Passive Manipulation

Story Highlights:

• Pundits use short-term trends in consumer behavior to support a variety of market and economic views.
• These indicators, while sensational, usually have little meaningful track record.
• Like many monthly economic indicators on their own, narrow, quirky patterns tell us little about future market moves.

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Financial websites aim to keep us updated on the very latest scoop. Manufacturing is down in Philadelphia! Consumer confidence is down … but retail sales are up! And exports are up! But wait, the "misery" index bottomed! Myriad "indicators" presenting conflicting information vie for attention. But what to do with all this information? Fortunately, there's constantly new, better ways to get the 4-11. No, not the Super Bowl Indicator or the Maria Bartiromo Market Hairdex.

We're talking about the beer indicator:

Beer May Not Be Recession-Proof
By the Associated Press, via CNNMoney.com

The food stamp indicator:

USA 2008: The Great Depression
By David Usborne, The Independent

The Lasik indicator:

As Economy Slows, So Do Laser Eye Surgeries
By Barnaby J. Feder, The New York Times

The brand-name-loyalty indicator:

Recession Diet Just One Way to Tighten Belt
By Michael Barbaro and Eric Dash, The New York Times

And the California indicator:

Californians Leading the Way to Consumer Bust
By James Saft, The International Herald Tribune

As we saw when the initial estimate of first quarter 2008 US GDP was announced in April, folks can eschew economic statistics. GDP grew 0.6%, but many said, "I don't care if GDP grew—it feels like recession." These stories follow suit: The "credit crunch" isn't about numbers; it's about every-day life. Pain is more meaningful than data. No one likes cheap beer, generic products, food stamps or following Californians into the economic abyss. If we hear anecdotal stories of quality of life slipping, we sometimes just accept things must stink.

Unfortunately, even when the economy is gangbusters, folks feeling pain can make emotional reactions in their stock portfolios. In the long run, markets move on fundamentals, but in the short-term, emotions can take over and lead to occasionally violent short-term swings. These new indicators are prime examples of investors trying to make emotional sense out of what we view as a big, but normal, stock market correction.

We often say here monthly economic indicators aren't, on their own, predictive for stocks. They don't tell the whole story, the accounting is frequently inherently murky, and statistics are easily manipulated to support any argument—good or bad. These new, qualitative indicators are equally useless in the long run for the same reasons.

Consider the Lasik indicator. The article says declining Lasik surgeries indicate economic trouble—but we aren't sold. Has this metric existed for a viable length of time? Is there enough data to divine significant trends? What is the ratio of surgeries performed to candidates, and is that ratio rising or falling? What are the typical patterns of any elective surgery in the first thirteen years following FDA approval? Looking at one small piece of data over a short time tells us squat.

Statistics and indicators simply can't be used on their own; they have to be part of a bigger story. Instead of decrying increased cheap beer consumption, investigate trends in overall beer consumption. Heck, investigate total alcoholic beverage consumption. Or, for that matter, the amount spent on all beverages—but only if you run a liquor store. Small slices of life and the economy tell us next to nothing about the big picture—and the big picture is, ultimately, what dictates long-term stock returns. Focus on that, and your portfolio will thank you.