Economic forecasting is a tough business. Does following economic information and adjusting your portfolio lead to superior returns? It is very tempting to try. Since WWII there have been 12 recessions according to the National Bureau of Research (NBER). The NBER is the official gatekeeper of the business cycle dates. Bear markets usually happen around recessions for the simple reason that the profits for companies decline significantly during recessions. Years ago (early 90's) I figured that if only I could predict recessions that I could avoid the bear market. Instead of the usual 10% return on stocks I would get higher returns. I was studying all sorts of data series and even entertained the idea of setting up a sophisticated econometric model. This was pre-internet and eventually I gave up since it was too much work.
Has following economic information helped my investment record? My results are probably positive over the long haul. In the 2001-2002 recession I was mainly in cash - stocks were also very highly valued during this period. I roughly broke even while the main US markets declined something like 40% plus. During the the 2008 crisis I must confess that I missed the whole thing. The yield curve was inverted in 2007 so I should of known better. I was basically 100% in stocks during 2008. I did outperform the markets though by a significant margin.
There are no economists in the Forbes 400 list of wealthiest people. If following economic information leads to superior investment returns you would expect to see at least a few people in the upper ranks. We see none as far as I can see. Needless to say views on this matter are divergent. Warren Buffett says he has NEVER used macroeconomic information in his decision making. BTW, this whole issue has a cult following of it's own. There are even web-sites dedicated to recession probablity forecasting.
Anyways, what are my views currently? I do NOT weigh economic information as highly as I used too. My views over the years have evolved. It is tough to predict the future. Always remember that the economic system is a COMPLEX ADAPTIVE SYSTEM. Rules that applied many years ago may not work now.
Where do we stand now in the business cycle? It hard to believe that we are headed for recession given the slack in the labor markets. Money is still easy due to FED policy making. The yield curve is positively sloped (ie. not inverted). My guess is that we are about half-way through the business cycle. In other words the stock markets have a way to go before the bear arrives.
I still follow a few economic indicators and I provide them below.
US 10 Year Treasury Bond Rate
US Nonfarm Payroll Data:
US Weekly Job Claims (4 week moving average):
Leading Index for the US (Fed Philadelphia):
US Industrial Production:
US ISM New Orders Index:
US Commercial and Industrial Loans (top 100 banks):
US B of A Merrill Lynch High Yield Master II Option Adjusted Spread:
US Government Bond Yield Curve:
http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx
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