The “Market”ing of Economics



Cory Hill

Financial Advisor & Associate Portfolio Manager


In the past, business program pundits, market analysts, and other “market experts” were routinely featured on various television and radio programs, and quoted in print media to share their opinions on investing.

There was never a shortage of opinions on where markets were headed, whether we were in a “bull” or a “bear” market, and whether the valuations of various market sectors and individual stocks were cheap or expensive, etc.

While the opinions and analysis of these experts and commentators would differ, you could take some level of comfort in knowing that those they expressed were usually the result of a widely used and accepted set of mathematical parameters that were fairly simple to follow and fairly easy to replicate. One could hear the reasoning for a particular opinion, for example, a particular stock is cheap or expensive based on a measurement of its price to earnings, when compared to other stocks in a similar sector. While not a perfect analysis, it was nonetheless fairly simple to grasp and understand. Whether they were right or not wasn’t really the issue as long as their audience could follow their logic, apply it themselves, and then arrive at their own opinion.

Today however, the landscape has changed dramatically vis-a-vis the analysis and distillation of market and economic data in the media. Investors now have to contend with analysis and opinions not only on the markets but also on economic activity and esoteric economic theories.

There are so many labels floated about in regards to current economic trends and economic theories that it’s no wonder clients (and advisors alike) have trouble keeping up sometimes.

Inflation, Deflation, Stagflation, Recession, Depression, Soft-landing – to name a few – can be confusing at best! Let’s try to “de-jargonize” the above list of economic labels and, hopefully, provide some perspective:

Inflation – It is the rate of increase in prices over a given period of time. To de-jargonize: it’s a basket of goods that is meant to represent what the average household spends money on. It’s not an individual basket nor one that takes into consideration things like age and region. Your “personal” inflation rate can and will be quite different than the official inflation rate, depending on your lifestyle, family makeup, and where you live, to name a few factors.

Deflation – It is when consumer and asset prices decrease over time and purchasing power increases. To de-jargonize: you can buy more products and services tomorrow with the same amount of money today.

Stagflation – It is a period where slow economic growth and joblessness coincide with high inflation. To de-jargonize: it’s when the economy is slowing, there are more people out of work, and inflation is higher than central banks want (typically they shoot for a 2% annual inflation rate).

Recession – It is simply a set of measurable economic indicators that present themselves during the contraction phase of the economic cycle. Technically, a recession is when two consecutive calendar quarters show a decline in GDP. To de-jargonize: it’s when a country’s gross domestic pro- duction (GDP) – a total of all a country produces – is lower than the previous three months’, two quarters in a row.

Depression – It is a major downturn in the business cycle characterized by sharp and sustained declines in economic activity; high rates of unemployment, poverty, and homelessness; increased rates of personal and business bankruptcy; massive declines in stock markets; and great reductions in international trade. To de-jargonize: it’s a recession on rocket fuel!

Soft-landing – A soft-landing is the goal of a central bank (Bank of Canada, U.S. Federal Reserve, etc.) when it seeks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation, without causing a severe downturn. To de-jargonize: it’s the ebb and flow of interest rate increases when the economy is booming and the decrease of interest rates when the economy is slowing.

Now, I don’t want to seem as though I am picking on economists or minimizing long-held economic theories. In my opinion, one of the problems with supplementing and in some cases, replacing market analysis with economic forecasting is that economics is a theoretical science; it doesn’t exist in real time, which is where we all live!

While stock markets are considered “leading indicators,” many of the data points and pieces information economists use to define the list of economic trends and theories are “lagging indicators.” Put another way, stock market indicators tell investors which direction the economy is likely to go in the future. Lagging indicators confirm (and label) what has already happened.

So, as an investor, isn’t it more valuable to look prospectively when planning our investment decisions? I believe it is. While somewhat noisy as well, market analysis, using widely accepted valuation tools, can give us actionable information to make proactive decisions with respect to investing. While economic theories are interesting, they are firmly, in my opinion, in the retrospective category. The past is a valuable tool, but as the saying goes in investing, “Past performance is not a guarantee of future returns.” ■

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