Welcome to a new paradigm: what seems not to work any longer is relying on past economic data to inform investment decisions, or, at least not assigning the same “predictive quality” to data as in previous years. To lead with the conclusion first, it is a given fact that aggressive monetary accommodation, initially enacted during the Greenspan era in the aftermath of the dot-com bust and later increased by policy measures designed to fend off the impact of the global financial crisis, has changed how the “financial engine” works or should work.
One prominent example is related to the assessment of the labor market. Going back to the mid-1960s, jobless claims and economic activity have been highly correlated, but current readings show this long-term trend “breaking down” when coinciding with the emergence of heavily policy-driven markets. Specifically, in the past:
- Economic contractions have occurred when jobless claims trended higher, as measured by 4-week moving averages; this relationship has ended.
- Economic growth indicators have been inversely correlated to jobless claims data; however, since the global financial crisis, this relationship has also ended.
The bottom line: we are living in an unprecedented economic “experiment” with a limited application of past analytical tools and data. Investors have to accept a continued divergence between financial markets and the economy, as shown in our example; although the U.S. may be hiring people, it is not creating the growth that has historically accompanied such situations.
Matthias Paul Kuhlmey is a partner and head of Global Investment Solutions (GIS) at HighTower Advisors. He serves as wealth manager to high net worth and ultra high net worth individuals, family offices and institutions.