Most people want to make money in the stock and bond markets. The markets provide the preferred investment path for retirement savings, emergency funds, and home down payments. But many would-be investors stay on the sidelines. Having seen the heavy losses imposed by market corrections, they choose to keep their money in the bank.
With low-interest rates and inflation an ever-present reality, leaving money in the bank presents the highest risk of all. Inflation will always devalue cash savings, eventually leaving the saver with severely diminished spending power. Just noting the difference in the cost of housing, vehicles, and everyday items over the last few years demonstrate this truth.
The key to successful investing lies in understanding what moves the stock and bond markets. To gain from market appreciation and guard against losses, investors, both large and small, must actively manage their holdings. When indicators show the markets are primed to stay strong, investors should buy more stocks and consider growth-oriented plays. Signs of deteriorating
conditions should signal investors to sell a portion of their holdings and move the proceeds into cash equivalents. The money remaining in stocks should be kept in safer, more conservative stocks that are known to hold up during economic and market declines.
If calling the market’s direction were easy, we’d all invest like Warren Buffet. While no one can predict all of the market ups and down on a daily basis, investment pros are able to read the overall trends in the market and determine when broad increases and declines are imminent. They key is following the fundamental market indicators and knowing what they mean in terms of market direction. Here are the fundamental market indicators every financial expert should know.
Though no single indicator can determine market direction, if one could, the unemployment situation would be it. Employment underpins the American economy. Since the vast majority of Americans receive most or all of their income from employment, a strong economy and a strong stock market are dependent on a low unemployment rate.
As explained in Investopedia, corporate profits rely on strong employment. When large numbers of Americans are out of work, corporate profits decline. People simply stop making non-essential purchases. When the situation gets bad enough, people stop making essential purchases as well.
Part of predicting the direction in the economy rests on understanding the state of the job market. To aid investors, the government releases two jobs reports each month: the household survey on unemployment and the unemployment insurance claims report. The household survey captures a
broader swathe of the job market because it includes those who are ineligible for unemployment insurance; however, because the jobless claims report has a long historical record, its movements can rely on the show the overall state of the job market.
As mentioned, inflation is the enemy of any saver. The goal of any investor is to beat the rate of inflation each year. Inflation also moves the market.
The Federal Reserve’s mission is to promote economic growth while taming inflation. As economies heat up, so does inflation. The government wants growth from productivity, not price increases from inflation. Because of this, the Fed tries to keep inflation in check by altering interest rates. When the economy needs a boost, it lowers interest rates. As inflation takes hold, it ups interest rates.
What the fed does with interest rates moves the markets. Investment pros monitor inflation indicators in order to gauge what the fed will do with interest rates. The Consumer Price Index (CPI) indicates the rate of inflation for consumer goods, while the Producer Price Index (PPI) shows inflation in the cost of making goods. Both reports should be monitored. A rise in PPI usually translates into an increase in the CPI as producers pass on their rising costs to
How consumers feel about the economy indicates their spending habits in the coming months. Thus, consumer confidence is a leading market indicator. Markets stay strong when consumer confidence is high. When consumers stop spending, corporate profits fall.
To gauge consumer confidence, watch the Consumer Confidence Index (CCI). When this index falls, a weaker market often follows. Retail sales also provide insight.
The Housing Market
Housing is a giant part of the American economy. Smart investors know that the state of the housing market affects the stock and bond markets. Though housing prices and construction activity vary greatly by region, the overall housing market provides clues into the health of the American economy. By watching the reports on housing starts and building permits each month, investors determine the strength or weakness of the housing market.
Investing is a tricky endeavor. No person can call the direction of the market correctly all the time on a short-term basis; however, knowledgeable investors are able to predict broad, long-term trends. The key is monitoring these key economic indicators.