Sorry, Fed Chair Powell, financial advisors watch their own economic indicators

Federal Reserve Chair Jerome Powell has his data. Financial advisors have theirs.

Powell has repeatedly said the central bank will take a “data-dependent” approach to future interest-rate hikes, focusing on numbers like Friday’s all-important August jobs report from the Bureau of Labor Statistics. While the Fed Chair may have more data-collection resources at his disposal than any single financial advisor, he doesn’t have a monopoly on economic indicators.

In fact, financial advisors often rely on their own signposts to guide their market decisions.

“When my clients that are the most scared of the equity markets call me thinking it is time to buy, it is a great indicator that the market is very near a peak,” said Jon Swanburg, president of TSA Wealth Management.

Conversely, when his long-term equity investors call him wondering if it’s time to sell, Swanburg’s gut instinct tells him the market is “usually pretty close to a bottom.”

Along similar lines, Anne Marie Stonich, chief wealth strategist with Coldstream Wealth Management, counts the number of client phone calls to discern if a market change is at hand.

“Our clients are well educated on market volatility and typically do not get overly worried about the markets. However, if we reach a point where I receive three to four calls from clients who are considering selling or are extremely worried, that is my indicator that we are nearing ‘capitulation’ and possibly the bottom of the market,” Stonich said.

On the flip side, when Stonich fields a series of calls from clients all asking if they should buy the same thing, such as a rental property or a particular tech stock, that’s her sign that “a high in the real estate market, or maybe a bubble for a particular stock” is close at hand. 

Nicholas Bunio, certified financial planner with Retirement Wealth Advisors, believes that good old detective work leads to a much better prognostication of a particular company’s future — and quite often the entire consumer-led economy — than the top-down, filtered-down, government-issued retail sales report.

“I think if you want to invest in companies dedicated to the consumer, like retail or car companies, just go and visit them. Or go to the mall. That’s the best indicator. If these companies are really doing well, there will be customers there. Check the parking lots. If they are full, maybe that’s telling you something,” Bunio said.

As for the better-known nontraditional economic indicators like the Christmas price index, hemline index or the Big Mac index, their merit is dubious at best, said Paul Camhi, senior financial advisor at the Wealth Alliance. As such, he appreciates their contribution to Wall Street lore, yet omits them entirely when making investment choices.

“Clients entrust us with their life savings, we take that responsibility very seriously. The data for these types of indicators is interesting to read about but it is not part of our decision-making process,” Camhi said

NOT SO INDICATIVE

When it comes to traditional economic indicators like the ones Fed Chair Powell focuses on, Coldstream’s Stonich finds many to be misleading and more often than not unhelpful for investment purposes.

“They often contradict each other or generally take longer than expected to play out, thus making timing trades based on these indicators very challenging,” she said.

Michael Rosen, managing partner and chief investment officer at Angeles Investments, also sees limited value in most traditional economic indicators as a result of their backward-looking nature. In his view, the market has already priced it all in and moved on.

“GDP, for example, is especially backward-looking as the first estimate covers the period 30 to 120 days in the past, and the second estimate 60 to 150 days in the past. That’s almost ancient history for the markets, and therefore contains little investment-worthy information,” he said.

That said, Rosen does keep an eye on one traditional indicator, even if it has lost favor with this particular group of Federal Reserve governors. “The Fed has shifted focus away from monetary aggregates like M2 and velocity, but we still find them useful,” he said. “The sharp rise in M2 presaged the jump in inflation we saw, so it’s worth watching.”

The Wealth Alliance’s Camhi also tends to frown on the predictive capabilities of GDP reports. 

“By itself, GDP does not tell the whole story. Take for instance two countries that have identical GDP. The first country is dealing with extreme poverty and high levels of pollution. The second country has low poverty and nearly no pollution. While they have the same GDP, the second country has a much more sustainable economy,” he said.

TSA Wealth’s Swanburg, meanwhile, tends to find recession indicators as a group to be generally unhelpful.

“Even if you had a crystal ball and could know the day the recession was going to start and the day it was going to end, you would generally lose money selling at the start and buying back in at the finish since the market typically goes down before the recession starts and begins to climb before it ends,” he said.

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