Friday, June 27, 2014

Why I don't watch "fundamentals"

The stock market's performance has little to do with the newsworthy economic factors that most people fret over, and even if it did, economic "data" is plagued by inaccuracies, guesses, and political massaging.

A recent example of the uselessness of economic data is the growth rate of the US economy in the first quarter of 2014.  As recently as April 30th - less than two months ago - the Bureau of Economic Analysis announced that the nation's economic growth rate was 0.1% in the first three months of the year.  It was a small number to be sure, but at least it was positive.

By the end of May, the first-quarter growth had been revised downwards to a shrinkage of 1.0%.  Now the latest revision has the economy shrinking by 2.9% from January through March, which is not only characteristic of a recession, but also represents the largest downward revision in GDP growth on record.

So, what did the S&P 500 Index do during this horrendous quarter?  Why, it rose of course!


For those of you who think the stock market does (or should) fall during economic contractions, and that savvy investors therefore should get out of stocks when the GDP falls, the first quarter of 2014 presents two conundrums:
  1. The stock market actually made a small net gain when the economy fell at an annual rate of nearly 3%.
  2. We didn't even know the economy was contracting until months after the fact.
So I don't worry about GDP growth, the unemployment rate, interest rates, or any of the other numbers that get breathlessly reported on cable TV or announced in bold font on financial websites.  The simple reality is that stock prices rise when a majority of investors are buying, and they fall when most investors are selling; it may sound like an obvious rule of thumb now, but it's easy to forget sometimes in the deluge of 24/7 news.

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