Economists release a great deal of data analyzing and projecting expectations for the market and economy.
This information can be insightful, but should we rely on these indicators?
When Economic Data Falls Short - Market Anchoring Bias
For about the past 3-4 years, consumer participation in economic surveys has dwindled. Therefore, the quality of economists’ data is starting to weaken, and there can be gaps between expectations and reality.
The market maintains an anchoring bias for economic projections and often reacts with short-term volatility when expectations go unmet.
If you understand where this reaction is coming from and how short-lived it is, you can have more confidence when facing this kind of volatility.
For example, at the time of this article’s publication in February 2024, January CPI (Consumer Price Index) data was just released. Economists predicted 2.9% year-over-year headline CPI. The reality was 3.1%.
Because of its anchoring bias toward the 2.9% economic forecast, the market was disappointed in the actual results and experienced tremendous downside on the day of the data’s release.
This, however, was temporary. The following day, after the market had time to digest the news and realize that the downward inflationary trend was intact, the market rebounded.
How Should We Make Investment Decisions?
Solely relying on economic estimates can create unnecessary volatility, so we attempt to remove that bias, remain objective, and focus on the best long-term allocation to achieve our clients’ goals.