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Why We Shouldn’t Invest By Looking In The Rear View Mirror

Some investors look at the latest economic data for an indication of where the economy is heading. From that data, they might use it to predict what the stock market would do going forward.

But does looking at past data really tell us where we are going?

The problem here is that economic data is always backward looking – it tells us what has happened in the past. Meanwhile, the stock market is always forward looking, with all its participants (me and you included) all making bets on what we think will happen in the future. So investing by focusing on backwards-looking market data is very much similar to driving by looking only into the rear view mirror.

In 2009, the United Kingdom and the United States experienced aa 4.8% and 2.4% decline, respectively, in their Gross Domestic Product. In that same year, both the UK and U.S. stock markets (represented by the FSTE 100 and the S&P500 respectively) experienced more than 20% in gains. Both market indexes had in fact, experienced one of their best annual performances for a decade.

Although the backward-looking GDP data had showed the terrible effects of the global financial crisis, the stock  markets were already predicting a recovery from the crisis.

A local context

Similarly, recent economic data in Singapore is suggesting that the private property market here has been slowing down With prices and transaction volume both falling.

Share prices of property developers such as City Developments Limited (SGX: C09) and CapitaLand Limited (SGX: C31) have also fallen a fair bit from their peaks in April this year (it’s a 13% fall for the former and a 7% slide for the latter) in response to that. We might not know if the share prices of these companies are still searching for a bottom or set for a huge rebound soon. But one thing we know for sure is that the current data regarding the property market will not tell us anything about its future.

Foolish Summary

All told, although economic data is often used to predict the movement of the stock market, the actual application of doing so is not that practical. As investors, we should focus on the opportunities a company has and its ability to capture that opportunity, instead of using a rear view mirror to predict where the market might be going next.

 

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.