Market Update 14th October 2024

Economists on trial

Warren Buffett once semi-joked that any company that has an economist has one employee too many.

It’s easy to see why. History is littered with examples of them getting things wrong. Most recently, they failed to understand the Federal Reserve’s thinking and encouraged everyone to pencil in rate cuts that proved to be far too premature. This was in part a result of their failure to comprehend what was going on in the US economy.

However, the angry mob out to get the economists (which would be a terrific name for an early 1980s punk band) should remember there are serious mitigating circumstances. Maybe this makes me among the apologists for the economists (which is not quite so fitting as a band name).

The data economists work with is not only extraordinarily broad, it is often out of date, sometimes estimated, and frequently open to revision. The data is usually contradictory too. Oh, and let’s not forget the impact of external variables like weather, the success of national football teams, and all sorts of other surprises that have potential to stuff up otherwise solid calculations.

Another issue is that even if their projections are accurate, there’s no guarantee the data will follow through neatly to a logical outcome. This is because it depends on what the market thinks is important at the time.

Take the last couple of years as an example. The market sometimes saw good jobs data as depressing because of its relevance to the Federal Reserve’s decision-making. Prevailing thought was that more robust economic indicators would increase the likelihood of rates staying higher for longer.

So to recap, for an economist to have added value they would have needed to have accurately projected the job numbers themselves, then how that would be interpreted by the Federal Reserve, and in turn how that would be presented by the Fed, and finally how that itself would be interpreted by the market.

Realistically, we do need some macro guidance – and it’s not the economists’ fault this is so difficult to get right. Perhaps it’s our fault for paying so much attention to them.

Anyway, for what it’s worth there is a strong consensus for the Fed to make two more 25bps cuts this year, which is what their own ‘dot plot’ implies too. The market getting what it has been craving is no bad thing, but if we want to look much beyond that, we should apply a healthy dose of caution.

If we accept that we can’t predict too far out on the macro side of things, the sensible course of action is to focus on investments that can deliver through a cycle. This is a cornerstone of our direct equity selection process.

A business that delivers an essential or value-add product or service is not only more likely to prove more stable through a downturn, it is also more likely to generate higher margins. We think higher-quality companies with a resilient topline, combined with a high and durable margin are better options for a long term holding period that will inevitably include some negative surprises on the wider macro.

We remain fairly optimistic about conditions now. But as we head into a busy period that includes a torrent of third quarter corporate results, the UK budget, the US election and the release of various other datapoints, we are particularly happy that our bias towards high quality businesses is the right option for clients.

George Salmon – Senior Research Analyst

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