We have all heard the phrase “by the numbers”. When you hear that phrase, do you think of an orderly process? Something being done “by the numbers” suggests the comforting notion that there is little or no deviation in a process or outcome. You might think that the phrase finds it origins in science or mathematics. According to the website Wiktionary.org, this phrase originated with riflemen during the Revolutionary war. The book was used for training soldiers to fight with their rifles, and it contained numbered diagrams showing different ways to shoot a rifle and fight with a bayonet. One goal of the book was certainly to create a sense of order on the chaos of a battlefield.
Looking for order in the midst of chaos is without a doubt our goal. From the standpoint of investing, we look to glean information from economic data, company reports, technical indicators, and news of all sorts. Heck, we even try to make sense of political rhetoric. (Warning, sarcasm ahead!) We just take all the data, plug it in, and “Voilà”, clear concise “by the numbers” advice. Okay, so it’s not as simple as that. But let’s take a look at some of the “numbers” we have observed of the past 45 days or so and see what we can determine.
The first number that jumps out is S&P performance. In December we saw that worst December equity performance since the 1930s. That was followed up by the 4th best January performance since 1950. What changed? Did trade with China get resolved? Did our own government agree to a solution over boarder security? Nope. Here is what did happen. Our government agencies, which were shut down for parts of December and almost all of January, reopened. While trade talks with China are still ongoing, there is now the belief that additional tariffs will not be introduced and a trade deal will result between the two super powers.
Here are some other numbers or relevant points. Global industrial production is slowing as a side effect of the previously mention tariffs and trade talks. This is putting strain on US imports and exports. The Chinese government is providing strong stimulus measures to stave off any additional negative effects to their economy. Using the equity market as an indicator, it would appear that relations between China and the US seem to be stabilizing.
Adding to equity market stabilization are 4th quarter earnings reports for US companies, which continue to come in strong. We are getting close to the longest economic expansion in US history. We are at 115 months—the record would be 121. US productivity measures are good, and inflation continues to be low. And with no economic evidence of a recession happening any time soon, you would assume that the Fed can continue to remain “patient” for any future rate increases.
What numbers could jeopardize this current market environment? We saw elevated weakness in auto sales, retail sales, and unemployment. The decline in auto sales was the largest since 2011. While the decline in auto sales could be explained by the retaliatory tariffs from China and auto-specific issues, it is very likely that the government shut down has had a significant impact on the reporting the economic data. Since we have averted another shut down, the March data and the subsequent revisions to January and February should provide a clearer economic picture.
As the numbers continue to be reported, we believe that patience will be rewarded. In the short term, we know that a “by the numbers” approach can be uncomfortable. And while we try to discern good data from bad and news from noise, we also recognize that everyone is susceptible to seeing what they want to see in the data. You have surely heard the story of the CEO who asks his accountant what the numbers tell him about the business, and his accountant replies, “What do you want the numbers to say?” We don’t want to be blinded by our positive biases, which is why diversification is an important part of our investment process, and why we have investment processes that run independent of our investment views.