British science fiction writer Arthur C. Clarke once said “any sufficiently advanced technology is indistinguishable from magic.” Today’s technology-centric culture means that we have access to information anytime, anywhere. We can check the weather, read the latest headlines, view a bank balance, make plans with friends and order lunch all in a matter of seconds. As investors, we can be informed of market moving news as it happens. This easy access to information is a mixed blessing, as it keeps us in the know but can also cause us to veer off course.
We’ve all been there: Reading positive headlines about a company and wondering if you should buy their stock; seeing interest rate predictions and wondering if your bond portfolio is ready for the inevitable increase. Here at BlackRock, our Scientific Active Equity (SAE) Team is tasked with following economic indicators like retail sales or consumer sentiment and their potential impact on companies and the market. This can be tricky, as there’s a lot of noise out there, and sometimes reports conflict.
Take, for example, consumer spending. If we look back at the dip in oil prices in the fourth quarter of last year, general sentiment among investors was that consumers would use their savings at the pump to spend more at the store. Survey-based indicators like the University of Michigan Consumer Sentiment Survey can be misleading, because people often say one thing but do another. As you can see in the chart below, this has been the case over the past six months; the Survey increased while actual sales dropped. Adding to confusion, Retail Sales come out with a several week lag while the Survey comes out earlier in the month. If the March Survey is positive, what will that mean for Retail Sales?
Sifting through the noise
So if we can’t always rely on economic indicators, what are we as investors supposed to do? Here’s the part where technology is a very good thing. Our SAE team found that most consumers do research online before making big purchases. So instead of taking them at their word via the aforementioned Survey, we instead harnessed the power of big data. Like retailers, we now track consumer activity online. For example, if we find that internet searches for big ticket items are increasing or decreasing in one country compared to how they are trending elsewhere in the world, we can draw a conclusion about whether consumers there will increase or decrease these types of purchases in the near future compared to consumers in other countries. Using these big data metrics, we were able to more accurately predict that consumption in the U.S. was not as robust in the fourth quarter of last year and so far has not picked up this year despite expectations to the contrary. There are some very recent signs that consumer activity is picking up some, but not nearly as much as expected. Here’s what that looks like:
For illustrative purposes only.
We use this information to guide our investing philosophy for a few key sectors and the stocks within them. This is just one example of how you can combine insights from data with sophisticated trading models that can act on learnings from those data to seek attractive investment outcomes. March Retail Sales are released on April 15 and will give us another indicator if we are right.
This is a guest post from Paul Ebner and The Scientific Active Equities Team at BlackRock.