Lessons in Preparing a Market and Economic Outlook

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on May 31, 2017 4:49:35 PM

and tagged Economics Lessons

Leave a comment

preparing an outlookSpring conference season is over. I’m back at the office and happy to be here. Rather than relaxing, however, I am now wrestling with my next big project: preparing an outlook for the second half of the year. What will happen? And why?

These are difficult questions to answer. I can generate a reasonable outline of where we are, make some good extrapolations as to what might happen, and throw in a pinch of outside-the-box thinking—but it’s possible I could still be substantially wrong in at least one of my theorems. 

How so? Well, unlike physics, which deals with (mostly) known variables and laws, markets and economics are all about people. And as the Harvard Law of Biology states, “Under the most rigorously controlled conditions of pressure, temperature, volume, humidity, and other variables, any experimental organism will do as it damn well pleases.” Truer words were never spoken.

So why prepare a market and economic outlook? 

The purpose of preparing an outlook

First, because it's expected. We seem to have a deep-seated need to see around the corner, and we all spend a great deal of time trying to do just that. It’s the same need that keeps fortunetellers in business.

More seriously, and more importantly, trying to project the future gives us a frame through which to view our current circumstances. In many respects, this process forces us to adopt an outside viewpoint, as I have discussed before. And that means looking at larger trends, rather than at individual data points. By trying to reconcile present views with a future reality, we often end up having to reconsider those views.  

Preparing an outlook also gives us a great chance to see where that outlook might differ from current consensus thinking—and why. Opportunities in investing come from gaps between market perception and what will actually happen, and it is these gaps that (hopefully) come to light in an outlook analysis.

In this context, even the necessary numeric projections—where will the stock market be?—provide a useful way to evaluate what we think, why we think it, and how we might want to invest in the near- to medium-term future.

Understanding how we could be wrong

For me, the final piece of the puzzle in preparing an outlook is trying to understand how it could be wrong—and even more important, how and when we would know. I refer to this kind of thought process as “tripwire analysis.” When drawing any important conclusion, we should think about what would make it wrong, what we should monitor to see if it is wrong, and when we would decide that we were mistaken.

In the real world, and as a simple example, this is how and why I use the 200-day moving average as a tripwire for the stock market. When markets drop below that threshold, I start to pay attention, as this has been a good indicator of potential trouble ahead. For a less simple real-world example, this is why I track job growth, consumer and business confidence, and the yield curve every month, as they are (in ensemble) a great indicator of pending economic trouble. With both of these cases, you need to dig into the details, but having a couple of indicators that act as canaries makes life much easier.

The outlook, then, is not really about the projections but about how we get there and what the projections tell us about where we are right now. When it finally comes out, I suggest you read it in that light.

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®