done in the context of your investment objectives, risk profile and time horizon. When economic data is reported with great fanfare, the implication is that it’s important and should be taken into account when making investment decisions. The only thing the constant flow of economic data does is add complexity to your investment decisions, which could result in investing behaviors that are detrimental to your portfolio performance.
The only four days that really matter to investors on the annual calendar are the days on which the companies they own issue their financial updates (quarterly earnings reports). These updates provide keen insights into the actual performance of the company along with the challenges and opportunities it faces. All the other days on which you might see news headlines pertaining to economic and financial data are only marginally relevant or not relevant at all. On those days, investors would be well-served to adopt an attitude of “intentional ignorance” to protect themselves from bad investor behaviors and focus their attention on information that really matters.
