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Daily State of the Markets Good Morning. In light of the fact that the current stock market seems to be all about the macro outlook, it would be logical to assume that investors will need to get the economy right if they are going to be correctly positioned this year from a big-picture perspective. While this is most definitely not the approach I take to investing in the market (and no, I am not going to go off on another rant this morning), a great many investors do utilize such a macro-based strategy. So, the question for this morning’s meandering missive is who does the best job at predicting the economy? Should we put our faith in the forecasts of professional economists? After all, this group does seem to make their living making such calls. Or how about the Federal Reserve? Logic would suggest that the FOMC may contain some of the best minds in the country. Or should we just listen to the stock market? Most investors tend to pooh-pooh the idea of the stock market being a strong predictor of economic recessions. But given that the stock market is viewed as a discounting mechanism for what investors expect to happen 3-6 months out, it is logical to argue that stocks might be a pretty darn good indicator of economic problems. But the most common complaint heard here is that the stock market has called 12 of the last 9 recessions. This view is derived from the fact that of the 12 worst bear markets since 1916, 9 were accompanied by an economic contraction. Therefore, economists love to wave off the idea that the stock market can predict what the economy is going to do. However, based on the data, the stock market has correctly called all 9 recessions over the better part of the last hundred years – but stocks did have 3 cases of “crying wolf.” How does this compare to professional economists, you ask? Let’s see… based on the Survey of Professional Forecasters between 1970 and 2011, the pro’s got exactly zero of the seven recessions during this period right. Yep that’s right, the average GDP forecast from the Survey looking ahead four quarters never once made the call that a period of negative GDP growth was the horizon. And for the record, this group is calling for a growth rate of +2.9% for the U.S. in 2012. What about the Fed? Given that the FOMC is independent, has a boatload of money available to spend on research, a gi-normous staff, and a mandate to keep the economy humming along, you might think they would be pretty good at forecasting the economy. This assumption would seem to be especially true now that the Fed is extending its forecasts out to five years. However, according to Ned Davis Research, actual real GDP growth has been in the Fed’s projected range just 27.1% of the time since 2000. As such, investors might want to take Mr. Bernanke’s 2012 forecast for the economy to grow between 2.5% and 3% with a grain of salt. One group that has gotten the economy right lately is ECRI (Economic Cycle Research Institute). As The Economist noted, they’ve correctly called three recessions without any false alarms in-between. In contrast, most of those who’ve accurately predicted a recession or two have also been guilty of crying wolf – in 2010, 2005, 2003, 1998, 1995, or 1987. However, ECRI’s streak of correct calls is currently on the line as Lakshman Achuthan said that the U.S. is heading for a sharp, prolonged economic downturn in June of last year. And so far at least, this call appears to wrong. So, who should those looking to base their stock market strategy on the state of the economy listen to? Strange as it may sound, history would seem to suggest that the stock market may be one of the better predictors of economic expansion and contraction. Maybe the tape does tell all after all. Turning to this morning… Passage of new austerity measures by the Greek parliament has sent overseas stock markets as well as U.S. futures. In the early going, futures have erased nealy all of Friday’s losses. On the Economic front… There are no reports scheduled for release before the opening bell today. Thought for the day… Don’t forget to check the happiness box today… Pre-Game Indicators Here are the Pre-Market indicators we review each morning before the opening bell… !========>
Positions in stocks mentioned: None For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com !========> The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment. Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided. The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed. The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer. Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice. Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results. !========> |
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