List of Economic Indicators to Guide Your Investment Decisions

Economy, Investing


This article is separated into 3 pages for easier reading. Locate the links to the other pages at the bottom.

21) Economic Indicator: Gross Domestic Product (GDP) Per Capita

Type of indicator: Coincident

What it means: An increase in GDP per capita means that people are getting richer.  Rapid increases in GDP per capita can also signal rapid economic development.

What to look for: Countries with increase in real GDP per capita, along with a low or declining levels of income inequality, and a government supportive of free speech and free-market economic growth.

What to do: Take equity stakes in multinational corporations with heavy exposure to emerging markets such as General Motors (GM).  If you want to take the riskier route, you can also try buying domestic stocks of emerging markets.

Where to look: https://cia.gov

22) Economic Indicator: LIBOR Index

Type of Indicator: Leading

What it means: The LIBOR index is the index of the interest rate at which banks borrow money from each other, which is different from the federal funds rate, which is the rate that the banks borrow from the Federal Reserve.

What to look for: You want to look for increases or decreases in the LIBOR rate over a period of several months.  An increase in the LIBOR rate can mean that the economy is heating, but it can also mean that the economy is extremely uncertain and thus banks do not trust each other.  In the course of  1-2 months in the fall of 2008, the LIBOR rate increase 2 percentage points because of extreme uncertainty in the financial markets.

What to do: The LIBOR rate can rise and fall due to the business cycle.  Thus, if the economy is heating up, move to riskier assets.  If the economy is slowing down, move money to assets that are not as sensitive to economic slumps.  When there are huge spikes in the LIBOR rate (like the one in the fall of 2008), scramble for cash—cash is king in time of extreme economic uncertainty.

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Where to look: http://www.economagic.com/libor.htm

23) Economic Indicator: New home sales

Type of indicator: Leading

What it means: Sales of new home make up around 15-25% of total home sales.  New home sales are measured when contracts are signed, not when keys are handed over to new homeowners.  Home sales are a big indicator for the overall health of the economy as they mean that consumers have money and are confident in the future, and it also means that banks are also willing to lend money.  New homes are typically more expensive than old homes.  New home sales  are excellent at predicting overall health of the economy—they typically turn down before recessions strike and move upward before the recovery of the overall economy begins.

What to look for: Increase or decrease in new housing starts over a several month period

What to do: When new housing starts increase, buy home-builder stocks or ETFs  (such as XHB) and the shares of companies that supply home-building materials.  When new housing starts decrease, do the opposite.

Where to look: http://census.gov/newhomesales/

24) Economic Indicator: Real Interest Rates

Type of indicator: Leading

What it means: Knowing whether the real interest rate is negative or positive tells you a lot about the policy of the Federal Reserve; it tells you whether the Fed has an accommodating policy or a restrictive policy towards economic growth.  An accommodating policy is when real interest rates are negative and a restrictive policy is when real interest rates are positive.  The lower the interest rate are, the more borrowers borrow, and with more money in the system, it encourages spending.  An increase in real interest rate is an indication that the economy will shrink in the future (compared to now).  A decrease in real interest rate is an indication that that economy will grow in the future (compared to now)

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What to look for: Compare current real interest rates to the recent past.  Has it increased or decreased compared to 1-3 years ago?

What to do: Buy hard assets when real interest rates are decrease.  Buy bonds when real interest rates increase as the nominal interest rate will probably move lower, sparking a bull market for bonds (via the inverse relationship between yield and interest).

Where to look: http://research.st.louisfed.org/fred2/categories/82

25) Economic Indicator: Russell 2000 Index

Type of indicator: Leading

What it means: The Russell 2000 is an index of the 2000 smaller publicly trade companies in different sectors.  Small businesses are more sensitive to fluctuating economic conditions and therefore benefit much more from good economic conditions.  Therefore, those who invest in the Russell 2000 take on more risk than investing in bigger companies.

What to look for: We want to look for increases or decreases in the Russell 2000 index.  If the index increases, that means appetite for risk is increasing due to investor confidence in economic conditions.  The inverse is also true; if there is a decrease in the index, it can mean that investors are wary of economic conditions and thus do not want to invest in smaller companies.

What to do: If you think the initial upward trend is sustainable, then you should definitely buy a Russell 2000 ETF or buy a company doing well in the Russell 2000.  If you think the downward trend is just the beginning of a sell off, short the Russell 2000.

Where to look: http://www.russell.com

26) Economic Indicator: Gold prices

Type of Indicator: Leading

What it means: When demand for gold increases (price of gold increases), investors fear inflation, economic troubles, or geopolitical instability.  Investors go to gold in lieu of fiat currency in times of uncertainty, thereby increasing the price of gold.

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What to look for: Watch for changes in price and quantities indicating that supply and/or demand for gold is shifting.

What to do: Buy gold on the first hint of inflation or political/economic chaos.  Short gold when politics and economics of a country stabilizes.

Where to look: http://gold.org

27) Economic Indicator: Retail investment activity

Type of indicator: Leading into recessions, lagging during recoveries

What it means: A recent outflow/inflow of funds from a certain asset could signal that the end of a bear/bull market is near.

What to look for: Changes in retail investor sentiment as measured by investment flows into/out of different types of mutual funds.  Specifically look for record flows of funds into/out of different asset classes.

What to do: Adopt a contrarian approach.  Buy when everyone sells off and sell when everyone begins to go on a buying binge.

Where to look: The Financial Research Corporation (FRC) does research into the money flow and the data is only made available to big corporations.  However, they release monthly press releases that can detail information about where the money is going.  In addition, by digging around the internet a little, you can probably piece together the information you need.

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Remember, when investing, it is important to look at the overall picture of the economy.  This list of economic indicators is just a beginning guide for you to dig further into investment options.  Good luck.

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Indicators in the book not included in this list: Unit Labor Costs, Baltic Dry Index, current account deficit, Tankan survey, TIC data, Beige Book, Crack Spread, Credit Availability Oscillator, M2 money supply, the Aruoba-Diebold-Scottie Business Conditions Index, Business Outlook Survey, Short Interest, GDP Deflator, Misery Index, Producer Price Index, Credit Spreads, Ted Spread, Texas “Zombie Bank” Ratio, TIPS Spread, CBOE Volatility Index, Vixen Index

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