Predicting the Future: Present Tense

Mark Wendell |

By Mark Wendell

To a large degree, Wall Street markets move on the daily predictions of ‘experts,’ - journalists, columnists, and media economists - who make magical prognostications based on patterns they claim to perceive in the ever-shifting kaleidoscope of USA and global economic activity.

The originators of the economic statistics generating these forecasts are often institutions, money managers and economists, some honorable and some merely opportunistic, who claim to have authoritative positions. The problem is that the media in general often seem to be interpreting current events and forecasts through their own overly dramatic, biased, and self-serving lenses rather than merely observing and reporting information. Intense competition and ‘never waste a crisis’ reporting among media outlets has tended to inflate both the positive and negative hype-level of reporting; too often, the pressure to grab the public’s attention outweighs dispassionate - unbiased analysis (witness recent politics). Objectivity challenged views of ‘experts’ strategically placed to sound off about the subject at hand conveniently validates the views of the media source, which influences Wall Street financial markets and generates more drama in a seeming endless feedback loop of news-generating-news-generating-market movements that generates even more news. This unfortunate ongoing drama trend sometimes stampedes investors into making decisions based on media exaggerated events. Investors would be wise to wonder whether the media’s reporting brings about self-fulfilling prophesies of movements in financial markets and therefore, also in their portfolios.

When it comes to investing, it is important to maintain a patient and long-term perspective.  Historically, market corrections must be judged, not by dramatic headlines, but by remembering that the loss of market value is eventually followed by market increases. Thus, attention grabbing headlines notwithstanding, media reporting today should be more broadly focused on factual economic matters and less on politically biased demagogues. As long as bad news, fake news, and political season silly news sells more advertising and attracts higher ratings than good news,  rational and objective news, headlines and ‘experts’ are likely to continue to shout expletives: “crisis, trade war, economic downturn, flat yield curve, recession, bubble, inflation, deflation, market correction, budget deficit, socialism, capitalism,”, followed by a question mark, leaving fear and uncertainty in investor’s minds. Should investors run for the hills? Should investors become more conservative with the belief that bonds will provide a more secure future? From whom should investors obtain credible information upon which to make informed decisions?

Fortunately, credible analysis of economic data is available from authoritative non-governmental sources — information that does, in fact, genuinely affect economic policy-making and therefore, legitimately also affects global markets. One such respected authority is The Conference Board, a non-advocacy, not-for-profit organization that defines itself as “a global, independent business membership and research association working in the public interest…” The Conference Board’s Leading Economic Index® (LEI) is an example of the kind of information researchers rely on — a concise algorithm designed to crystallize mountains of data on past and present economic factors, which can, within limits, foretell future economic conditions. The LEI is a composite of a number of different metrics that, because they cover so many different economic factors, serve better as a credible predictor when integrated as a group rather than as isolated data points.

Since economics, as a social science, deals with unpredictable human behavior, it may be self-limiting — predictions about market movements affect market movements in a feedback loop. This is especially true when political ideology, rather than historical empirical evidence, guides monetary policy (Federal Reserve: interest rate and money supply policy) and fiscal policy (Congress: budget matters including entitlement spending, defense spending and tax policy). Even a factual ten-component, non-partisan LEI index cannot be expected to be a perfect soothsayer when the underlying variables are human hopes and fears that are driven by emotional politics, a drama driven media and an unpredictable Federal Reserve. What does the current LEI report say about our economic future, as of March 22, 2019?

The Conference Board Leading Economic Index® (LEI)for the U.S. increased 0.2 percent in February to 111.5 (2016 = 100), following no change in January, and a 0.1 percent decline in December.

“The US LEI increased in February for the first time in five months,” said Ataman Ozyildirim, Director of Economic Research at The Conference Board. “February’s improvement was driven by accommodative financial conditions and a rebound in stock prices, which more than offset weaknesses in the labor market components. Despite the latest results, the US LEI’s growth rate has slowed over the past six months, suggesting that while the economy will continue to expand in the near-term, its pace of growth could decelerate by year end.”