Wednesday, July 29, 2009

Predicting the future of economy



The stock market is hard to predict, however there are some leading indicators which can try to unveil what is going to happen to the economy overall. I read up for 'leading indicators' in Wikipedia mentioning an index predicting the 8 recessions over the past 50 years. However, it also had predicted many false recessions too. It is worth reading the research paper, containing the consideration and problems.



However, that was for the US stock market only therefore I search in Singapore then. Not surprisingly, Singapore Statistics have a index with leading indicators too. There is also a paper how Singapore Statistics come up with the index and the issues. The indicators try to predict GDP in around 3 to 6 months ahead. The paper also show the evaluation of the index. It is constantly updated and showing how some indicators are used only quarterly, some are used monthly. It also talks about the cyclical nature of indicators.

Comparing their methodological and results with technical analysis by many investors, I can see the similarities why I don't like technical analysis. They will change factors to tweak their results. This can lead to over-fitting and also past performance is never a indicator of the future. However, they at least attempt to use logical indicators and reasonings to explain/lie why they they can predict the future.

Nevertheless, the current CLI(Composite Leading Index - the leading indicators), till Quarter 1, 2009, predicts that GDP is decreasing much more slowly around -1.7% compared to -6.4% the previous quarter.

Investment tips:
Anyone who claim they can predict the future is probably lying unless they manipulate the market. But, it is still worth reading what are the indicators and their cyclical nature. However, the indicators serve as a guideline to GDP and not individual stocks. At least the indicators used are more 'logical' than just stock prices and volume used by technical analysis.

Investment is about finding the inefficient of the market, so it is about taking opportunities of the mistake with these indicators or predictors. Therefore, the more efficient the indicators are the harder it is for investors to make money. An example is the bonds, treasury bills. The indicators are quite accurate and variations from results are low, therefore there isn't a value to analysis them.

References:
  1. Index of Leading Indicators - Wikipedia, the free encyclopedia
  2. Research paper
  3. Statistics Singapore - Theme on Leading Indicators
  4. Statistics Singapore - Papers & Analyses (Economy)

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