Some economist say we’re recovering, but to a “new normal” level of activity that is significantly below the prior peak. The traditional economic indicator suggests that things are better now than they were when the economy topped out in October of 2007. Still others view enormous upside from here, primarily because the sell-off two years back was so severe. In reality, no one really knows for certain, which makes it hard to make any decisions based on economic forecasts.
The most common result of this controversy is that many investors make investment decisions based on emotion, rather than economic fundamentals. Lacking perfect information, the vast majority of investors either throw out all of the data or only pay attention to facts that support their current beliefs. Here in Western Colorado’s conservative country, anger at the Federal government’s fiscal and monetary policies has led many investors to conclude that the recovery is an illusion.
May-Investments has been measuring and monitoring events all year, having been forced to develop a proprietary Leading Economic Indicator to help us objectively track the direction of this economy. The indicator shows that we aren’t anywhere near the prior peak, which supports the view on Main Street that we have a long way to go before we have really recovered from the 2008 financial panic. On the other hand, the May-Investments Leading Indicator suggests that the recovery in corporate profits is sustainable, the worst of the unemployment situation may be behind us, and a spirit of optimism may soon return to America’s entrepreneurs. Never underestimate the resilience of the American economic system!
Of our ten indicators, only exports, bank lending (still the most negative indicator), and manufacturing orders are waiving red flags. For several months, now, 70 percent of the indicators are positive. Since these are leading indicators, these suggest that the current recovery can continue through much, if not all, of 2011. For investors, it means that outperforming cash and bond investments might not be too difficult, at least for the first few months of the year. Looking back, it appears that 2010 will go down as a pleasant surprise as compared to expectations, even if it’s not a banner year in absolute terms.
Hopefully it also means that every reader will have a Merry Christmas and a Happy New Year celebration in the coming weeks.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .
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