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WORTH KNOWING
INTERPRETING FINANCIAL MARKET DATA
By Susan M. Walton-Bothamley
Each week dozens of economic reports
We’ve highlighted below the key topics which most market updates attempt to address:
and indicators are released providing
IS THE ECONOMIC ENVIRONMENT LIKELY TO SUPPORT GROWTH OF CONSUMER
CONSUMPTION AND BUSINESS SPENDING?
measurements for evaluating the health
of our economy, the latest business cycles,
how consumers are spending and their
general outlook. Investment professionals
will use this information not only to
explain their investment strategy, their
tactical portfolio decisions and to provide
context around the performance of assets
they manage, but also to gain insight into
the prospects for future economic growth,
inflation and the overall stability of the
financial markets. This data is often used
Gross Domestic Product (GDP), the value of all goods and services produced in the
economy over a given time period, is a widely used indicator of economic activity.
GDP of 2.5-3.5% is considered by many to be the range of “best overall benefit”
because while it is sufficient for corporate profit and jobs growth, it is moderate
enough to avoid inflation concern. If businesses are profitable they tend to hire
more workers, who will almost certainly then spend money on goods and services.
Conversely, falling GDP tends to indicate lower spending and thus lower revenues, often
leading to a slowdown in hiring. The general definition of an economic recession is two
consecutive quarters of negative GDP growth, conditions most investment professionals
carefully watch to ascertain if the economy is heading into a retreat.
IS THE RATE OF GROWTH LIKELY TO LEAD TO INFLATION OR DEFLATION,
AND HOW ARE THE CENTRAL BANKS LIKELY TO RESPOND?
The Consumer Price Index (CPI) measures changes in the total cost of a basket of
goods and services purchased by an average household. In general, rising CPI indicates
inflation — prices are rising and the currency within the economy is worth less than it
was before. If the Federal Reserve determines that the economy is growing too fast,
it will raise the Federal Funds Rate, which in turn can cause banks to raise their prime
rate. This may then affect mortgage rates, business loans, car loans and various other
consumer loans. Higher interest rates almost always make borrowing more difficult
and thereby slow consumer spending.
as a basis for what is commonly referred
to as a ‘Market Update’.
ABOUT THE AUTHOR
Susan M. Walton-Bothamley is a senior vice president
with the U.S. Trust® Institutional Investments &
Philanthropic Solutions.
Conversely, if CPI falls below zero the economy may be entering a deflationary phase;
prices are falling and consumers are less inclined to hasten purchases of nonessential
goods and services, reasoning that they can be purchased for less money in the future.
Deflation can be a nightmare of sorts for central bankers because conventional tools
are highly ineffective in fighting it. There’s no upper limit to how high the central bank
rate can rise to combat inflation, but rates can go only as low as zero.
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Sustained deflation typically wreaks havoc in an economy; falling prices
invariably equal falling revenue in the businesses providing goods and
services and, as a result, they need to cut costs in order to remain
profitable — which usually leads to layoffs and pay cuts. When people bring
home less money, they tend to buy less; demand for products falls farther,
forcing even deeper price cuts to entice consumers. Once an economy
enters this cycle it’s very hard to break out of — which is why the Federal
Reserve keeps a close eye on any hint of deflationary pressures.
EMPLOYMENT — ARE PEOPLE LIKELY TO BE SECURE IN THEIR JOBS?
The unemployment rate, probably the best-known labor market
indicator, is widely quoted in the media. In short, the unemployment
rate measures the percentage of the labor force that does not have
a job and is actively looking for work. Simply put, when people are
employed they tend to be comfortable spending money on goods
and services, thereby increasing business revenue.
INTEREST RATES — ARE RATES LIKELY TO SUPPORT BORROWING
OR CURB BORROWING, BY BUSINESSES AS WELL AS INDIVIDUALS?
The 10-Year Treasury yield is widely viewed as a benchmark for
interest rate movements and the cost of borrowing. Rising value
levels indicate increasing interest rates; a rise in interest rates will
often cause businesses and individuals to put off non-essential
spending. Decreasing value levels indicate the opposite and thus
tend to lead to an increase in spending.
The yield spread between the yields of the 10-Year Treasury and
3-Month Treasury measures the market’s outlook for future interest
rates. An increase in the yield spread typically indicates an expectation
that interest rates will increase; conversely investors generally view a
decrease in the spread to mean that interest rates will decrease.
HOUSING — ARE WE INCREASING THE HOUSING STOCK? POSITIVE
HOUSING TRENDS TEND TO DRIVE ECONOMIC GROWTH.
The New Residential Construction Report measures the number of
newly built private homes during a given timeframe. A strong housing
start figure typically reflects healthy levels of consumer confidence
and employment.
The S&P/Case-Shiller Home Price Index is a measurement of
U.S. residential real estate prices and tracks changes in the top
20 metropolitan regions. Residential real estate represents a large
portion of the US economy — the Home Price index helps monitor
the value of real estate. Rising value levels indicate an improving
economy and increased homeowner wealth while declining values
usually indicate the opposite.
CONSUMER CONFIDENCE — WHAT IS THE PSYCHOLOGY
OF THE PEOPLE WHO SPEND MONEY?
Consumer confidence measures how consumers feel about the overall
state of the economy and how they feel about their own financial
situation. If consumer confidence is high, consumers tend to make more
purchases. Conversely, if confidence is lower, consumers will likely save
more and spend less. A strong consumer confidence report, particularly
when the economy is lagging behind estimates, can actually move
the stock markets by causing investors to be more willing to purchase
equities. In short, a happy consumer is more likely to spend more and
make bigger purchases such as a home or a new automobile.
ARE BUSINESSES GOING TO SPEND MONEY TO EXPAND?
The Durable Goods Orders Report measures business spending on
items such as machinery, equipment and aircraft. Typically businesses
only buy these big ticket items when they feel confident about the
direction of the economy. When businesses aren’t confident, they will
often delay the purchase of durable goods until things get better.
We’ve listed below several of the economic indicators cited in this paper.
Economic Indicator
Source
Gross Domestic Product
(GDP)
U.S. Department of Commerce –
Bureau of Economic Analysis
Consumer Price
Index (CPI)
U.S. Department of Labor –
Bureau of Labor Statistics
Unemployment
U.S. Department of Labor –
Bureau of Labor Statistics
New Residential
Construction Report
U.S. Census Bureau and the
Department of Housing and
Urban Development
S&P/Case-Shiller Home
Price Index
S&P Dow Jones
(McGraw Hill Financial)
Consumer Confidence
The Conference Board
Durable Goods
Orders Report
U.S. Census Bureau
The information and views contained in this publication are for informational purposes only and do not provide investment advice or take into account your particular investment objectives,
financial situations or needs and are not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Any opinions expressed
herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.
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