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How Economic Indicators Impact the Value of your Stocks
Using indicators to make stock market predictions
Welcome to The Profit Zone, where 12,000+ millionaires, CEO’s and high-performing entrepreneurs read the #1 financial newsletter on Substack, providing you with weekly insights on the stock market and tips you can’t find anywhere else.
Happy Tuesday!
Hope you’re having a great holiday season with your family.
The agenda for today:
👉 Tough week for index funds
👉 Jobs report continues to outperform expectations
👉 7 stocks that hit 52-week highs
👉 How market indicators can help you make better investment decisions
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Weekly Market Update 🗒️💡
Indexes
The three major indexes saw losses this past week for the time in the last 10.
The Nasdaq saw the biggest drop at 3.25%, its worst week since September.
The S&P 500 fell 1.52% and the Dow dropped 0.59%.
Buying opportunity.
Jobs
The U.S. added more jobs than anticipated in December which may have an impact on when the Fed will decide to start cutting rates.
Jobs added totaled 216,000, while economists predicted a gain of only 170,000.
Unemployment remained at 3.7% showing increased signs of labor strength.
The consensus was that the Fed would start cutting rates as early as March, with as many as six more times throughout 2024.
That expectation may have to be delayed while the labor market continues to roar.
Futures
Dow futures were down 0.16% this past week, while S&P futures fell 0.16% and the Nasdaq fell 0.22%
52-week Highs
7 companies that reached this milestone:
Hartford Financial
Loews
Bank of NY Mellon
Synchrony Financial
American Express
JPMorgan
Capital One
How Economic Indicators Can Affect Your Investments
Economic indicators are stats about the economy that can give you a better insight into your own portfolio.
Ultimately, they can help the average investor understand when is a good time to buy or sell investments.
I’ve always preached understanding just base-level economics can help make you a lot of money.
You don’t even have to go into detail, but knowing how market indicators affect the ebb and flow of the market can ensure you’re making the right financial decisions when opportunities present themselves.
If you want to learn more about economics from one of the best teachers on the internet, click here.
Types of Economic Indicators
There are plenty of economic indicators you can evaluate to gain a better understanding of the stock market.
Here are the 3 groups:
Leading Indicators: help project future changes in the economy. Useful for short-term projections because they typically change before the economy does.
Lagging Indicators: indicators that come after the economy changes. Useful for confirming patterns in the market. These types of indicators won’t help you predict what will occur in the market but will help you confirm your theory.
Coincident Indicators: help provide valuable information about the current state of the economy. These indicators occur at the same time as the changes they signal.
10 Specific Indicators To Keep an Eye On
Gross Domestic Product (GDP)GDP is a lagging indicator, however it should not be overlooked.
It’s one of the first indicators used to judge the health of an economy.
Essentially, this indicator will give you a better idea of the economic production and growth of the economy.
GDP is usually expressed in comparison to a previous quarter or year and is measured as Real GDP (adjusted for inflation) and Nominal GDP (not adjusted for inflation).
An increase in GDP tells us that businesses are making more money and the standard of living is rising for people in that specific country.
The Stock MarketThe stock market is a leading indicator because stock prices are mostly based on what companies are expected to earn in the future.
If you’ve ever heard someone say “The interest rate hikes are already built into market prices” it’s because prices are forward-looking, as is investing.
It’s important to note that this indicator is not always accurate, as earning estimates could be wrong and the stock market is always pricing in market news that may not have as much of an impact as one would think.
UnemploymentUnemployment is a lagging indicator.
The unemployment report is released every month and captures the cumulative number of jobs lost or created in the previous month.
It also tells us a percentage figure of how many citizens of that country are unemployed and actively looking for work.
You can use this figure to determine the health of an economy. When businesses are hiring, it suggests that businesses are performing well and are looking to grow.
More hires can also lead to the prediction that more people will have money to spend on consumer goods because more people are employed.
When more people have money, that money flows back into the economy and the cycle continues.
Consumer Price Index (CPI)CPI is a lagging indicator and the US relies on it as a good gauge for inflation.
The CPI measures the change in prices paid for goods and services by consumers over the course of the month.
In other words, it captures the cost of living and how much a consumer will spend on basic living needs.
The CPI takes into account hundreds of goods and services across a wide range of 200 categories.
If the CPI is rising, it means the cost of living is rising too.
This could be a bad sign for the stock market as consumers will have less disposable income to flow into the equities and bond markets.
Balance of TradeBalance of trade is a lagging indicator and captures the net difference between a country’s value of imports and exports.
It will tell you whether a country has a trade surplus or deficit.
A surplus is a good thing and indicates that more money is coming into a country than leaving. A deficit tells us the opposite.
Trade deficits can lead to large amounts of domestic debt, which over time can result in the devaluation of the countries currency.
On the flip side, if a trade surplus is too high, it could mean that the country is not taking advantage of the opportunity to buy products from other countries.
Housing StartsHousing starts are a leading indicator and this data is released every month.
Housing starts are an estimate of the number of housing units that have begun construction that month.
It also includes how many homes were issued building permits and how many construction projects were started and completed.
This number is correlated to changes in interest rates, which affect mortgage rates. As we’ve seen recently with rates rising, mortgages are becoming more expensive for consumers.
Housing starts represent about 4% of a countries annual GDP however it can be a good indicator for the financial health of an economy.
Interest ratesInterest rates are lagging indicators and are based on the federal funds rate.
When the federal funds rate rises, interest rates do too.
When interest rates rise, money becomes more expensive and consumers are more reluctant to take out loans.
This can have a large impact on borrowers but can also put a constraint on business growth, as they will be less inclined to take out debt to expand.
If rates are too low, it can lead to a higher demand for money and potentially raise the probability of inflation, which can erode the domestic currency.
A double-edged sword.
Currency StrengthCurrency strength is a lagging indicator.
When a country has a strong currency, its purchasing and selling power with other countries rises.
In a nutshell, when a country has a strong currency, it can import products for cheaper and sell products for higher prices.
Income and WagesIncome and wages are lagging indicators.
In a healthy economy, earnings should keep up with the average cost of living, or the inflation rate.
However, when income falls relative to the cost of living, it can be a sign that businesses have started laying off workers, cutting wages, or reducing working hours for employees.
Incomes are always measured based on demographics such as age, gender, education, and ethnicity.
However, a problem for one group could signal a problem for the larger group.
Consumer SpendingTypically in the middle of the month, the US releases a retail sales report that captures consumer spending from the previous month.
This can be both a leading and coincident indicator because a decrease can raise the fear of a recession however numbers are based on present spending.
The rise and fall of consumer spending can have a direct impact on the stock market and, more importantly, the retail sector.
When sales are high, companies perform better. The reverse is also true.
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