The most valuable tool in an investor’s arsenal to navigate the complicated maze that is the stock market are economic indicators. They not only help determine where the economy is going but how fast it is getting there.
With wide scope and range and consistently released data by written reports, global investors can adjust their portfolios as per the country’s economy. As an investor, you should be familiar with the most common of these indicators to make smart decisions regarding your assets.
The simplest way to explain an economic indicator is that it aids an investor to understand the economic condition and the stock market. A country’s economy is highly volatile and unpredictable. For an investor to make the best decisions regarding asset allocation and investments, the raw data from the economic indicators need to be compiled cohesively. This is done through surveys and reports published by both government and non-profit organizations.
The value of this data isn’t limited to individual investors but also policymakers such as those at the Federal Reserve to determine the progress of the economy and the trajectory it takes.
There are multiple economic indicators; however, the ones you need to monitor before making a decision vary based on individual investor needs. For instance, a stock trader reliant on business cycles would prefer a jack-of-all-trades approach and keep an eye on all indicators. On the contrary, a retired couple living on pensions and treasury bonds would only need to rely on a couple of specific indicators.
One way to remain updated is through monthly research newsletters like Power Gauge Reports for info on the best stocks to invest in with easy-to-interpret data. Marc Chaikin’s number one stock suggestion for the month is provided in the Power Gauge Report, which is based on his Power Gauge stock-rating system. You must check it out because indicators are only helpful only if you know which stocks are ideal to invest in.
The macroeconomics forecast contains important information in addition to the specific indicators. They are all available to the public and on websites like Yahoo! Finance, Associated Press, Reuters, and Marketwatch, highlighting key pieces. These data have been compiled after analyzing seasonality figures, yearly results, and analyst expectations. Investors can benefit by discussing them in future meetings and through newsletters.
The market value of all goods and services produced within a given period and adjusted for price changes in the real GDP. Technically a high GDP doesn’t positively signify an economy’s growth if the price of goods and services is also high. Thus, you would subtract the inflation rate from the GDP for the actual growth percentage. This also makes it the most-watched economic indicator by financial markets.
Obviously, when the real GDP shows a percentage growth, it indicates that businesses are selling a higher value of goods and services, thus making more money. Additionally, the projected growth rate also determines the sovereign debt of the country.
However, the real GDP is not solely responsible for the market response. The quarterly real GDP compared to prior quarters and economists’ expected GDP versus the actual real GDP as well as any revisions to the short term or long term forecasts of real GDP all influence the market response.
The monthly measure of the prices of a basket of specific goods and services including food, transportation, clothing, medical care, and more by households is the Consumer Price Index (CPI). It aids an economist to gauge inflation.
By periodically using prices from a sample of representative items, a statistical estimate is derived which makes the index. Another indicator closely observed by financial markets, a high CPI can lead to higher interest rates and reduced lending. And vice versa.
Meanwhile, the Producer Price Index (PPI) is from the perspective of the seller. It looks at the monthly sale price received by domestic producers of goods and services. As it is the first inflation measure available in the month, markets sometimes opt for this index to predict inflation before changes in the CPI.
Moreover, it tracks price changes in the output of nearly all production industries. The CPI, on the contrary, measures inflation through price changes of only a sample of items for the urban population. This makes PPI the better indicator of the two for economic growth.
As its name suggests, the retail sales report is a measure of all the monthly sales by retail stores. Similar to indicators discussed before, its trajectory can have a direct effect on the stock market. Higher sales mean more spending consumers, which in turn means profit for companies. The opposite is true for when sales dip.
On the manufacturer’s end of the spectrum, durable goods orders measure new orders for durable goods, which indicates manufacturing activity. Goods such as large appliances and cars that are kept for at least three years are durable goods.
Each month, the Department of Commerce’s Census Bureau publishes its report on durable goods. As expected, good economic health is established by a rise in durable goods orders as well as an increase in stock indices. On the other hand, the reverse is true for declining orders.
Federal Reserve Interest Rate Announcements and Meeting Minutes
Surprisingly, the most closely-watched calendar item on Wall Street is the regularly-scheduled announcement of changes (or lack thereof) to the target range for the federal funds rate, that is the rate banks charge each other to borrow money maintained by the Federal Reserve. The Federal Reserve issues the Beige Book, containing anecdotal information about current economic conditions from each Federal Reserve Bank. Other central banks, including the European Central Bank (ECB), Bank of Japan, and others also release similar notes on a regular or semi-regular schedule.
The monetary policymaking body of the US central bank, aka the Federal Open Market Committee (FOMC), holds regularly-scheduled meetings eight times a year. Low rates caused by banks passing on their borrowing costs to their customers help revive the economy, especially during tough times such as the 2008 financial crisis.
Even though this strategy is associated with bolstering stocks, this is not feasible in the long term. A prolonged period of low interest rates may also risk high inflation, which is why rates can’t remain low indefinitely.
Furthermore, hints in FOMC’s meeting minutes give hints about future outcomes. Stocks climbed in November after the minutes from the FOMC’s October 2015 meeting were released. As a result, most FOMC participants expected conditions to merit an increase in the fed funds target range that could be achieved by the December FOMC meeting.
First developed by Markit Group and the Institute for Supply Management, the Purchasing Managers’ Index (PMI) is a key economic indicator that warns companies to stop raw material import during low demands. It does so by measuring the acquisition of goods and services by purchasing managers every month. The PMI Manufacturing and PMI Services indicators are the two most important surveys.
The upside to this indicator is that it identifies problems in an economy long before other reports like retail sales or consumer spending.
Benchmark pieces of economic indicator data mean nothing much on their own if one doesn’t know how to interpret them.
To understand the stock market and the economy, investors need updates on the major economic indicators. This also aids them to find the right time to revisit an investment thesis. Whether you are an investor or a professional asset manager, using economic indicator data from power gauge reports to buy or sell in conjunction with standard asset and securities analysis can lead to smarter portfolio management. A smart investor knows when to bet their money on the best horse with the correct hints from the indicators.