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AAM Viewpoints – When Everything is Breaking News, Nothing is


My wife recently insisted that I begin using Instagram. Her and our oldest child are both very active on social media and each were emphatic when telling me that “There’s so much you can keep track of, so many things you can follow!” While they were right, the sheer volume of things, people and interests to follow eventually became overwhelming. Having a wide variety of interests, it is not hard to imagine that soon my feed was filled with all manner of updates and post after post competing for my attention. While every so often something would be genuinely interesting, often I found myself casually scrolling through things which were only of marginal interest. I simply scrolled in a nearly unconscious way. This only served to temper the uniqueness of what I originally found interesting about those things that I chose to follow. The posts in my feed became a commodity; a large collection of similar tidbits, each of only marginal interest.

As the end of August approached I was struck by this notion of commoditized information. This is not to say that the ease with which information can be obtained is without value, but rather to suggest that not all information has equivalent value. Not all “breaking news” is truly “breaking.”

During the month of August, we witnessed a total of 145 economic releases. The audacity of that number is astonishing. While this includes sub-reports released as part of larger reports, consider that for each of the 23 working days in August, we received over six economic releases daily. Consider also that by my own unscientific tally, 55% of these releases were the subject of headlines for one or more of the business news channels. That’s nearly 73 “breaking news” items related to economic data!

For example, the Producer Price Index measured by the Bureau of Labor Statistics (BLS), has no fewer than six separately referenced sub-indices;

  • Month over month Final Demand
  • Month over month Ex Foods and Energy
  • Month over month Ex Food and Energy and Trade
  • Year over year Final Demand
  • Year over year Ex Food and Energy
  • Year over year Ex Food and Energy and Trade

The Consumer Price Index (CPI) measured by the BLS, has a similar number of sub-releases. The monthly Retail Sales release includes a headline release, an ex-auto release, an ex-auto-ex-gas release as well as a control release. The University of Michigan Consumer Sentiment Index has a “current sentiment,” a “current conditions,” an “expectations” and two inflation expectation components.

The sheer volume of noise related to economic releases during a single month is not unlike that which I faced with my recent Instagram experience. While marginally interesting information can sometimes be relevant, it is often noise which unnecessarily tempers the impact of what is truly relevant. For the average investor, the cacophony of endless economic releases hides the economic data which is truly valuable for their investing future. As investment professionals, it is important we separate the wheat from the chaff because not all information is good information.

After 30 days of Instagram I culled the herd and winnowed my feed down to those things which were more deeply relevant to my interests. Certainly, we can do the same with the 145 economic releases in August. While the entire portfolio management team at AAM has a handful of indicators we monitor, below are three indicators which clarify the volatility of August, generate insight into our thoughts on the coming 18 months and provide justification to our current credit and interest rate stance.

The Chicago Fed National Activity Index (CFNAI) is a measure of 85 monthly economic indicators constructed from four broad categories of data, weighted and summarized an estimate of standard deviation relative to potential Gross Domestic Product (GDP). As the results are released during the month, analysts tend to use the three-month moving average to gauge how each quarter is shaping up. The CFNAI illustrates that while there is some softening in Q3 (3rd quarter) GDP vs. Q2 (2nd quarter), growth is expected to continue to run above 2.5% for the quarter confirming what both the Conference Board’s Index and yield curve (both below) are forecasting. Remember the zero line represents potential GDP.


The Conference Board’s Leading Economic Index (LEI) is a diverse measurement of economic activity which is compiled to develop a forecast of how the economy is expected to perform in the coming months. Using a selection of 11 real, market, labor and yield measures, the LEI has a distinction in forecasting meaningful changes in GDP. The LEI continues to remain positive on a month over month basis while year over year the index remains at levels last seen in 2015. Were we to see consistent month-over-month negative readings from the LEI combined with a negative year-over-year reading, we would be more cautious but at the moment the LEI paints a continued picture of an economy growing at or marginally above potential GDP.

Finally, we use the above two economic releases in tandem with the U.S. Treasury Yield Curve. Much has been written this year about the inexorable march of the flatter yield curve. The yield curve continues to receive our attention as we feel it is one of the best leading indicators available and while we keep a wary eye on the slope, we feel it is imperative to understand that the curve 1) remains positively sloped and 2) indicates economic activity for the next 12-18 months. As the Federal Open Market Committee (FOMC) is expected to march rates higher throughout 2018 and into 2019, it is entirely possible the yield curve will continue to flatten. As a result, we feel combining the curve with other indicators such as the LEI and the CFNAI paint a picture which clearly illustrates continued near-term growth.

It is this growth potential for the U.S. economy and the inflation potential this portends which we feel biases interest rates higher. FOMC Chair Powell recently commented at Jackson Hole that the FOMC will continue to balance the two mistakes it fears most making: raising rates too much/quickly to slow growth too far, and not raising rates quick enough to temper the adverse effects of rising prices.

It is imperative to deftly manage fixed income portfolios throughout the breadth of the business and interest rate cycle because ignoring these tactics can bring about unwelcome, but not so surprising effects. In an investing environment in which every economic release is “breaking news” clamoring for an investors’ attention, it is imperative to turn down the volume and determine what really helps us understand the direction of the economy. Of the 145 economic releases in August, a remarkable few can be used to understand how to carefully balance both credit and interest rate exposure to find value without incurring unacceptable risk. In addition to the three mentioned above, Scott Colyer previously provided additional context to what is all too often a media frenzy of chaotic releases.

 

References

 

CRN: 2018-0904- 6870 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.

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Effective, June 10, 2016, please note that Gene Peroni left Advisors Asset Management (AAM) to become President of Peroni Portfolio Advisors, Inc. Peroni Portfolio Advisors, Inc. ("PPA") is an investment advisor independent of AAM.

 

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