Two Key Takeaways

• Economic data is valuable—but it isn’t perfect. Most government economic reports are backward-looking, frequently revised for months, and often give investors a false sense of precision.
• Successful investing isn’t about predicting every economic statistic. It’s about identifying the handful of factors that actually drive long-term stock prices—earnings, valuations, interest rates, and investor expectations.

Good evening everyone. Have you noticed that these days… everyone seems to be an economist?

Every jobs report…Every inflation report…Every GDP release…

Within minutes, thousands of opinions appear telling you exactly what it means for your investments. I had all those classes and went to a pretty good school for an MBA and after 35 years managing equity portfolios, I’ve learned something very different. What’s that?

You don’t need to know everything, or much of anything about macroeconomics to become a successful investor. In fact, trying to predict every economic data release can actually make you a worse investor. Tonight, I’d like to explain why.

POINT #1ECONOMIC DATA ISN’T AS PRECISE AS IT APPEARS

Let’s start with last week’s employment report. This data is from Zerohedge who our team has relied on for almost 5 years to dissect, true up, and interpret the government stats.

The headlines said the U.S. economy created only 57,000 jobs, roughly half of what economists expected. At the same time…The unemployment rate actually fell to 4.2%.

How can job growth slow dramatically…while unemployment improves?

The answer lies beneath the headline.

The labor force shrank by roughly –720,000 people, causing the participation rate to fall to its lowest level in years. If fewer people are looking for work, the unemployment rate can fall even when hiring weakens. April and May payrolls were also revised a combined –74,000 jobs lower, reminding us that the first estimate is often not the final estimate. April was cut by -17% and May was even worse at a -25% adjustment down.  the worst aspect of the jobs report was once below the surface, where we find that that the number of full-time workers collapsed by a 514K, confirming once again that the composition of the US labor market remains terrible. Remember under this government accounting scheme, In the NFP (Nonfarm Payrolls) report, firing one full-time worker and hiring them for two part-time jobs results in a net +1 job created. The NFP tracks the number of paid positions, not the number of employed people, so each new payroll counts as a separate jobs. The n umber of full-time jobs has dropped more than 2.2mm in about 18 months.

Here’s what many investors forget.

Currently Government economic data is :

• Collected after the fact.
• Revised for months.
• Most often, substantially changed long after the headlines disappear.

The Bureau of Labor Statistics does work trying to measure an economy with more than 170 million workers, many who no longer want to be counted.

These estimates is never perfectly precise which means investors should be careful about making portfolio decisions based on one or two monthly reports.

One of my favorite sayings is: Economic data is often inaccurately precise.

We quote it to the nearest thousand jobs…Sometimes to the nearest tenth of a percent…

But months later, the numbers can look very different.

POINT #2

PLEASE, particularly, in the Stock Market Particularly DON’T CONFUSE CORRELATION WITH CAUSATION

Now let’s talk about another investing myth that our team spent months dispelling a few years ago. For 2-3 years, particularly post Covid in 2022, one of the most popular charts on financial television compared the Federal Reserve’s balance sheet with the S&P 500.

The argument was simple. “The Fed printed money.” “The balance sheet expanded.”

“That’s why stocks went up.” Here’s a copy of the chart that was circulated for months in 2022  This chart was everywhere. To help dispel this notion, RIA Advisors produced this one that even had the timing of all the QE programs on it. I like his chart because it’s pretty apparent this wasn’t a real thing. But man this argument was everywhere.

Firms, including GMO, as part of their then continuing bearish call on stocks back then, highlighted research showing that balance-sheet expansion appeared to support equity valuations and influence market returns.

But here’s the problem. Correlation doesn’t prove causation.

If the Fed’s balance sheet alone drove stock prices…

Then stocks should have struggled as the balance sheet stopped growing—or even shrank. The Fed’s balance sheet peaked in mid2q2022. Here’s the chart.

And since that time? The S&P500 has returned almost +85%.

It didn’t decline with the balance sheet. even in the time periods that were discussed. Why? Corporate earnings accelerated. Productivity expanded, margins improved.

And companies continued generating record cash flows. Those fundamentals helped support stock prices even as the Fed’s balance sheet became a much smaller part of the story. Sure, the balance sheet mattered. Money supply and liquidity mattered.

But they weren’t the entire explanation. Investing is rarely driven by one variable.

It’s usually several important variables working together. Earnings, earnings growth rates, interest rates, real interest rates and inflation, and investor sentiment and positioning.

THE BIGGER LESSON

Investors Don’t Need To Predict or have a Opinion on  Every Economic Report.

Most of all we need to understand:

• Are earnings growing? Accelerating or slowing?
• Are profit margins improving? Which way if Free cash flow heading?
• Are valuations expanding or contracting due to market based interest rates?
• Is monetary policy becoming more or less supportive?

That’s a much shorter—and much more useful—checklist.

CLOSING

So, the next time someone tells you they know what one economic report means to the overall stock market…Or exactly how one government statistic will move the market…

Remember this. The economy is incredibly complex and given its complexity it is slow to change direction, Government data gets revised. Revised to the point that it’s generally not particularly useful in making longer-term investment decisions. Markets and corporation, at least the best ones, constantly adapt.

After 35 years in this business, I’m not interested predicting or even discussing  every headline…I’m interested in understanding the long-term drivers of a stocks revenue, earnings, and cash flow to drive wealth creation.

Because successful investing isn’t about becoming a good economist. It’s about becoming a disciplined investor. Stay focused on earnings. Stay focused on cash flow, Stay focused on rate of changes and stay diversified.

Try not to let one monthly data release, particularly I the time of the quarter when companies aren’t reporting earnings, cause you to lose sight of your long-term investment plan.

I’m Chris Perras with Oak Harvest Financial Group. Thank you for watching, and I’ll see you next week.