So Much Noise; which government economic reports Can I Ignore?

If you watch the financial news, you might feel overwhelmed by all of the statistics that now dominate these broadcasts. While reports on inflation, employment, housing, and geopolitical developments can move markets over the short-term, constantly monitoring them can be time-consuming and stressful, especially for retirees and near-retirees.

If you’re just an ordinary investor, however, there’s good news. In terms of your long-term planning, most of these monthly updates are simply noise.

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Why economic headlines can be misleading

Seniors have enough to worry about without focusing on short-term economic headlines. Whether it’s making sure all the bills are paid on a fixed income or planning out adventures you’ve waited your entire life to enjoy, being dragged down by economic data is usually not a good use of your time. Even if investing is your hobby or main source of interest in retirement, digesting economic reports as they come out can actually cause more harm than good.

While this data can provide useful information about economic trends, markets often react emotionally. Sometimes, stocks will even rise when “bad” economic news is released, or sell off when economic news appears strong. If you try to adapt your portfolio to every single report as it’s released, you’ll almost certainly end up underperforming your investment benchmarks.

For retirees, stability and discipline generally matter more than reacting to each headline. With that in mind, here are some of the most frequently discussed economic reports that seniors typically do not need to track closely:

Consumer Price Index (CPI)

The Consumer Price Index, or CPI, is the most commonly discussed measure of inflation. It’s an especially important indicator for seniors in particular, because rising prices can reduce purchasing power over time.

For this reason, some retirees are overly concerned with every CPI report as it’s released. But the important thing to remember is that inflation trends unfold gradually over time. Long-term portfolio decisions already should account for inflation risk through a combination of stock exposure and inflation-protected securities.

As a result, daily or monthly fluctuations should not usually trigger immediate investment changes.

Producer Price Index (PPI)

The Producer Price Index, or PPI, isn’t as widely quoted among seniors as the CPI. However, it provides important insights into inflationary trends by measuring prices at the wholesale level. As with the CPI, however, monthly fluctuations in PPI are not something that should drive retirees to change their portfolios. Rather, increases in the PPI, which will eventually trickle down to consumer prices, should already be planned for in a well-built investment portfolio.

For retirees, stability and discipline generally matter more than reacting to each headline.

Jobs report (nonfarm payrolls)

Another economic report that often moves markets is the jobs report, technically known as the nonfarm payrolls number. As a retiree, however, the current status of employment in America is less important, as many seniors are out of the job market. Certainly, this data can affect the overall economy, which ultimately could in turn impact your pocketbook. But the direct effect is minimal. The nonfarm payrolls number is also one of the economic statistics that often gets revised, so it’s wise not to put too much emphasis on any one report.

Housing starts and building permits

In terms of the overall economy, reports on housing starts and building permits can be very important. However, this type of data is often extremely cyclical and tends to be revised in following months, just like nonfarm payrolls.

Housing data can signal economic strength or weakness, but these indicators are cyclical and also frequently revised, like many other reports. Long-term retirement portfolios, however, are designed to withstand economic cycles, which are a natural part of the business cycle. If you change your investments based on housing starts, you’re going to end up flip-flopping nearly every month, with disastrous long-term results.

Retail sales

Retail sales are yet another important economic indicator that seniors don’t need to track. Not only is consumer behavior very seasonal, other temporary factors, such as weather and promotional periods, can greatly affect how consumers spend. If there is a long-term downtrend in consumer spending, it could tip the economy into a recession, and that may prompt a portfolio review. But short-term retail sales trends are just noise, especially for retirees.

Federal Reserve speculation

The Federal Reserve’s interest rate decisions can have a major impact on markets and the economy. But it’s the trend that matters, not the results of any individual meeting. For this reason, seniors are advised to avoid the hype around each and every Federal Reserve decision and instead focus on major shifts in direction or policy.

If the Fed is about to embark on a long series of rate increases, for example, that could prompt some minor portfolio shifts. But a single rise or drop of 0.25% in the fed funds rate can essentially be ignored.

What’s more important for seniors

Instead of worrying about every bit of economic data that the government releases, seniors should focus on things that they can control. Rather than react to every short-term economic news release, build a portfolio with these essential components:

Appropriate asset allocation
Low costs
Managed withdrawal rates
Adequate cash reserves
Regular portfolio reviews

Avoiding emotional reactions to market volatility is another key aspect of successful portfolio construction. If you expect at least some level of economic uncertainty, you’ll be better prepared to deal with the ups and downs of government economic reports.

Reducing financial stress

The best way to forestall financial stress is to build a well-structured portfolio. If you invest for the duration of your retirement, which can last 25 years or more, you won’t have to worry as much about cyclicality, seasonality and short-term volatility. That frees up your time to enjoy your retirement instead of worrying about every economic indicator.

Ignoring financial noise is not irresponsible. In fact, it’s quite the opposite. By recognizing which information truly matters, you can identify which data can safely remain in the background.

So Much Noise; which government economic reports Can I Ignore?