‘Check Yourself’ As the Data Zig Zags ↯

Stocks made new record highs, with the S&P 500 setting an intraday high of 5,264.85 and a closing high of 5,254.35 on Thursday. For the week, the S&P increased 0.4%. The index is now up 10.2% year to date and up 46.9% from its October 12, 2022 closing low of 3,577.03.

Believe it or not, the chart below is real. It reflects monthly developments in a major economic data set. Can you guess what it is?

Core capex orders have been trending sideways in a bumpy way. FRED

It’s the past year and a half’s worth of monthly core capex orders, one of the most telling leading indicators of business activity and one of the key tailwinds to the economy.

One month it’s up. The next month it’s down. And then it’s up again. And then it’s down again. For more on this metric, scroll down to this week’s review of the macro crosscurrents.

Core capex orders have been trending sideways in a bumpy way. FRED

This chart is the latest reminder that economic data can be “full-on Monet”: From a distance, patterns and trends become clear. But up close, it’s a mess.

Analyzing short-term moves in data is treacherous work for anxious investors and traders who are eager to adjust their positions in anticipation of major shifts in the economic narratives.

Unfortunately, the end of a prevailing narrative and the emergence of a new narrative only become clear with months of hindsight. What might initially look like an inflection in a trend is often just noise.

So it’s probably best not to lose one’s mind over one month’s economic data.

The same goes for short-term moves in the financial markets.

Consider the slide below. It’s from a presentation I gave to Columbia Journalism School students in 2022 and lists stock market news story headlines during the seven trading days following news of the Omicron variant of COVID-19 in November 2021.

As you can see, markets zig-zagged during the period. And along the way, major news outlets flip-flopped on the narrative to fit the daily price moves.

This kind of thing happens all the time if you follow markets daily.

The lesson: It’s often futile to draw big conclusions about the world based on short-term moves in market prices and economic data.

Fed’s Powell: ‘Check yourself’ on the ‘sometimes-bumpy road’ 🛣️

All that said, just because short-term moves aren’t necessarily conclusive doesn’t mean you should ignore them.

That was the message from Federal Reserve Chair Jerome Powell in regards to the recent uptick in inflation data after months of trending lower.

“I always try to be careful about dismissing data that we don’t like” Powell said during the March 20 press conference. “So, you need to check yourself on that, and I’ll do that.“

Powell was specifically addressing the recent pick up in inflation as measured by the core PCE price index — the Fed’s preferred inflation gauge — in the January and February reports.

“I take the two of them together and I think they haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes-bumpy road toward 2%” he said.

In other words, while Powell is mindful of the recent data not going his way, he is not yet willing to call the end of two years worth of cooling inflation.

Zooming out 🔭

As I wrote in A 5-step guide to processing ambiguous news in the markets and the economy 📋:

…the first step is to have a robust macro framework…

If an economic metric, a company’s earnings announcement, or some other news is in line with your macro framework, then congratulations: You just got confirmation that your macro narrative makes sense.

At the same time, it is often the case that individual companies — or even a group of companies — may say something that conflicts with prevailing narrative…

A turn in one day’s, one week’s, one month’s, or even one quarter’s worth of data doesn’t always confirm a change in prevailing trends. In the real world, nothing — especially trends in the markets and the economy — develops in the form of smooth, straight lines.

The markets will have weeks, the economy will have bad months, and companies will have bad quarters. And sometimes, these periods will prove to be anomalies…

One thing is for sure: If new data goes against the prevailing narrative, there’ll be plenty of pundits on business news arguing why this is indeed an inflection point and that we should brace for a new paradigm.

But again: One piece of data does not make a new narrative, and one piece of data does not break an existing narrative.

Inflection points for big trends can matter in the markets and the economy. Unfortunately, you just can’t know for sure without the benefit of hindsight.

What to do? Manage your risk and be open to the possibility that narratives may be shifting while being wary of data that may eventually prove to be noise.

A version of this post was originally published on Tker.co.