The difficulty of forecasting the economy and the stock market is a long-standing tradition here. Ever since the rapid rise in energy prices many have been calling for a fall in the domestic economy. However the news seems to be tracking in the opposite direction.
The Capital Spectator notes the news from the Conference Board’s index of leading economic indicators is all good. Despite low expectations the index has risen in five of the last six months. They note that there are some explanations for the rise, but by and large the economy is stronger than usual and difficult to forecast.
Surprises have been everywhere in recent years, from interest rates to consumer spending to the persistent buying of dollar-based assets by foreigners. What seems logical and imminent has quite often turned out to be wrong. Even the greenback’s supposed collapse has been put on hold, causing dismal scientists of a certain persuasion to scratch their heads and go back to the proverbial drawing board. The American growth machine appears to be the latest candidate to confound, mystify and bewilder the pessimists.
Anything’s possible in the global economy of the 21st century, with the possible exception of figuring out what comes next.
Even if you predicted the rise in the LEI you might have been confounded by the market’s reaction. Mark Hulbert in Marketwatch.com notes there is little correlation between changes in the LEI and the stock market. If there is any relationship it is negative, that is when the LEI presages a weak economy the stock market does better.
The challenge for investors who forecast the economy is two-fold. First the forecaster needs to get the direction of the economy correct. Second the forecaster needs to have the relationship between the economy and the stock (or bond) market correct. In short, investors should be careful how they spend their time (and capital) when it comes to using forecasts at the heart of their portfolio management process.