Wealth solutions – Use economic indicators for investor’s edge

Wealth solutions – An excellent example of a guide or financial advisory consultant is “The Atlas of Economic Indicators,” by W. Stansbury Carnes and Stephen D. Slifer. It is loaded with visuals for simplification and available in paperback.

Economic indicators are business-related data, published regularly by the government – items like personal income and consumption, the inflation rate, the unemployment rate or GDP – which taken together indicate how well or poorly the economy is doing. They can also suggest how well or poorly it will do in the future with respect to wealth solutions.

Financial advisory consultant says when these indexes show investors their prior assumptions were wrong, the latter can adjust investment strategies. They can tune in to what is really happening in the dynamic business activities that dominate stock and bond markets.

There Are 12 Most Important Economic Indicators for Investors and Wealth Solutions

According to the atlas and a financial advisory consultant, what follows are the most important benchmarks for investors to use, in detecting changes in the health of the US economy and, therefore, in US investment markets. Also see the exhibit, “Effects of Economic Indicators on Stock and Bond Markets.”

Gross Domestic Product (GDP), published monthly by the Bureau of Economic Analysis (BEA) of the Department of Commerce (DOC), is one of the two most important economic indicators for investors and wealth solutions. Although correlations are not perfect, growing GDP suggests conditions are right for a rising stock market. Not so for the bond market, however. The reason is that expanding GDP sometimes leads to inflation, including higher interest rates. This reduces real income from bond interest.

Payroll Employment, the other paramount signal of economic health, is also published monthly by BEA. When payrolls are going up, workers usually buy more goods and services. This is likely to boost stock markets, but not bond markets, says financial advisory consultant. The explanation is the same; higher payrolls tend to increase interest rates and inflation – anathema to bondholders.

The Unemployment Rate, part of the dual employment prime indicator, is issued monthly by the Bureau of Labor Statistics (BLS) of the Department of Labor (DOL). It measures the ratio of unemployed workers comprising the work force with respect to wealth solutions. When the percentage is going higher, fewer shoppers are at the malls, and that tends to push stock markets down. Because investors look for more security at such times, a rising unemployment rate sends money into safer and rising bond markets.

The Producer Price Index comes from BLS, monthly as a financial advisory consultant. Since it deals with prices near the point of origin of manufactured products, it can be the first alert of inflation. Proceeds from capital gains, dividends and interest buy less during inflationary periods, so a higher reading tends to react negatively on both stock and bond markets.

Retail Sales data emanate monthly from the Bureau of Census of DOC in wealth solutions. Rising sales augur well for stock markets but tend to push bond prices lower. The effects are reversed, when sales decline. The series is very volatile, with revisions often disappointing, which are situations bond investors eschew.

Industrial Production numbers are released by the Board of Governors of the Federal Reserve System (FED) monthly, in volumes of physical units produced rather than dollar amounts. Rising production rates can raise interest rates, which lowers values of outstanding bonds. Hence, incremental Industrial Production can push down bond markets, while uplifting stock markets.

Industrial Capacity Utilization also comes from the FED on a monthly basis. This is the percentage of available plant and equipment being used. High utilization suggests improving margins; therefore, it is favorable for stocks. However, peak utilization rates suggest inflationary pressures in the economy, which is likely to reduce the purchasing power of interest and depress bond markets.

Reports on Housing Starts/Building Permits fall under the jurisdiction of the Bureau of Census, on a monthly schedule. This component is a leading indicator of economic activity. When they rise, stocks also tend to rise but bonds fall, due to pressures on interest rate increases.

The Consumer Price Index is published monthly by BLS. This series tells what has happened to individuals’ purchasing power as a result of price changes for goods and services. As such, it is the most used consumer inflation indicator. When the inflation index rises, both bond and stock markets are apt to decline, and the reverse of that when prices drop. Basically, this happens because rising prices penalizes all proceeds from investing, while sliding prices improve their purchasing power.

Personal Income levels and its corollary Consumption rates are monthly BEA reports that are bullish for stocks and bearish for bonds, when rising, and bearish for stocks and bullish for bonds when declining. For investors, these are very insightful indicators, for consumer consumption is over one-half of GDP.
Consumption is the portion of disposable income, expressed as a percentage, not saved. When it is moving higher, it suggests higher spending ahead, good news for stock markets but not bond markets. Declining Personal Income and Consumption have the opposite effects on markets.

The monthly Index of Leading Economic Indicators (LEI) maintained by BEA is a composite of several leading indicators, designed to predict future general economic activity. Primarily, these indicators predict changes in the aggregate economy. When going up or down for three or more consecutive quarters, the index suggests that GDP will move in the same direction. If its movement is upward, stock markets are impacted positively and bond markets negatively. When the LEI loses ground, the reverse is true.

Indicators Are Not Perfect Predictors But they Keep Investors Tuned In Wealth Solutions

Economic indicators are not perfect predictors of stock and bond markets. But they do empower investors to be in sync with the economy more often than not. That is very important, because the economy is the giant fountainhead of the revenue streams that flow down and produce profits or losses for Corporate America.