The Weight of the Evidence

TLA continuously researches and monitors economic and market trends on behalf of the families we serve.

Breaking News: Subject to Revision!

Those who watch so-called business channels or subscribe to economic alerts on social media are well-acquainted with the relentless “breaking news” on “just released” government statistics like the latest unemployment rate, inflation rate, or GDP-growth rate.  These headlines are typically followed by the three-person panel of “experts” who comment on the latest announcement and the implications of that newly released number.

Those who have been reading The Weight of the Evidence for some time may notice that we almost never quote those government statistics (derived from surveys) when they appear in financial headlines.  The reason is that these often-quoted government statistics are nearly always revised days, weeks, or even months later.  Sometimes these statistics are revised multiple times.  By the time those stats are ultimately revised and corrected, the macro environment they intended to speak to is no longer current.  By that time’ we’re looking at newly furnished stats which may also need to be revised.

Measuring numbers across all 50 states and thousands of communities is a monumental task that requires input from multiple sources that generally don’t coordinate with each other and may not even use the same methodology.  Therefore, revisions or corrections are to be expected.  As a comparison, it takes public companies (dwarfed by the size of the U. S. government) up to 40 days to capture, interpret, massage, confirm, and finally release their quarterly financial reports.  Revisions or corrections are therefore to be expected.  Taking action based on a single report, which by its very nature is preliminary, seems imprudent.

Now that we are near Major League Baseball’s playoff season, compare this to the score of a game.  Imagine you get an alert on your smartphone that the Astros just won today’s game, 5-4, followed by hours of commentary of how they won and what the implication is for their playoff spot.  Now imagine, even though the game is over, this report is only “preliminary.” A few days later the MLB announced that the Astros actually lost 6-5.  By the time you get the corrected, final score, they may have played 2 more games and that alert you first received (with all the commentary to follow it) is now hardly relevant.

Business and investment decisions should not be made based on any single economic statistic in the headlines that are subject to revision.  The Federal Reserve Open Market Committee (FOMC) certainly doesn’t operate that way.  Their decisions are more thoughtful, based on scores of data points and trends that they observe over time.  The most recent example is the FOMC decision to cut the federal funds rate earlier this month.  The federal funds rate is the interest rate at which banks lend money overnight to each other and is a fundamental tool the Fed uses to attempt to slow or pump the economy.  Perhaps as important, the FOMC projects that it will continue to lower this key rate for the next 5 quarters.  You can be sure that their decision was not based on one headline.

Decisions at TLA are not based on one headline either.  We start with understanding the intersection of your financial and emotional risk tolerance.  Financial risk tolerance measures your ability to withstand volatility.  We think of emotional risk tolerance as the amount of safety you need to sleep well at night.  Our 40+ years of experience has taught us that financial success is most often attributable to a plan that includes prudent spending, allocation discipline, tax minimalization, and systematic rebalancing within your risk tolerance.

Elections, The Economy, and Markets

Those who believe they can predict the direction of the economy or markets, based on future election results are often disappointed with their predictions.

The losing side typically predicts that the economy and therefore financial markets are doomed.  And yet, the markets have produced double-digit returns for every President since Jimmy Carter except one.  Not only is the election winner a poor predictor of overall market returns, it’s proven to not be a reliable gauge to determine which sectors of the market would outperform.  Who would have ever thought, for example, that the only S&P sector to lose money during the Trump term was energy, but has been the number-one sector during the Biden presidency?

It’s often been said that “It’s time in the market, not market timing” that builds wealth.  The following chart is a clear illustration of how timing the market based solely on Presidential elections has retarded wealth-building in the past.

Source: Bloomberg & Bank of America
Note: growth does not consider taxes

• $10,000 invested only during Republican-led administrations (& sold out during Democratic-led administrations), would have grown to about $30,000.00.
• $10,000 invested only during Democratic-led administrations (& sold out during Republican-led administrations), would have grown to $56,000.00.
• $10,000 invested in 1953 and remained in the market through all administrations, would have grown to $1.7 million.

Investing only when one party is in the White House has been a very expensive lesson that we do not recommend.

Historically, the period leading up to elections, especially close elections, is often volatile because markets tend to prefer clarity. Once the election is over, we hope that the new President and Congress begin to address the structural budget challenges that have been especially ignored during this election cycle.

Over the long term, the American economy should continue to benefit from a relatively strong, diversified economy, based on the rule of law and property rights; leadership in global trade; technological innovations; AI-assisted productivity; demographic expansion, and an entrepreneurial spirit. These fundamentals transcend temporal political officeholders.

For almost 250 years our sons, and for the last few decades our daughters, have fought and sacrificed to ensure our right to vote. We honor them when we exercise that right.