The Economy or the Stock Market?

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  • on September 28th, 2010

“I noticed my macro opinion often got in the way of a good trade“, Bill Luby on AbnormalReturnsTV

Discussing the economy is a sport in its own right, but can it help you profit in the market?  Even if you’re an investor measuring your timeframe in years, do you really need to know how much economic growth lies in the future?

There are a ton of factors impacting our ability to profit, but having a prediction for the economy ranks pretty low.  In fact, as shown in this paper, future returns are substantially greater when investing during weak economic periods.  Why?  That perverse discounting mechanism called the market is constantly adjusting prices for future conditions, so by the time those conditions arrive they are old news.

So while the media obsesses about each month’s jobs report, companies keep moving forward with business plans…I suggest we as traders and investors do the same.  Use the economic data if the reactions give you a chance to add or trim on better prices, but don’t rely on the data as an input to your strategy.  This isn’t 2006 with sharp disagreement on the future conditions for housing and jobs.  We’ve all bought into the “muddle along” vision…a tanking economy would surprise very few.

Focus on your edge, and use data-driven gloom and excitement to enhance that edge.  If you’re missing opportunities because you’re worried about next quarter’s GDP, you’re focused on the wrong thing.  Reference a graphic like this, and remember that valuation and sentiment are far better predictors of long-term market direction.  Applying multi-year macro thinking to day to day planning is a recipe for frustration and the source of  “Trend Relativity Errors” that drain both your emotional and financial capital.


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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