Market Noise

No reason to blur our own convictions with IMF forecasting noise

To use Nate Silver’s terminology (in his insightful book highlighted by our colleagues over at Bond Vigilantes recently), this week has seen plenty of ‘noise’ (subjective commentary) for very little ‘signal’ (objective data).

In the signal-lull between last week’s flurry of economic data releases (for example, on US inflation, manufacturing, housing and employment) and next week’s major earnings reports, market participants have had plenty of dialogue to focus on from the world’s policy-makers, politicians and pundits (from, for example, the IMF, the World Bank, the Bank of Japan governor, European politicians and the US Federal Reserve).

The International Monetary Fund’s (IMF) fairly gloomy half-yearly World Economic Outlook caused a particular stir with warnings of “frothy” stockmarkets, amid downgrades to their own previous forecasts for global growth. We would all like to be able to predict the future direction of financial markets but given how unlikely anyone is to be consistently successful in that area, the best chance we can give ourselves of being on the right side of things in the future is to be mindful of what the current facts are signalling, what to look out for in other people’s reactions and how to react ourselves.

Amid such uncertainty, it is tempting to grasp for some certainty by giving a lot of weight to the predictions of ‘experts’ like the IMF. The problem with giving the IMF’s forecasts precedence over your own views has been highlighted by the fact that this week they revised the forecast they made just six months ago – they can be no-more sure of the future than the rest of us. Therefore, amid noisy distractions, it is important to keep backing your own convictions unless you find hard evidence to suggest you are wrong. If you are holding assets based on your own assessment of the facts (which you should be) the fact that someone else, even if they are the IMF, have a particular forecast shouldn’t mean much. Of course, it is still important not to just ignore these things altogether, not least because the sort of short-term volatility they can trigger may throw up interesting opportunities.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.