Sunday, June 14, 2015

GDP Now Poor Investment Guide


Have you noticed that almost all top-down investment theses start with the US Gross Domestic Product (GDP) as the base for their recommendations? Often these extensions have proven to be considerably wide of the mark in terms of predicting equity markets' price movements.

I suggest that the fault is not in the stars, as a modern day Cassius might say to Brutus according to Shakespeare, but in their numbers. As a professional securities analyst I have never seen a number that is sufficient in and of itself for decision-making. To make money one should dig deeper into the numbers to find value. This is similar to last week’s post where I pointed out that there was a lower risk way to earn the same return as on the winner of The Belmont Stakes by betting on the second placed horse to place.

1st Quarter 2015

Turning to the GDP releases, the pundits jump on the first or flash release of quarterly progress of the Gross Domestic Product numbers for their prognostications. By the time the final of four quarterly releases the number may well have meaningfully shifted. The first quarter of 2015 was reported to be -0.7% down. The next release expected to be issued on June 24th could very well show the first quarter was about flat. This should not come as a surprise, as perhaps with the handling of your betting on The Belmont, if you looked at the numbers in some detail. The two double digit declines in GDP reported were -20.8% in non-residential structures fixed investment and -14% decline in export of goods. From my handicapping (racing analysis) days I would have thrown both of those out as significant future indicators. The severe winter weather probably delayed building construction and the US West Coast dock strikes hindered our exports, probably more than our imports which could find other ways to deliver.

For those who follow the GDP carefully they would have also recognized that the recovery in March counted for only 1/9th of the quarterly ratios according to the construction methodology used - with the earlier months of the quarter counting for more than the last month; with the worst of the winter storms occurring in the first half of the period, the better results were not as significant.

More reliable indicators

As often stated I tend to look at investments through the lens of mutual funds. One of my developments in terms of fund data before I sold my firm’s data activity to Reuters, now ThomsonReuters, was the development of 31 investment objective indices tracking the performance of the largest funds in each of the major equity investment objectives.   

Health/Biotech and European Funds are up double digits for the year to June 11th . Utility and Real Estate funds are slightly negative, all the rest are showing gains. This indicates to me that the market prices in the vast majority of stock portfolios are gaining ground a bit. On further analysis the Small Market Capitalization and Mid-Cap funds are doing better rather consistently than the Large Cap funds. For example, in terms of growth funds, Large-Cap +6.03%, Mid-Cap +6.96% and Small-Cap Growth +8.09%.  This suggests to me, despite consistent net redemptions from domestic-oriented funds for the year, investors are making money in US-oriented stocks. If they are fearful of a final negative GDP report for the first quarter, that might trigger a fear that it would be followed by a second quarter of decline for the GDP that would qualify as a recession. 

Beyond the US

Each week The Economist publishes the performance of 43 markets both in terms of local currency as well as in US dollars. As of the moment there are only seven that are showing declines in terms of US dollars as well in their local currency. This suggests to me that these markets are expressing some longer term concerns which could trigger future political and/or currency actions. Three of the largest declines are in the Mediterranean:




The second largest year-to-date decline is in Colombia -18%. The other three are geographically close to one another:
-18.0 %

To the global investor using US dollars as their measure, these seven are probably more risky than the stock markets that are not down in local currencies but are down in US dollar terms. There are eight of these. Avoiding  both sets showing declines, there are 28 markets that are showing positive results which suggests that as of the moment carefully chosen global investing is relatively safe for now.

Bottom lines

Be careful in utilizing top-down GDP focused investment recommendations. Careful analysis of any set of numbers offered as a foundation for an investment action should require deeper study by professional investors.

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