We all know that timing the market is pretty well impossible, but you can watch certain economic indicators to get clues as to what is happening in the economy. This in turn helps us make smarter investment decisions.
A (Very) Brief Economy Lesson
The economy moves in cycles. If I drew a diagram it would look like a roller coaster with troughs at the bottom and peaks at the top of each loop. Like a roller coaster there can be gradual changes, or steep climbs and stomach-churning drops. Going from trough to peak is called expansion and from peak to trough is a contraction.
Key Economic Indicators
How do you know where we are in the economic (or business) cycle? There are entire courses and books on economics (and most economists never agree with each other), but there are some clues that are readily available to the general public in the economic section of any major newspaper or financial website. These are called indicators. There are three main types of economic indicators:
- Lagging indicators change after the economy has already begun to follow a particular cycle.
- Leading indicators show what is going to potentially happen in the future.
- Coincident indicators show what is happening in the economy right now.
Some Indicators You Should Watch
- Unemployment figures are lagging indicators so they might confirm that the cycle is in fact rising or falling. Track reports that give the number of people on the unemployment rolls.
- Consumer confidence is a leading indicator as it refers to how consumers feel about the future of the economy. If consumer confidence is high, they are much more likely to spend which translates into higher profits for companies which can lead to higher stock prices. Of course, if confidence is low it means consumers are going to be saving their money instead of spending it.
- Retail sales is a coincident indicator, which gives clues as to how the consumer is actually behaving. The first industry to recover after a contraction if frequently retail. Then the demand for goods pushes businesses to produce more products, which often leads to a spike in manufacturing and materials.
- Real estate and new housing starts figures are a leading indicator of economic activity. Individuals will make big-ticket purchases when they feel their jobs are secure and that they will be able to keep up with their mortgage payments.
There are many other indicators you can track including manufacturing and industrial trends, and inflation. It’s important to monitor a number of different indicators before you change investment strategies to see if they signal the same thing.
Don’t worry about being too precise with the timing. Each phase will last some time and you’ll have ample opportunity to read the signs and take appropriate measures.
With the current global economic crisis there is a lot of talk about a coming recession to equal that in 2008. However, recent data on consumer confidence, retail spending and employment figures are trending upwards.
Do we look for good opportunities to buy, or keep our money in a savings account while we wait and see what happens next? What do you think?