By Todd Sullivan of Value Plays……
Some relationships are so simple as to almost omit all others. For instance is rail traffic is increasing, so will GDP. If temporary employment is rising, so will overall employment. Yes there will be month to month anomalies but the trends and their relationship always hold. The same can be said of durable goods/employment. While durable goods will be more volatile month to month its trend, and that of employment levels match. So, ignoring whether the reading (which will be revised) today was .1% or .3% above or below the consensus is wise because as we step back, seeing the trend relationship tells us far more. Here it is simple, both are increasing and that bodes well…..
US Durable Goods Orders have been in an uptrend since April 2009. By most measures the pace has been ahead of the 2002-2003 economic recovery as can be visualized in the chart below. Employment tracks this economic indicator relatively closely with regards to the timing of changes in trend with Durable Goods being leading indicator for employment by 12mos-18mos. Employment tracks Durable Orders in general magnitude and direction.
The media was predictably negative on this report finding small details to claim as a poor reading for the economy while ignoring the whole. This is the reason for market underperformance with regards to economic progress since May 2011 in my estimation. This sets value oriented investors in the particular position of having value situations presented to them the past 7mos.
It is impossible to predict how long this period of unwarranted pessimism will last, but I urge all to take advantage of this situation. Once the pessimism turns towards optimism, investments today should provide better than average gains to those who able to believe in the trends in the chart below and ignore the media’s fearful forecasts.
One must be a contrarian to invest successfully.
Optimism is warranted!
Enjoy the Holidays.