Economic Indicators in the Stock Market

Economic Indicators in the Stock Market

Posted on 18. Sep, 2010 by in Stocks

There are many economic indicators that can show us what might happen in the stock market in the near future.  It’s a very fluid system that may change at any time for any number of reasons.  Here is a little bit of how it works and what the major indicators are.

Some of these are called leading indicators because they happen before the stock market actually moves in a particular direction.  These leading indicators show us where the market might go in the near future.  If you want understand stock market basics, you need to know how these indicators work and behave.

Many economists and analysts find these leading indicators by doing a regression analysis on the particular indicator and stock market prices.  A regression analysis can give you a correlation between two variables.  It’s not always 100% accurate but anything that can even closely predict stock prices are extremely valuable.  It should also be noted that an indicator that is leading in one period may not be in the next.

Gross Domestic Product – GDP

The GDP measures how much a country produces in any given time period.  If it is growing period after period, that means the economy is probably healthy and that the stock prices should go up in response to the growth.

If the GDP is stagnant or shrinking, that means the economy might be in danger of going into a recession.  The best investment strategy for a negative GDP report, in general, is to get out of equities and go into bonds.

Jobs Report

All of the jobs reports are very important indicators.  They tell us if people are working, how much unemployment there is, and if people have money to buy the things they need or want.  If people don’t have disposable income, they can’t buy non-essential items.  Without disposable income buying power, the economy will be adversely effected.

High unemployment means a recession is here or is coming soon.  A recovery without a significant increase in jobs is suspect and may not be a real recovery.  If people don’t have jobs, it’s hard to imagine how people are going to spend money.

Retails Sales

Retail sales is closely related to the jobs report.  It tells us if people are spending money.  If they are, that means they are confident in the state of the economy and their financial situation.  If they are confident, that will grow the economy.

On the contrary, if people are not buying, that means they are worried about the economy.  That worry causes spending to go down which causes the economy to shrink as well.  In many ways, it’s a self-fulfilling prophecy.

Related Posts:

Tags: , , , ,

Comments are closed.