A stock trader needs to understand where the economy is in the business trade cycle and there are a number of key economic indicators to help you decide this.
We’ll look at the main ones that will help you with your online stock trading.
As set by Central Banks such as the FED in the US and the Bank of England in the UK. Interest rates and their setting is the key weapon for central influence on the economy. Raising rates is likes to slow down spending and take the heat out of a rising economy to stave off the threat of inflation. Conversely lowering interest rates is a spur to increase growth and spending in a downturn.
Whilst there are many definitions of the money supply the main thing to remember that an increase in the money supply over and above demand will likely fuel inflationary pressures. Interest rates have largely overtaken money supply management as the primary tool of central fiscal policy on both sides of the Atlantic with the glaring exception, post the 2007 crash, of the $trillion quantitative easing programs adopted globally. It is too early to fully assess the impact of these measure but we can not help but feel that inflation will follow as surely as night follows day.
There are a number of ‘official’ inflation rates but perhaps it is more important to look at a number of key indicators to assess the risks of inflation.
- GDP – (Gross Domestic Product) is the monetary value of goods produced in a given period. It includes consumer and government spending and is important to stock market traders as it indicates how fast the economy is growing (or not.)
- CPI – (Consumer Price Index) Measures the cost of a representative basket of goods and services and is perhaps the best known inflation measure among the general population.
- PPI – (Producer Price Index) Measures a basket of other indexes which impact producers, such as goods manufacturing and finishing.
- Retail Sales Data – tracks information about retail sales.
The number of unemployed and in work is a crucial indicator for traders on where the economy is heading. Rising unemployment can be an early sign of recession whilst rising wages indicate inflationary pressures on the way.
Consumer confidence is a good indicator of future market performance. High confidence leads to increased spending and when confidence is low pressure on interest rates will be downwards.
Again a number of indicators are used to assess business activity including, Orders, Housing Starts and various business surveys.
All in all there are large range of indicators that the stock trader must keep an eye on to help assess the current state of the economy and in which direction the next broad market move is likely to be. Your online stock broker will also advise you on their opinion of where the market is headed.