All of Wall Street has been waiting for the Commerce Department to release the merchandise trade figure for November today, but it's a good bet that a year from now market-watchers will be obsessed with an entirely different statistic.
Over the last two decades, Wall Street's focus has moved from one economic barometer to another, and the trade deficit figures are simply its fixation of the moment.
If the trade figure for November shows a deficit greater than $16 billion today, Wall Street analysts are predicting that stocks will plunge; if the number is smaller than $14 billion, the good news is expected to send stock prices soaring.
Even traders and brokers who cannot explain the trade figure's significance (a growing deficit can depress the value of the dollar and lead to higher interest rates, which could dampen the economy) and who have never concerned themselves with its accuracy are convinced that it is important. After days of waiting for its release, they are poised to react; the anticipation surrounding the release of the monthly figure has grown since last October, when an unexpectedly high trade deficit number played a role in triggering the stock market collapse.
There are those who say that the buildup surrounding the release of trade deficit figures increases the likelihood that they become nonevents. "My suspicion is the markets will become impervious to any further shocks from the trade number," said Loews Corp. portfolio manager Joe Rosenberg.
Whatever the reaction today, the widespread focus on this statistic puts too much emphasis on a single monthly number, according to Boston Co. economist Allen Sinai. He said the statistical error in a given report is plus or minus $2 billion.
Nevertheless, Wall Street's obsession with a single number is entirely rational investor behavior, according to former Goldman, Sachs & Co. partner Phil Scott, who said that over the last two decades the market has focused on a series of numbers that described conditions in the areas of greatest financial instability.
Around the time of the market decline in the late 1960s, traders focused on "C&I loans," a weekly statistic released by the Federal Reserve that measures bank commercial and industrial loans to business, Scott said. The thinking in that era was that since corporations might have difficulty meeting their financial obligations, any dramatic increase in loans would put even greater stress on the financial system, he said.
In the early-to-mid 1970s, after corporations increasingly began to meet their short-term borrowing needs by selling obligations known as commercial paper, traders and investors focused on figures that measured the change in commercial paper outstanding. At the same time, traders kept an eye on bank borrowing from the Federal Reserve.
The oil crisis and sudden leap in energy prices of the early 1970s turned the attention of traders to various measures of commodity prices, Scott said. By the mid-to-late 1970s, amid fears of inflation, the Federal Reserve's money supply figures captured center stage.
"The reason the money supply figure became important to watch is because it showed the degree to which the Fed was willing to continue to finance growth in the economy," Scott said.
From 1977 through early 1985, the dollar generally performed well in foreign currency markets, Scott said. Once it began to decline, though, "you had to watch not just signs of speculation in the corporate sector and commodities and whether or not the Fed would finance it, but you had to worry about whether foreigners were going to finance it."
As financing of the federal debt increasingly relied on purchases of government bonds by foreign investors, "you had to get a global perspective," Scott said. This led to the focus on the merchandise trade deficit and on the value of the dollar.
"Now we are at a point, curiously, where the Fed is not watched very carefully," Scott said. Once the release of the weekly money supply figures was a major event on Wall Street; the release of the numbers yesterday was largely ignored in the financial markets.
Because interest rates affect stocks, traders over time have focused on the impact that various indicators have on rates. The focus today will shift to the trade deficit's impact on stocks.
"The budget and trade deficits have a big effect on the dollar," Sinai said. "The dollar is a key to inflation. That is a key to interest rates. Interest rates are a key to the stock market."