Market Direction and Why Macroeconomic Charting Can’t Help

Market direction is the single most important aspect of the decision-making process behind investing in equities. You can buy the “greatest” stocks but when the overall market direction trend is lower, negative investor sentiment will outweigh even the “greatest” stocks.

Today I was reading an article on why the next 10 years are going to miserable for equities based on Macroeconomic charting. The article “The Next 10 Years: Much More Misery” is on seeking alpha and can be read through this market direction link. I know from experience that market direction investing based on macroeconomic charting does not work.

Market Direction And Macroeconomic Charting

The problem with macroeconomic charting and why it is of no value when investing in equities is because it is looking at past events trying to predict future events. It’s almost like saying “history will repeat itself” and as we know when it comes to investing the only certainty is uncertainty.

Many of the charts in the article are certainly interesting and I posted a comment with the article because in the past I spent money buying up all kinds of macroeconomic charts and at one time I even joined a macroeconomic newsletter for a year. What I found was that studying macroeconomic charts was literally pointless. I found that it was a waste of time to look at such charts as the misery index to predict the future trend of the economy and thereby of equities.

40 Years of Flawed Macroeconomic Charting

Having started investing in 1972 I have gone through all of the events that the past 40 years of macroeconomic charting is predicting. While charting is great fun the studying of macroeconomic charts to predict future events is fundamentally flawed. When I bought books at the height of the 1974 market panic and signed up for a year of macroeconomic newsletters the predictions were dire. The world according to macroeconomic events was entering a major depression that would make the 1930’s seem like a picnic.

What I found out of course was that the stock markets recovered and by the end of the decade had actually ended up just slightly higher than at the start of the decade, but for those investors who bought equities at the height of the panic, they doubled their capital.

Lessons From My Mentor

In 1973 I had found an investment mentor but I was shocked when he began to draw up “battle plans” as he referred to them, as the market kept tanking. By the time the market was down 50% in 1974 my mentor was the happiest I had ever seen him. He was downright euphoric. I remember telling him what all my books and my shiny newsletters were predicting and he told me nothing can predict the future like a good market panic can. So I followed his advice and bought stocks in the market crash and stayed awake nights worrying about what little capital I had left and how I was going to feed my kids and pay my bills. I was so worried I took a second job in 1974, and delivered newspapers before my kids were even awake. I remember lining up to buy gas because of the oil embargo and thinking my mentor must be an idiot.

Death Of Equities

I thought it the world economically was about to “end” and indeed I found confirmation that it was true when Businessweek published an issue with the ominous headline “The Death of Equities”. But by mentor was right and I was wrong. He explained to me that macroeconomic charting based on past events is a poor predictor of future ones because the data being compiled is already flawed.

Macroeconomic Charting Is Fundamentally Flawed

He explained that when the macroeconomic charting predictions of 1974 did not pan out, the charting data itself would be altered by the events they did not predict making them even more unreliable for future use. Repeat this process over a 50 year time period and you can begin to understand that charting macroeconomic events on past events is fundamentally flawed.

1929 Disaster

He told me that he had been caught in 1929 when macroeconomic charting predicted another 10 years of “happiness” only to find out that the misery index is a poor indicating because it is actually a delayed indicator. At the start of 1929 the misery index did not predict a market collapse or pullback of any kind. It did not predict the 1930’s depression that followed. But after the market collapse and unemployment climbed and business started to close then the misery index show “more misery” lay ahead.

Black Monday

On Friday we “celebrated” the 25th anniversary of Black Monday. I wrote an article here: in which I mentioned how in December 1987, 33 eminent economists from around the world met in Washington DC and after studying macroeconomic charts among other economic indicators they predicted that the years to follow Black Monday would be the worst since the 1930′s. They were of course wrong and once more macroeconomic charting now contained all those errors.

2008 – 2009 Bear Market Collapse – Buy A Gun

In January 2009 with the severity of the bear market, macroeconomic charting including the misery index predicted so much devastation I should have bought a bunker, a gun and loaded up with cans of spam and baked beans instead of buying stocks. But I knew from the collapse of 1973-74, 1987, 1997, 1998, 2001, 2002-03 that macroeconomics is based on flawed data that can at best be used for coffee table books at Goldman Cafeterias.

Market Direction And What Really Drives Stocks

Two things always drive stocks, earnings and investor sentiment. In 2008 corporate S&P 500 earnings were for want of a better word “in the toilet”. Fear among investors that the “financial world was ending” plummeted stocks. In the spring of 2009 earnings started to improve for corporations and stock prices and investor sentiment followed suit.

In 2010 the S&P average earnings was up 25%. This was an incredible jump and stocks followed that trend.

The question facing investors now is have earnings peaked.

The Best Thing About Market Direction Today – Profits

The best thing about today’s stock markets versus when I started investing is the ability of small investors to profit in any market environment thanks to the multitude of everything from a wide array of optionable products to the Ultra Type ETFs and Hedge Funds that we can benefit from.

Macroeconomic charting is an impossible way to invest for the future. I cannot invest based on what “may” happen as predicted by flawed macroeconomic data. Instead my time is better spent studying present conditions and investing for the conditions I see before me as an investor. In other words investing appropriately for the market direction trend.