The expectations game

It is widely understood that the expectations game looms large on Wall Street. Miss your earnings target by even a small amount, and it doesn’t matter how well you really did – your stock price gets hammered. Case in point is this morning stock market lead in the online Wall Street Journal – Dell Results Depress Stocks: “Stocks opened weaker Friday, hurt by Dell’s worse-than-forecast drop in net profit.”

The same game gets played in Washington on the economy. Case in point is the most recent leading indicators. According to the Conference Board, the Index of Leading Indicators rose 0.3% in October, after a 1.0% rise in September and a 0.4% rise in August. Here is the analysis of the data in the press release:

Says Ataman Ozyildirim, Economist at The Conference Board: “After half a year of consecutive increases, the month-to-month growth of the LEI is stabilizing and the gains continue to be broad-based. Meanwhile, the coincident economic index has been essentially flat since June, after declining since November 2007. The composite indexes suggest the recovery is unfolding and economic activity should continue improving in the near term.”
Says Ken Goldstein, Economist at The Conference Board: “The data indicates that economic recovery is finally setting in. We can expect slow growth through the first half of 2010. The pace of growth, however, will depend critically on how much demand picks up, and how soon.”

In other words, the economic is recovering, slowly. What is the standard press response? The headline of the AP story in the New York Times: U.S. Economic Indicators Weaker Than Expected. Why? Because a poll of economist expected a rise of 0.5%!

So, what is the real story here? Is it “Economy Bad”? Or is it “Economists Guess Wrong”? I would argue for the latter. Unfortunately, the expectations game has taken root — so the story that is running in the media is the former.

I have to say, I am guilty as well. In my monthly trade and employment postings, I including the economist estimates. I do so because it gives some indication of how the numbers will be perceived. I will have to rethink that.

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