How to determine the state of the economy and not to lose profit
At the stock exchanges there is a certain set of indicators characterizing the current state of the economy and prospects for economic trends. Watching market indicators and analyzing them, it is possible to make balanced and adequate investment decisions for the long term.
Millions of investors around the world follow these indicators
and examine them literally under a microscope. I suppose you’ll have
It’s interesting to know about them. Let’s take a short walk through the most important things.
Gross Domestic Prodact (GDP) or Gross Domestic Product (GDP)
Represents the aggregate market value of all goods and services produced in the country. By the way, there are two methods for calculating GDP: by income.
and expenses. Which is logical, because if someone has produced the entire volume of goods and services and received income for this, then the one who bought all this, obviously, incurred expenses. Here, the dynamics of GDP is particularly important. If there is growth, it means that all types of income grow: salaries, profits, rent payments, etc.
The most important indicator with a funny sound, shows the number of new jobs created in the non-agricultural sector. This indicator shows the state of the US labor market. Traders can predict the dynamics of unemployment in the country by this indicator.
Consumer Price Index (CPI)
Consumer price index is an indicator by which one can judge about inflation in the economy and, accordingly, about the prospects of credit and monetary policy of the Central Bank. Simply put, the indicator shows whether there is a tightening (when liquidity is withdrawn) or an incentive – when money is “thrown out of the helicopter”. Then it is easier to understand whether the markets will grow or decline. Inflationary expectations are also very closely related to the CPI dynamics. Now it is especially relevant. Inflationary expectations characterize the yield spread of Treasuries and government bonds protected against inflation (TIPS). It is also the Fed’s real key rate minus core consumer inflation, which can be both positive and negative.
Industrial production. The indicator characterizes the output in all sectors of the economy, except services, and represents the most important part of the Gross Domestic Product.
To understand the prospects of the national currency.
keep an eye on the trade balance.
To understand the prospects of the national currency, it is important to monitor the dynamics of such an indicator as the trade balance. Trade Balance shows the difference between exports and imports. Accordingly, it can be either positive, when a country exports more, or negative, in case,
if the country is bringing in more goods than it is bringing out. In the latter case, the pressure on the national currency will increase.
The Reuters/University of Michigan’s consumer sentiment index.
Consumer Sentiment Index, showing the result of a survey of 500 Americans on their financial condition and attitudes
to the economy. The first estimate is published in the middle of the reporting month, the final one – towards the end of the analyzed period. There is also a consumer confidence index from the Conference Board.
Leading indicators index
An index that shows the current state of the economy. It is calculated on the basis of 10 indicators, some of which provide published macro statistics: primary applications for unemployment benefits, number of new orders in industry, number of issued permits for housing construction, the difference between the yield of 10-year Treasuries and the key rate of the Federal Reserve, the consumer sentiment index and the most significant – the S&P 500 index. Leading indicators show the expected development of the country’s economy in the next six months and, as a rule, shows the possible onset of recessions and recovery from them.
The listed market indicators give an assessment of the economy as a whole. But you are not buying the economy as a whole. You invest in a specific share of a particular company. And for this you need to understand how fairly this paper is valued by the market. We’re talking about valuation by market multipliers. And here the P/E index of the S&P 500 (ratio of capitalization to total profit) will be especially useful. It is possible to use
and another similar indicator – Shiller P/E or CAPE (P/E, based on the average inflation-adjusted profit for 10 years), which helps to smooth out cyclical fluctuations in income. CAPE was developed by Nobel laureate Robert Schiller and is widely used today. It is common to compare the indicator with peak values as well as the historical average. The higher the Shiller P/E is, the more expensive is the stock market.
Meanwhile, on the market as a whole everything can be fine, but the specific company is not doing well – the fall or rise in quotes ultimately depend on the company’s profit. Here you should pay attention to the dynamics of consolidated profit per S&P 500 share (eps, annual dynamics).
And finally, the indicator, which is the gold key to understanding the movement of absolutely all types of assets: commodity, currency, gold and stock indices – the discount rate or refinancing rate of the Central Bank and the Federal Reserve System.
It is the key interest rate at which the central banks or the Fed lend to commercial banks. If the rate is lowered, financial conditions become softer and credit availability increases. Money becomes cheaper. If the central banks raise the interest rate, the money becomes more expensive with all the consequences for the economy.
This is most clearly seen in the growth of yields on debt bonds, for example, ten-year Treasuries.
As a result, a simple example of the impact of this process on the market is the recent increase in the yields of U.S. 10-year bonds to 3.1%, which eventually led to a sharp rise in bond yields on the real estate market, and thus the growth of mortgage rates.
I don’t think it’s worth reminding that good times in U.S. real estate are coming to an end.