Economics Indicators

Four Key Indicators of the Markets

Lots of economic surveys and economic indicators are examined and described in the business news every week. Generally, the amount of data is so large and differs so slightly, that it is very easy to underestimate the value of this data in the context of market. On the other hand, any experienced investor must constantly monitor all changes in the economy. That is why it is vital to take economic indicators into account. Here you will find the description of the most important economic indicators, which play a certain part in economy and the market. Knowing this information will allow you to predict and react to development of the market in future

First Economic Indicator – Employment

Employment is probably the most important economic indicator, because it points to healthy or unhealthy economy. The U.S. Bureau of Labor and Statistics releases its monthly unemployment report and nonfarm payroll on the first Friday of each month. Basing on these reports, you can find out the amount of gained or lost jobs in the United States and the current unemployment rate. These reports contain valuable information for market participants, who await them impatiently. As a rule, release of unemployment report and nonfarm payroll causes considerable one-day movements in stock and bond markets. Moreover, these reports influences other important economic indicators, for example, consumer sentiment and consumer confidence.

The overall prosperity of the economy largely depends on the state of the labor market, because about 70 percent of economic activity of the United States fall to the consumers. As you can see, if something happens with labor market, it will immediately influence the economy. For instance, corporate profits become lower when the labor market is weak. Logical conclusion is that if a man doesn’t have a job, he has no possibility to buy homes or other things that lay in the basis of corporate profits.

Second Economic Indicator – Inflation

The Federal Reserve should positively influence the economy and provide price stability and economic growth. In order to measure price stability special rate of change in inflation is used, and inflation reports are released every month. These reports help market participants to be in touch with the monetary policy of the Federal Reserve and allow them to determine the future course this policy.

The Consumer Price Index (CPI) is the most prominent economic indicator of inflation among many other indicators. The “job” of CPI is to take measurements of consumer prices changes and form a theoretical conclusion, which includes information about to what extent life is becoming more expensive for the average consumer. The Producer Price Index (PPI) is another widely known indicator, which takes measurements of the rate of change in inflation for producer goods. The more these prices are, the higher a probability of price increases in the consumer sphere is. As a rule, only CPI and PPI indicators are analyzed by economists without taking into account energy and food; volatility of these spheres is widely known.

There are several key commodities, which are constantly monitored by market participants, too. For example, it is oil. Oil is a very important resource for economy of many countries, so it is worth paying some attention to its price. If the price of oil becomes higher, offsetting effects may arise. On the other hand, the higher the price of oil becomes, the higher prices of other products may arise, too. All is due to the fact that oil is a component of many materials. Moreover, the price of oil influences the cost of transportation of other products for sale.

Corporate valuation can be easily done with the help of inflation, as the rate of inflation is the discount rate to perform discounted cash flow analysis factors. The higher inflation is, the higher discount rate is and the lower project value is. But then deflation comes into action; it is a very dangerous process, because low profit forces companies to perform lay-offs or other cutbacks because of not having a possibility to maintain their full workforce.

Third Economic Indicator – Consumer Activity

The level of stock prices and profit of corporations depend directly on consumer activity changes. You can receive very valuable information about economy only by analyzing data about where and what people buy. Consumer activity can be measured by means of several methods.

As a rule, consumer confidence is measured by market participants. It is one of the most popular techniques. Again, consumer confidence can be measured by means of several methods, all of which are intended to determine attitude of consumers towards their economic prospect in the nearest future. Everything is simple in theory: the more confidence people have, the more money they are ready to spend and vice versa. There is another tendency in the forward looking market: by analyzing stock prices, you can draw a picture of future consumer opinions, but you can do in today. Retail sales are among other measurement methods of consumer activity. Retail sales allow you to review shopping patterns of the past, while consumer confidence is forward looking.

Another important economic indicator is the housing market. In spite of being highly localized and difficult to measure on a national basis, housing data still can be processed by several indicators. In order to get information about housing market activity level, market participants monitor different monthly releases, including building permits, housing starts and new home sales. Price changes are also under vigilant surveillance of market participants, who use different indicators in order to keep their fingers on the pulse of the economy, including the S&P/Case-Shiller Home Price Index. This indicator is meant to monitoring of home price changes in twenty major cities of the USA. Market participants use many different housing reports in order to find out if people are going to make large purchases or not.

Fourth Economic Indicator – Investor Activity

Market participants measure not only economic indicators, but also investor activity, too. It helps them to get more information about the state the market. People believe that the best time to invest is to wait until everyone is bullish. In reality, it is not true, and, despite popular belief, it is better to make investments when the majority of investors are bearish. In case the bullish tendency prevails among everyone else, no one will buy anything and, therefore, prices won’t become higher (of course, it depends on your investment strategy). It means that it is very important to take investor sentiment into account. There are a lot of indicators available for this purpose. Several indicators are created by big investment or research companies, which perform polls among their from time to time in order to draw market consensus

Another important direction of activity measurement is overseas investors. They have become very important for the financial markets of America and attracted attention to their activities. The purchase of U.S. Treasuries by foreign central banks is included in one of the most actual reports out there. The following tendency arises: central banks buy more Treasuries, interest rates become lower and stock prices become higher. The reverse tendency is also possible: central banks buy less Treasuries, interest rates become higher and stock prices become lower.

The number of new highs/lows and advance/decline ratios are among other vital market indicators. Basing on these indicators, market participants can draw conclusions about health of the overall stock market and market advance/decline “quality”.

Conclusion

The information about different indicators, which influence markets, is not enough for winning the battle. The second and the most important part is interpretation of the data of indicators and decision about their possible market impact. The trend in the indicator and the market’s expectation for that indicator are other two important factors, which should be taken into account along with the absolute level of an indicator. All these factors altogether can give you idea about reaction of the market to a given economic or market report, so you should learn to monitor financial markets carefully and interpret these reports correctly. You should work hard and be persistent, and only then you will be able to react to economic and market data with due determination.

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