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Take This Month’s Economic Data With a Grain of Salt

U.S. government shutdown will skew some economic data points


The government is open again and economic data is beginning to flow. That said, the shutdown delayed some numbers, delayed capturing some other numbers, and generally will continue to have an impact on all the numbers we see over the next few weeks from what I’ve been told.

In particular, inflation data, because of the way it is collected and processed, could give a wrong impression about the state of inflation in the economy for the next six months. Why? Because some of the data for the inflation numbers, in particular rent numbers, are only collected every six months. And other economic data will be affected, for a while at least, due to sampling error in the October data due to the shutdown. It’s a mess, particularly given the fact that inflation is one of the two benchmarks the Fed says it is using to determine when to begin tapering of its $85 billion per month bond purchases. From the analysis I’ve seen, it’s important to keep an eye on 12-month numbers and not get carried away with monthly numbers which could be all over the map.

The other number the Fed is concerned about is unemployment and this past Tuesday we finally got the Sept. report showing a small drop in the unemployment rate, to 7.2%, but a slowdown in new jobs. August’s numbers were raised a bit but the economy, for the millions of jobs created since it bottomed, isn’t firing on enough cylinders to really goose job creation. Again, this should put any Fed action on hold until well into Janet Yellen’s term as Federal Reserve Chair.

Speaking of economic data, China said GDP spurted ahead in Q3, but I always take numbers from a government-run economy with a large grain of salt. I don’t think we can ever really know how well the country is doing without looking much deeper into our own exports into that country, and those of other countries as well because numbers from the inside looking out are always suspect.

The stock market has been hitting records lately with the S&P 500 index hitting a high on Tuesday. Vanguard is keeping a watch on the S&P because today, Vanguard’s S&P 500 ETF (VOO) did a reverse split. It has been trading around the $80 level recently. But after the reverse split the price has doubled to about $160. As I explained in the October issue of the Independent Adviser for Vanguard Investors, the move is a competitive one aimed at gaining traction among large traders who prefer the SPDR S&P 500 ETF (SPY) which currently sells around $175 per share and swamps the Vanguard ETF in terms of trading volume.

The bond market has rebounded pretty mightily if you consider that just a month ago the 10-year Treasury, in anticipation of tapering, traded up to a 3.00% yield and is now trading 50 basis points lower at around 2.50%. The bond market’s been strong this month with Vanguard Total Bond Market Fund (VBMFX) up 0.7% through Thursday night. The fund is now down just 1.3% for the year. Still, most bond funds remain in negative or slightly positive territory for the year. The best, Vanguard High-Yield Corporate Fund (VWHEX), is up 3.6% for 2013.

As my research director Jeff DeMaso mentioned last week, you should expect to see some wickedly high five-year numbers for many of the funds you own when October comes to a close. Currently, most Vanguard funds are showing five-year returns in the high-teens, with Vanguard Capital Value Fund (VCVLX) showing a five-year return of more than 24%. Please keep your expectations in check when you see these incredible numbers. They are not to be taken as gospel, or as something easily repeated over the next five years, for sure.

Senior Editor Dan Wiener and Editor/Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.

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