The ‘trick’ to using data of this type is to not be trying to trade it. It is much better to invest using the momentum of the economic cycle in my opinion and let other investors reprice the markets higher on ‘Good News Surprises’ during economic uptrends and lower on “Bad News Surprises” during economic downtrends.
Industrial Production as an economic indicator
The Industrial Production is one of several key economic indicator which can prove very useful for predicting longer term market pricing. The basis is if the economic trend is “Up”, then investors who worry will be surprised by better news than they are expecting. If the economic trend is “Down”, then investors will be surprised by worse news than they are expecting. We have centuries of history on this with markets shifting higher or lower on changes in investor expectations.
If one can judge the longer term economic direction, then history shows market psychology and market prices follow along even with multiple short lived contrary events. It is the economy which eventually drive markets long term in spite of the ‘short-termism’ of the bulk of investors. The Industrial Production Index chart shown below comes from the St Louis Federal Reserve FRED site. Recessions are marked as LIGHT GRAY VERTICAL BANDS. Look carefully and one can see that each recession since 1919 is preceded by a slowing in the growth of this index. Currently there is no indication of slowing in our current economic cycle.
There is simply no recession in sight. In fact, it appears that our economy may be accelerating!!
For investors once one understands the cycle, then all one has to do is to select companies and portfolio managers to carry us along. The ‘trick’ is to hold our positions in spite of those panicking at every new piece of weekly or monthly information that fails to meet their short term investment horizons. If one’s horizon is the length of the economic cycle and one has developed the tools to monitor the economy, then investing becomes simpler, carries less anxiety and is more about making measured choices knowing that the economic trend has your back.
Industrial Production Set another Record Via ValuePlays