Natalie Miller, Consulting Director for Russell's Advisor & Intermediary Solutions
Doug Gordon, Senior Investment Strategist
When you’re looking at a roadmap to plan your route, you first have to figure out your starting point. For any investors, moving forward requires a clear understanding of where you’re standing today.
We created the Economic Indicators Dashboard for this purpose. In 2009 many investors were traumatized. They were worried about the long-term effects of the global financial crisis on the U.S. economy, so we used key economic indicators in a dashboard configuration to give them a clearer fix on current economic data in context of “typical” historical performance. We created it in light of the economy’s fresh starting point and to help track economic progress in simple and visual terms from that point forward. We also wanted to help investors re-establish context and perspective at a time when they were at risk of losing their way.
The crisis has passed, context has changed, but our dashboard remains in use because evaluating the health of the U.S. economy continues to be important in the conversations financial advisors have with their clients. This kind of performance data can help investors and advisors sift through the media headlines to separate noise from the facts of economic health and market performance.
To better understand the practical utility of dashboards in various market and economic conditions, we spoke to Doug Gordon, Senior Investment Strategist - North America, and Natalie Miller, Consulting Director for Russell’s Advisor & Intermediary Solutions.
Q: Why did Russell create the Economic Indicators Dashboard for the U.S., and how do financial advisors use it to help their clients?
Natalie: We created the dashboard to help financial advisors have better conversations with their clients, who at the time of the global financial crisis didn’t know what to do or where to look.
We wanted to give advisors a way to have productive conversations with their clients, to lead them on a path forward, and to engage with them so they could continue to make the right portfolio decisions. The dashboard wasn’t driving those decisions, but it was educating investors about what was going on in the current markets and the economy.
Doug: The dashboard was never intended to be a forecasting tool. Instead, it’s a great starting point to help advisors engage with their clients to say, “Where are we now, where have we been, and how does today compare to what’s happened in the past?” After that, advisors can say, “OK, starting from here, what do we anticipate?”
The dashboard provides an easy way to look at a range of key economic indicators relative to their long-term historic averages. It has been an important tool and a very good guidepost as we have navigated our way out of the global financial crisis.
Q: How can the dashboard and its select group of indicators help us honestly interpret data without skewing our view of the economy?
Doug: The dashboard and our specific selection of indicators are meant to assess how our current economic situation measures against long-term historic averages. We choose a family of indicators that when combined, will help us take a fair look at the overall health of the economy. This gives us a first-level view of how we’re doing, which was extremely helpful during the global financial crisis.
Also, while our dashboard reflects only U.S. economic conditions, we can see the alignment between the health of the U.S. economy and other global economies if we compare our metrics to comparable indicators from other regions. On a global scale, this may help us spot new concerns or potential opportunities.
Natalie: It’s a way for our advisors to talk with clients about the state of the market and the economy, and to establish a level of confidence that the advisors are doing their best to help those investors navigate through whatever is going on. So the dashboard can build confidence, educate investors, and help them make sense of what’s happening.
Q: Why was the Economic Indicators Dashboard needed?
Doug: At inception, it was a tool to help encourage level-headed assessment of the state of the economy. It also provided an early measure of the effectiveness of fiscal policy decisions that were being made to calm the crisis. Now, having moved from crisis to recovery, we can use the dashboard to see how far or how fast we are moving on the path of economic recovery. Above all, a total assessment of the indicators can create a more nuanced view of the economy and help people retain perspective while resisting their own natural biases to flee from threats or flock toward rewards.
Q: You periodically change the dashboard and its indicators. Why?
Natalie: Indicators are most valuable when they fairly and accurately reflect what is most important at the time. Similarly, some weather indicators are more telling during a storm versus a fair weather pattern. For example, when the dashboard was launched, it contained a metric measuring the perceived credit risk in the economy, the TED spread. As the economic situation progressed from dire to uncertain, the TED spread narrowed to well within its historic range, and was not as relevant. Nearly a year after launch, we removed the TED spread and added a measure for inflation (core AIS price index) and interest rate expectations (the spread between three-month Treasury yields and 10-year Treasury yields). As the economic context changes, we periodically evaluate the indicators to see if we can capture a more relevant set of metrics overall.
Just recently, we updated some of the metrics to be more reflective of the progress that the economy has made, and more in line with the metrics advisors and investors were hearing and reading about in the media and the marketplace. We retired the “Residential mortgage delinquencies” and “Corporate debt” indicators, adding the S&P/Case Shiller Home Price Index and the 10-Year U.S. Treasury Yield, indicators that we believe are more relevant in today’s economic climate. At the same time we changed the basis for three of the indicators to sources that are more commonly reported on, and understood by investors: U.S. unemployment rates, University of Michigan’s Consumer Sentiment Index and U.S. CPI Urban Consumers Index.
Doug: Different indicators have different degrees of volatility during different periods. As you get to a point where you need a more nuanced perspective, you may need different tools. That’s what Federal Reserve Chair Janet Yellen has done with respect to the way that she is addressing the second mandate for the Federal Open Market Committee (FOMC) which is full employment in addition to managing inflation and providing price stability.¹ That is why she is using a dashboard of information to assess the state of the labor market rather than the guidepost used during the heart of the global financial crisis, the singular unemployment rate. At Russell, the dashboard has evolved over time, to allow us to always try to align the best tool with the current macroeconomic environment.
Q: How do institutions, advisors and investors tend to use or misuse economic indicators and how does the dashboard address that?
Doug: All of these indicators are valuable, but looking at any single indicator always offers a narrow view. Over time, the range of indicators in the dashboard will provide a more comprehensive and nuanced measure of the economy.
By marrying all of these pieces of data together, the sum becomes greater than its parts. Abuse of indicators or dashboard tools can occur if the parts are considered individually without an understanding of the aggregate picture.
Another good example of effective dashboard management is Fed Chair Yellen’s use of the U-6† unemployment rate in addition to overall unemployment data. This nuanced look at jobs allows the Fed to gain a deeper understanding of the current labor market conditions given the duration of the great recession and drawn out recovery.
Natalie: One of the beautiful things about the Economic Indicators Dashboard is its simplicity. When we use it in client conversations or presentation materials, we wrap it with context, either context around other indicators or context around why we believe that it still makes sense to be in a globally diversified, multi-asset portfolio, and how that all feeds into the advice that advisors are going to give their clients. It allows advisors to focus their conversations with their clients on a handful of metrics, rather than the barrage of data they may be inundated with via the media, and provide context around the current state of the economy.
In short, the feedback we get from advisors tells us that the dashboard has continued to be a valuable investor coaching tool amid a wide variety of economic conditions. Sometimes the tools that you devise during a crisis become a mainstay in your work even after conditions return to a more normal state.
† U-6 Unemployment includes discouraged, marginally attached and involuntary part-time workers.
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