The financial markets always pay attention to the latest economic data, but it feels like it’s taken on even greater importance over the past two years. In 2022, it was all about inflation data and trying to figure out how high it might go and when it would stop. Around the end of 2022 and into early 2023, it was GDP growth as investors tried to determine if/when the highly expected recession would begin. Now, the street is watching the labor market and when the cracks might finally show up that would clear the path for a global downturn.
The thing is, most of the numbers don’t really matter. At least not in the way that the market tends to immediately react to things.
The reason is that most of these numbers get revised over time (in some cases, multiple times) rendering the absolute numbers themselves almost obsolete. Directionally, they’re certainly useful, but the fact that the market’s significant difference in reaction when the unemployment rate comes in at 3.4% instead of 3.3% is missing the forest for the trees. I talk about path quite a bit as it relates to financial asset returns, but it applies just as much to economic data. The overall trend and rate of change are what’s important. The absolute numbers? Not so much.
Here’s a good example of the number that almost everyone pays attention to - S&P 500 earnings. Analysts are always trying to figure out where corporate earnings are headed next. Unfortunately, they’re not very good at it.
A couple of trends are pretty evident here. First, analysts are almost always over-optimistic at first and then spend the next year or two revising their estimates lower. It’s happened almost every year since the financial crisis. Second, we’re not just talking about minor tweaks here. We’re talking about MAJOR changes. We can cut 2020 some slack since the COVID pandemic was an outlier, but look at 2021. Earnings estimates started out around $200 per share, got adjusted downward into the $160s and then eventually got revised all the way back up to over $200 again. Is this exercise useful or does it just create a lot of volatility?
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