Advisers, managers comb economic statistics for clues

NEW YORK — Just as Federal Reserve monetary policymakers will use economic data to determine what to do with the federal funds rate this week, financial advisers and asset managers rely on such data to pick investments.
To be sure, they are devoted Fed watchers, but advisers and managers also monitor economic statistics such as gross domestic product, the producer price index, inflation, consumption, unemployment data and other metrics that can help them to identify the best investments.
With government data coming out on a weekly basis, knowing where and how to allocate assets is necessary when crafting an economic forecast and making prudent economic decisions, said Michael Kitces, president-elect of the
Denver-based Financial Planning Association of Maryland and director of financial planning for Columbia, Md.-based Pinnacle Advisory Group Inc., which manages about $500 million.
“The central theme of the economic outlook is the gross domestic product number [which was 2.2% in the fourth quarter of 2006], and evaluating it is important and relevant to what is going on,” he said.
Although Mr. Kitces stressed the importance of wages as a driver for consumption growth, he added that there are other factors, such as the consumer price index and PPI data, that also come into play when measuring inflation.
A fund manager also is sticking to the consumer sentiment reading as a key economic gauge.
“[We are watching] consumer sentiment and consumer confidence very closely, and what spillover effects there have been so far,” said Wendell Perkins, the chief investment officer at Johnson Asset Management Inc. in Racine, Wis., which manages $1 billion in assets. “The consumer needs to do what [they do] best, and that is where the [economic] sentiment is coming from.”
Some advisers have created sophisticated models to help them make investment decisions.
The Guerite Indicator, a proprietary economic risk indicator from Guerite Advisors LLC in Greenville, S.C., would have predicted each of the seven recessions that the United States has experienced since 1960 based on 12 pieces of economic data, according to Hugh Moore, managing director at Guerite, which manages the $10 million Guerite Absolute Return Fund (GARFX).
To reach its conclusions, the indicator evaluates credit and equity markets, scrutinizes a weighting of investments using credit spreads and reviews data from the Institute for Supply Management in Tempe, Ariz.
Right now, the economy is headed toward recession late this year or early in 2008, according to the Guerite Indicator. The forecast is based on troubles in the mortgage market, potentially high unemployment and a likelihood of accelerating inflation, Mr. Moore said. But one financial planner has built a portfolio that is not correlated to hard numbers.
“We use a strict allocation model that puts off short-term reliance on those types of metrics almost entirely,” said Bruce G. Coldsmith, whose Mobile, Ala., firm, Coldsmith Lee & Associates, manages $93 million in assets.
Tracking economic numbers may help the firm make decisions that insulate clients from short-term market fluctuations.
“We take inflation into account when managing short-term metrics,” Mr. Coldsmith said, adding that the topic rarely comes up when talking with clients. “Our clients need to be immune from fluctuations over the short term.”
But some advisers rely on technical analysis to assist them in making decisions.
Steven D. Landis, a certified financial planner at Sojourn Financial Strategies LLC in Columbus, Ohio, uses a 200-day moving average of the Standard & Poor’s 500 stock index and doesn’t adhere to pure buy-and- hold strategies, preferring horizons of between two and nine months.
“The market will tell you at any given moment what the price of a particular security is,” Mr. Landis said of the strategy, which he has employed since 1999. Sojourn manages $15 million in assets.