Economic Indicators Every Investor Should be Familiar With
It takes more than simply following the ups and downs of the S&P 500 or Dow Jones in order to be a successful investor. You need to be aware of current events and track changes as they occur in order to know where the economy is and where it might be headed. Failure to do so could result in unexpected losses due to a changing economic environment that could have otherwise been avoided.
One way investors can check in on the market is by paying attention to economic indicators. These reports essentially take the temperature of the market and tell investors where the economy is currently at as well as giving them clues as to what might happen next. But with dozens of reports released in any given month, it can be a full-time job keeping up with them all. Luckily, there is only a handful that investors really need to pay attention to.
Creating an economic watchlist
There are numerous economic reports and charts available to investors that make it difficult to know which ones are important and which are merely informative. Investors should tune out most of the reports that come in and focus instead on those that really matter. Reports that show the current strength of the US economy, workforce, or marketplace are the ones that will make the most difference in a portfolio.
Here’s a list of the top three economic indicators investors should watch out for:
GDP – Arguably the most important piece of data an investor can have is the most recent GDP (Gross Domestic Product) report. This report is a macroscopic view of the US economy and gives investors a look at where the economy was at and where it might be headed. It’s a lagging indicator meaning it gives investors a solid look at where the economy was in the past quarter or so but also helps chart out long-term trends.
Unemployment – Another critical piece of data for investors is the unemployment numbers. The number of jobs added or lost in the US economy gives investors an idea of how strong the market is. Jobs gained generally indicate a growing economy whereas jobs lost could indicate economic weakness.
Inflation – Inflation is one of the trickiest indicators to understand but also essential in order to design an appropriate portfolio. Rising inflation indicates a healthy economy that’s growing, but too quick of a rise can also spell trouble for stocks that might not be able to keep up with the changes. Conversely, falling inflation is usually an indication of an economic contraction and investors may want to prepare by investing in defensive stocks.
Investors should be careful not to put too much emphasis on any one indicator. Oftentimes economic indicators can tell conflicting stories about the economy. Investors should take all the information presented and filter out the inconsistencies to paint a clearer picture of what’s going on economically. Taking a long-term view will help smooth out trend inconsistencies and help you become a better investor.