Investing in the New Year
Almost everyone can agree that investing is an essential part of building long-term wealth and financial stability, but what are the key factors that drive investment decisions?
How does the GDP affect your portfolio?
What happens if the unemployment rate rises? What if it drops?
These questions and many more are not easily answered, but can all play a role in how investments will be affected.
As much as we would like to predict the future, the truth is nobody can be 100% certain when it comes to investing. There are many factors that play a role in the behavior of the economy, but watching certain economic indicators can help you and your adviser make educated decisions that are tailored to your financial needs and goals.
Indicators can be categorized many ways and different investments may change due to different factors. Before we continue, it is important to review exactly what an economic indicator is and how they can help us invest in a smarter, more efficient manner.
Understanding Economic Indicators
Economic Indicators are signals that investors monitor to help them develop meaningful insight for the past, present, and most commonly, the future of an economy.
Another way to put it, as Dave Ramsey states, is to “Think of these economic indicators as thermometers. To a certain extent, they help us keep an eye on the temperature of the overall economy. Sometimes they can show us if it looks like certain parts of the economy are heating up or on the verge of cooling down.”
It is important to recognize which indicators your financial adviser is following and how they wish to incorporate their analysis into your personal strategy. Understanding economic news and the possible repercussions from economic indicators will help you grow your investments, stay knowledgeable on the trends affecting your strategy, and a peace of mind for the ebbs and flows that are bound to take place over time.
Wealth management is a complex and intricate field. Equipping yourself with the right financial adviser and understanding the statistics being considered can help your journey to financial success.
Again, while there are many factors that can and will affect the economy, it is important to remind everyone that no one can with 100% certainty predict the future. Investments in any shape or form carry a risk of loss to the investor and those risks should be discussed and considered before an investment is made.
Where Do I Locate Economic Indicators?
Before we dive into the key statistics to follow it is important to answer the following questions:
- Where can we as investors find the correct data for our economic indicators?
- Who is the trusted authority collecting the data on economic indicators?
Introducing The Conference Board, a global research group and professional membership that spans across the globe publishing their findings. Founded in 1916, this non-profit lives up to its motto “Trusted Insights for What's Ahead” by helping investors, companies, and wealth management companies make informed decisions for their future.
10 Major Economic Indicators to Follow
According to the The Conference Board Leading Economic Index®, there are ten major economic indicators to follow when investing:
- Average weekly hours, manufacturing
- Average weekly initial claims for unemployment insurance
- Manufacturers’ new orders, consumer goods and materials
- ISM® Index of New Orders
- Manufacturers' new orders, nondefense capital goods excluding aircraft orders
- Building permits, new private housing units
- Stock prices, 500 common stocks
- Leading Credit Index™
- Interest rate spread, 10-year Treasury bonds less federal funds
- Average consumer expectations for business conditions
Each indicator will play a role in your financial future and the overall economy as a whole. Generally speaking, predictions and analysis can be concluded from these indicators up to 6-9 months in the future for U.S. markets.
Many of the economic indicators listed above are also affected by any number of factors; however, the average consumer’s expectations for business conditions stands alone as it is the only indicator that is 100% built purely on expectation. These findings are released monthly.
The Lagging Indicators
Going beyond the initial economic indicators, The Conference Board also publishes The Index of Lagging Indicators. This index is comprised of the following factors:
- The average duration of unemployment (inverted)
- The value of outstanding commercial and industrial loans
- The change in the Consumer Price Index for services
- The change in labor cost per unit of output
- The ratio of manufacturing and trade inventories to sales
- The ratio of consumer credit outstanding to personal income
- The average prime rate charged by banks
This index is published monthly and are changes that typically come after economic changes have taken place. Used together with the major economic indicators listed above, intelligent assessments about the overall health of economy can be made and financial strategies can be executed.
The Composite Index of Coincident Indicators
So you’ve researched the major indicators that may affect the future, made note of the lagging indicators that have come from the economic changes beforehand, but what about indicators that produce data for the current economy cycle? These are found in The Composite Index of Coincident Indicators:
- Number of employees on nonagricultural payrolls
- Personal income less transfer payments
- Industrial production
- Manufacturing and trade sale
Long-term insight is paramount for success in finance, but it is important to see the entire picture. Spending all of your time trying to predict the future can be dangerous, as you may forget to assess the current state of your investments, strategy, and economy as a whole.
Indicate and Invest With Confidence
These are just a few of the bigger economic indicators to consider when investing and there are many other factors at large. The world of finance is always evolving, as is the economy.
Whether you are just starting or you are a seasoned investor, there is an ocean of information to sift through. It can be tempting to take on this challenge alone, but why go in alone when you can have the peace of mind by working with an expert?
GPS Wealth Management is a team of leading investment advisers in the League City region providing guidance and clarity for their clients. Handling everything from divorce financial services, investment and retirement planning, and wealth management. GPS Wealth is equipped to satisfy your financial needs.