INSIGHTS

On April 18, 2012

What to Do With the Daily Data Divulge?

As we peruse through the myriad of daily economic and market data, it is easy to be inundated to the point of paralysis.  In the month of March, there were 120 economic data releases (not including all subsets of numbers) for the United States according to the Bloomberg Economic calendar.  While that is numerous and we would argue many of the more relevant numbers lie in the subsets and trends of such numbers, this is dwarfed when compared to the World wide releases of economic data which stood at 1,700.  This doesn’t include the seemingly infinite amount of corporate earnings announcements.  While many of those may not seem relevant to the average U.S. investor, these numbers are generated for a purpose of which some investors may place a heavy weight and influences their investment decisions.  We often speak about how looking at the initial releases of “important” data has been minimized by the severity of the revised numbers that follow.  The job of interpreting the data is far more important and also much more artistic than at times in the past.

A favorite column of mine is from the Economist and titled under the anonymous author, Buttonwood.  On July 12, 2007, Buttonwood penned a rather remarkable article, with some highlights below regarding “too much information.”

“For example, an extraordinary amount of attention is paid to analysts' forecasts of company profits. But a study by James Montier and Rui Antunes of Dresdner Kleinwort, an investment bank, found that the average forecasting error on such predictions was 43% over 12 months and 95% over two years.

More information does not necessarily lead to better decisions. Michael Mauboussin of Legg Mason, a fund-management group, cites a study that gave horse-racing handicappers varying amounts of information when ranking horses. The more information they received, the more confident they became about their answers. But the success of their predictions was actually worse when given 40 pieces of information, than when given five.

One of the most striking undermines the capital-asset pricing model, the basis for academic analysis of the markets. In the model, stocks that are more volatile (“high beta” in the jargon) produce higher returns than more stable (“low beta”) securities. But a study by Jeremy Grantham of GMO, a fund-management firm, found that, over the period from 1963 to 2006, the supposedly boring low-beta stocks beat the racier high-beta ones by as much as four percentage points a year.”

A lot has changed since July 2007, which has only led to the increased influence of the “Recency Bias.”  Recall the recency bias’ basic premise is that recent events influence expectations for the immediate future.  As such, the last few years have seen various bubbles burst (equity, housing, etc.), with the most important bursting bubble being that of confidence.  Confidence has grown from 2008, but many would argue it still has a long way to go.  We get the sense that many investors are reminded of the quote: “Remember, amateurs built the ark. Professionals built the Titanic.”

This is not necessarily a new phenomenon as it occurs in nearly every lengthy recession, but the severity of it could be classified as historical. With this in mind, the “Wall of Worry” that is currently facing the markets appears as wide as it is deep.  This is an important ingredient to a recovery, albeit an unquantifiable one.  A typical response in meeting this wall of worry, we also have some of the largest positions of cash equivalents in the household, corporate and banking sectors. 

Simply ignoring the immense amount of data would be foolhardy and we must use more corroborating data and scrutinizing the data among trends and the volatile monthly data.  This has given rise to the more artistic aspect of viewing the markets than how we may have in the past.  This is why one’s prediction for the markets may differ completely from another while looking at the exact same data.  As such, the importance of the rationale for why one may feel a certain way about the markets is as important as the actual conclusion.  From understanding the rationale, perhaps better decisions can be made and help investors avoid “investment paralysis.”  Now, more than ever, beauty is in the eye of the beholder.

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