Take Indicator News with a Grain of Salt

Wednesday, September 23, 2009

787736_business_reportEvery day there are new economic indicator reports, often presented and analyzed as if they carried high significance and provided important insight. But they don’t – especially if our interest is in investing wisely. Here are the problems…

First, no one indicator can provide the information needed. Each economic period is unique, and the measures that are important change over time.

Second, the data is not real time. Data must be gathered and compiled, and the time lags can vary. For three indicators announced this week: retail sales were for last week, leading indicators were for August and house prices were for July.

Third, the results are seldom precise. To shorten the reporting time, surveys and sampling are done. Revisions of past reports are a regular occurrence and can be sizeable.

Fourth, trends virtually never occur in a steady manner. Measures typically rise and fall at differing rates period by period.

Fifth, stock prices and bond yields lead the indicators, not vice versa. Investors attempt to gain by correctly anticipating the news, not acting on its release.

So, indicators are fine to watch and evaluate. But they should not be expected to provide the foundation for a successful investing program.

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