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Why it’s so hard to invest based on macro data

James Malthus, Macro Analyst

Invest based on how things will be—not how they are

Investing would be a lot simpler if all you had to do was buy stocks in countries that are doing well and sell stocks in countries that are doing poorly. Instead, it’s a great way to lose money in the market. Economies that are doing poorly can have and often do have equity markets that outperform those of countries with better current fundamentals.

Investors have soured toward Canada and Australia in the last year in favor of southern European stock markets as Europe exits recession. The countries that have suffered most over Europe’s double-dip recession now have the most upside in recovery.

Prices can anticipate and lead fundamentals

There are tons of examples of equity prices rising long before fundamentals improve and falling long before they deteriorate. One instance is of US stocks over the last six years versus the unemployment rate and initial jobless claims, two measures of the health of the labor market.

The SPDR S&P 500 ETF (SPY) tends to lead changes in the unemployment rate by three months and changes in initial jobless claims by two months. In 2009, the S&P bottomed nine months before unemployment peaked! Any investor trading US stocks based solely on the current unemployment rate is running at least full quarter behind the market.

Economic data only matters insofar as it impacts expectations

Central banks around the world still exert a massive amount of power on equity markets. So investors interested in investing based on macroeconomics should focus most of their attention on the metrics that central bankers look at to set policy going forward.

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