Skip to main content

Sound Advice: February 9, 2022

Economics: The Great Guessing Game 

Among the most interesting (and controversial) developments affecting the investment markets are the periodic reports on what’s taking place in the economy.  The ongoing flow of information includes the weekly level of new unemployment claims, the monthly reports on the consumer price index, and the monthly reports on new jobs.  Although many esteemed economists provide regular weighty pronouncements on what the new numbers will be, the accuracy of same is on a par with a blindfolded person throwing at a dartboard.

Indeed, prior to the announcement of the job numbers for January, economists put forth estimates that averaged 150,000 new jobs, suggesting that the situation was significantly constrained by the dramatic jump in Omicron variant Covid cases.  Several even forecast a substantial drop in the jobs total.

The actual result was quite different: 467,000 new jobs.

It gets much worse because the numbers reported each month are always revised, usually by a lot.  In December, the initial report was an addition of 199,000 new jobs.  That was later revised to 510,000 new jobs.  The November report estimated 249,000 new jobs, but that was revised to 647,000 new jobs.

Not only is the probability of a gross error of concern, but equally important are the assumptions created as a result.  Given the ongoing strength in demand for goods and services, one of the biggest challenges facing businesses is finding enough labor to provide the required supply.  This have resulted in higher salaries, sign-up bonuses, and the ongoing need to maintain adequate staffing.  The latter is still constrained by health-related absences.

This relative imbalance has led to a continuation of an inflation rate that’s several times the level seen as optimal by the Federal Reserve.  Although the Fed’s actions are supposed to take into account a wide variety of business measures, the report on new jobs, even though often wide of the mark, cannot be ignored.  That makes the Central Bank’s task even more challenging.

As a result, it seems appropriate to avoid knee-jerk reactions to the ongoing flow of business information.  Patience and perspective against a long-term context will prove to be more worthwhile.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com

Any questions?  Please contact me at nrwayne@soundasset.com

Comments

Post a Comment

Popular posts from this blog

Sound Advice: July 16, 2025

Fixed annuities are poor investments Fixed annuities are often criticized as poor investments for several reasons, despite their reputation for providing stable, predictable income.  Here are the key drawbacks and concerns:   High Fees and Commissions Internal Fees:  Fixed annuities can carry a range of fees, including administrative charges, mortality expense risk fees, and rider fees. These can add up to 2%–4% per year, significantly eroding returns over time. Commissions:  Sales agents and financial advisors often receive high commissions for selling annuities—sometimes as much as 5%–8% of the invested amount. This creates a financial incentive for advisers to recommend them, even when they may not be the best fit for the client. Comparison to Other Investments:  Mutual funds and ETFs typically have much lower fees and commissions, making them more cost-effective for long-term growth. Limited Growth a...
Post a Comment
Read more

Sound Advice: October 8, 2025

How many investors have outperformed the stock market over the last 20 years? Very few investors have outperformed the stock market over the past 20 years.   Data shows that only about 6% to 8% of actively managed equity funds in the U.S. beat the market over this period, with the vast majority—over 90%—underperforming the S&P 500 or equivalent broad indexes. Percentage of Investors Beating the Market Only 8% of equity funds investing in large companies managed to outperform the market over a recent 20-year span. About 94% of all domestic funds underperformed the S&P 1500 Composite Index from 2005-2024. Over shorter timeframes (5-10 years), typically fewer than 15-20% of fund managers beat the S&P 500, and performance persistence is rare. Why It Is Rare The S&P 500’s high returns have proven immensely difficult to beat, especially as indexing has become popular and markets have ...
Post a Comment
Read more

Sound Advice: January 15, 2025

Why investors shouldn't pay attention to Wall Street forecasts   Investors shouldn't pay attention to Wall Street forecasts for several compelling reasons: Poor accuracy Wall Street forecasts have a terrible track record of accuracy. Studies show that their predictions are often no better than random chance, with accuracy rates as low as 47%   Some prominent analysts even perform worse, with accuracy ratings as low as 35% Consistent overestimation Analysts consistently overestimate earnings growth, predicting 10-12%                 annual growth when the reality is closer to 6%.   This overoptimism can                 lead investors to make overly aggressive bets in the market. Inability to predict unpredictable events The stock market is influenced by numerous unpredictable factors, including geopolitical events, technological changes, and company-specific news.   Anal...
Post a Comment
Read more