Analysis Paralysis: How Too Much Data Creates Inertia

I came home last March to find my daughter, Natalie, watching basketball playing on a TV and 2 laptops with a sheaf of brackets in her lap. Of course, it was the opening round of the NCAA basketball tournament.

She has been a sports fan her whole life. I still cherish the memories of her as a 3-year-old, decked out in her Ravens gear as she sat in my lap to watch an entire football game.

As a student of sports, she has devoured reams of statistics. She’s also learned that sometimes you just have to act. In 2012, the Ravens offense was sputtering. An unhappy 8-year-old Natalie called for the firing of Ravens Offensive Coordinator, Cam Cameron. The coach, John Harbaugh, agreed and the Ravens went on to win the Super Bowl.

In most fields of endeavor, you will never have perfect information. In business school, we were taught that if you got to 75% to 80% of accuracy you should act. Business case after business case showed actual instances where incomplete data prevented successful launches.

Recently, many media outlets have been producing a number of articles indicating a pending recession. The recent press pile-on is due, in part, as a result of the recent yield curve inversion created when the 2 Year Treasury inverted. It is still a slight inversion and may adjust quickly.

I’ve written previously of the yield curve inversion as a recessionary indicator, see: https://www.fiduciamwealth.com/news/2019/06/battling-seesawing-rates-and-volatility/

The 3 Month to 10 Year Treasury Yield inversion continues and is about to hit 4 weeks. This bears continued watching, as several months of inversion is troubling.

This gives the public the impression that there are clear signs out there. I wish it were true. Unfortunately, it is not that obvious.

For example, many believe that the definition of a recession is two consecutive quarters of negative Gross Domestic Product. In fact, a recession is actually defined by the National Bureau of Economic Research (NBER) as “a period of falling economic activity spread across the economy, lasting more than a few months.”

How is economic activity measured? NBER uses 6 categories: Real Gross Domestic Product (both quarterly actuals and monthly estimates, that’s 2), Income, Employment, Manufacturing, and Retail Sales. NBER looks at the data available on a monthly basis to assess recessionary indicators prior to the GDP quarterly actual availability.

I have tried to keep this simple, but as you can imagine the economists involved with NBER are looking at hundreds if not thousands of metrics constantly. Buried within the measurements above are sub-categories such as new housing starts, auto sales, and initial jobless claims.

Consumer confidence is another factor. Subjective measurements may have even more importance. The perception of a downturn can in fact precipitate one. The trade war with China is troubling, as well as the Hong Kong demonstrations, but there may yet be another unforeseen geo-political issue to contend with.

For some folks this can be overwhelming. The old saw, analysis paralysis comes into play. Too much data can cause lack of decision making or inertia. I prefer the saying, time in the market is more important that market timing. I’ll be writing more about this next time.

Where does this leave investors? At the same place, it always should: IT ALL STARTS WITH A PLAN.

• Do you have a financial plan?
• Does your plan lay out your goals?
• What is your risk appetite?
• What is your time horizon?

Answering the questions above, will get you the framework of a plan. More in depth discover is necessary, but this should get you started.

If you would like to discuss portfolio strategy or financial planning, please contact me. Feel free to share with others and make suggestions for future articles: peter.oneill@fiduciamwealth.com