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Time Horizons and Forecasts

by in Trusted Advice

With the world (or at least the digital version) at one's fingertips wherever you go, it is easy to be caught up in the desire for instant gratification. Do you want to listen to music, check the latest sports scores from around the world, find out what your friends are doing, play a game or trade a stock? Just launch an app on your smartphone or tablet. It is all there. We are now connected wherever we go, whenever. One of the side effects is a shortening of time frames, especially in investments. We have gone from investing for years, to days, to minutes to fractions of a second. Multiple cable TV networks, newspapers, websites and blogs compete for attention. Especially for the larger players, dependant on viewers and advertising, every new piece of data is emphasized and hyped to get attention, viewers and revenue.

While some of this data is important, much of it is not and even that which is important is subject to revision. One of the most closely watched and potentially market moving data releases is the monthly nonfarm payroll number. The chart below compares the moves in the S&P 500 Index on the days the nonfarm payroll number is released vs. the average daily change in the index through July 12th 2013.

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While this data can often move the markets, what many forget is that it is revised over the next two months as more data comes in. In the June 2013 report, in addition to the 195,000 net new jobs initially reported as added for June, 70,000 jobs were added to the total for April and May. The charts below show the monthly changes against the preliminary figure in both absolute terms and a percentage basis.

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While the changes so far this year are large on both an absolute and percentage basis, the changes during the turbulent times of 2008-2010 were even larger. In the Fall of 2008, there were months with over 200,000 more jobs lost than initially reported, while in 2009, there were months with over 100,000 more jobs created than initially reported. The chart below from the St. Louis Federal Reserve shows those changes for both the payroll number and retail sales for the period including 2008 - 2010.

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While monthly changes of even 200,000 are not large in the scope of an economy with a labor force of over 144 million workers (roughly 0.14%), as you have seen, these revisions are large relative to their initial number of jobs created. In addition, with actual reported figures this flexible, as you can imagine, forecasts are even further off the mark. The chart below from the Wall Street Journal compares the Federal Reserve's forecasts of economic growth to actual growth.

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Even the Fed with all of their top notch economists and data can be very far off the mark in their forecasts.

While all of the data noise and media hype can make it difficult to invest, it does offer a great opportunity to the patient investor. Large investors such as hedge funds and mutual funds constantly watch their performance and often react to every piece of data. This offers an opportunity to those investors, such as Covenant Asset Management, willing to take a longer-term view. This does not mean buying and holding forever. It does mean doing ones homework, separating the wheat from the chaff, realizing things may change and taking advantages of dislocations in the market caused by the constant barrage of data, which is itself subject to revision.

Sources: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis, Wall Street Journal, Yahoo Finance.

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Guest Saturday, 22 February 2020