what does the philly fed index mean to us? August 24, 2011

| Wednesday, August 24th, 2011 | Comments Off on what does the philly fed index mean to us? August 24, 2011

It is important to take economic reports with a grain of salt and not make investment decisions based on one number, no matter how bad or good that number may be – or how important the report is considered.  The Business Outlook Survey, more commonly known as the Philadelphia Fed Index, is a monthly survey of manufacturers in the Third Federal Reserve District.  Participants indicate the direction of change in overall business activity and in the various measures of activity at their plants. The survey has been conducted each month since May 1968 and last week it reported an August data reading of -30.7, which in perspective is the worst level since March of 2009.   On the surface it appeared to confirm the inevitability of a double-dip – but beyond the headlines there is another story.  Jason Goepfert of SentimenTrader.com has looked at every reading of the index since 1968, and subsequent stock market performance:  There have been 20 historical readings worse than -30 prior to last weeks report and 6 months later the SP500 had advanced 80% of the time, with a median return of 14.1%.  When performance is evaluated one year from the reading the market had risen 95% of the time with a median advance of 22.9%.  This is not a prediction of future returns – we have economic headwinds to overcome – but this analysis illustrates that taking economic reports at face value, and their perceived impact on the stock market, can be precarious if not hazardous.

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