Focusing on the Economy

Technology is a wonderful thing. The increasing availability of raw data and computing power lowers barriers for new businesses to compete and allows most people to take on roles they would have avoided a few years ago. While I am clearly a beneficiary of this trend, when it comes to the markets as I can both manage client accounts and distribute my weekly newsletter EPIC Insights electronically, the desire to know more has a downside. As more information becomes available, investors embark on a quest to understand and predict every stock market movement. Believing that crunching one more data point or fine-tuning a magic algorithm will unlock the mysteries of the market, people travel down a road looking for certain answers to unsolvable problems.

Last week offers a perfect example of how the market can act counter to the news cycle. Entering the week, the Dow Jones Industrial Average (Dow) had suffered four triple-digit losses in the prior five trading days and was short-term oversold. We then saw excellent earnings from growth-stock darlings Apple (AAPL) and Amazon.com (AMZN), Ben Bernanke was confirmed to a second term as chairman of the Federal Reserve (Fed), and fourth-quarter gross domestic product (GDP) came in at a better than expected 5.7%. Most would see these results and expect a sharp rally. Instead, losses continued, with the Dow falling 1% on the week and now 3.5% lower for the year. Markets can act any way they wish, and those looking for certainty will be frustrated.

My investing style has steered away from the belief that I could fully understand why each move occurs. Focusing on what actually happens, as opposed to trying to understand why it did, allows investors to see what the market is actually doing instead of what they feel it should do. Once we make this shift in our thinking, we can spend our time looking for the opportunities the market provides us. Without the headache of explaining why the perfect formula yielded incorrect results, we look toward the future and position our portfolio for growth.

As earnings season winds down over the coming weeks, investors' attention will turn toward the economy. The stock market is very weak and improving economic numbers remain one of the few catalysts that could reignite the rally. The upcoming week of 2/1 to 2/5 will act as the official handoff from earnings season to the economy as company-specific reports dwindle and the dominant economic theme, employment, takes center stage. Currently, the stock market is looking toward economic growth as the reason to cease the decline and move higher, but until we see a sustained creation of jobs, such a rally will remain elusive.