Economic Indicators & Other Causes That Can Affect Stock Prices Other Than Company News

 

Basics

The best investors read a lot, since in order to make a good decision about an individual stock, investors not only have to understand the company, but they also need to look at the bigger picture.  This includes the industry and other factors that might impact the stock and the stock market in general.  Obviously, any news coming directly from a company will affect the stock’s price.  Good earnings or corporate expansion can cause a stock’s price to go up.  Poor sales and profits can cause a stock price to go down.  However, there are many other “news” stories social, economic, political, local or global that can affect a stock’s price.  You must also review news on the stock’s industry and its competitors.  You should become familiar with business cycles and economic indicators.  Looking at broader trends might give you a heads up on the direction of the market, so you can take advantage of it.  Finally lots of things can impact a stock; the more you read the more you will be able to spot trends and get ahead of the curve (see Stocks: Buying, Selling & Researching).

 

United States Economic Indicators

There are many economic indicators that economists and financial advisors and investors look at.  Here are some of the major indicies that economists and investors look for and analyze for indications of where the U.S. economy is heading (in Alphabetical Order):


  • Consumer Confidence Index (CCI):  This measures how confident consumers feel about the state of the economy and their spending power.  The more positive the CCI is the more likely the consumer will go out and spend.  This data is released on the last Tuesday of the month at 10:00 am EST and is published by the Conference Board Company. http://www.conference-board.org/economics/ConsumerConfidence.cfm
  • Consumer Price Index (CPI) This is the most widely used measure of inflation.  This measures the price of a fixed basket of goods purchased by the average consumer, including food, transportation, shelter, utilities, clothing, medical care, entertainment and other items.  It is widely used to adjust things like Social Security payments, sometimes union contracts, tax brackets, salaries, and TIPS Treasury Inflation Protected Securities U.S. Treasury Offerings Section.  The Consumer Price Index is published monthly and released at 8:30am EST around the 15th of each month. http://www.bls.gov/cpi

     
  • Durable Goods Orders:  This measure’s how much people are spending on things that will last more than 3 years such as cars and appliances and is broken down by industry.  It is reported around the 26th of every month, and is released at 8:30am EST, by the U.S. Census Bureau. http://www.census.gov/cgi-bin/briefroom/BriefRm
  • Employment Cost Index:   This measure changes in employer payroll costs, which includes salaries, wages, benefits and bonuses.  A significant increase usually signals inflation.  It is produced quarterly by the U.S. Department of Labor around 8:30EST, near the end of the first month of the quarter for the prior quarter.  http://www.bls.gov/news.release/eci.toc.htm
  • Employment Indicators:   These include: Unemployment (percentage of the work force that is unemployed); Number of new jobs created, which are compiled by the Bureau of Labor Statistics (BLS).  The BLS is also a good source for statistics on the economy:  There are various employment announcements by BLS on the first Friday of every month at 8:30am EST.  Indicators are   http://www.bls.gov/bls
  • Government Index of Leading Economic Indicators:   This measures how strong the economy is.  Since this is a leading economic indicator it generally changes before the economy as a whole:   http://www.conference-board.org/economics/bci/pressRelease_output.cfm?cid=1
  • Government Spending –See Politics below:
  • Gross Domestic Product (GDP):  The value of all the goods and services (by labor and property) produced in the United States.  This includes: consumer and government purchases, private investments, and net exports of goods and services.  The U.S. economy has historically grown around 2.5-3% annually, and considerable change in this range can have significant impact on the financial market.  It is published quarterly by the Bureau of Economic Analysis and is released at 8:30am EST on the last day of each quarter. http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

     
  • Housing Starts/Building Permits:  This shows the number of new homes, or units (one apartment building with 30 unites would be reported as 30 new housing starts), that have been started in the latest period.  If builders are building that is a good sign for the economy.  The data is released at 8:30am EST, by the U.S. Census Bureau around the 17th of each month.  http://www.bankrate.com/rates/interest-rates/prime-rate.aspx; http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/daily_treas_bill_rates.shtml
  • ISM Manufacturing Report On Business:  This is a index based on a survey of purchasing managers which eights new orders, production, employment, supplier deliveries and inventories.  It is produced by Institute of Supply Management (ISM) monthly on the first business day of the month around 10:00 EST.  http://www.ism.ws/ISMReport/
  • Industrial Production:  This measure the total output/production of all U.S. factories and mines.  It is produced by the Federal Reserve Board, and comes out around 9:15 EST around the 15th of the month.  http://www.federalreserve.gov/Releases/g17/
  •  Interest Rates:   If money is cheap to borrow, both businesses and consumers will be more inclined to borrow it—when the rate is higher, the opposite is true.  Look at the U.S. Treasury Bill Rate and the Prime Lending Rate as two key indicators: http://www.wsjprimerate.us.
  • Money Supply:  The Federal Reserve Board can tighten or ease money supply through the Federal Funds Rate.  One of the publications that can provide some insight is The Beige Book, which is published 8 times a year and is released two Wednesdays before each of the Federal Open Market Committee’s meeting.  At these meetings the Federal Reserve Board discusses how economic conditions can tighten or ease the money supply through the Federal Funds Rate ("the rate of interest on overnight loans of excess reserves made among commercial banks").   For further information go to the Federal Reserve Board’s Website: http://www.federalreserve.gov .
  • Producers Price Index (PPI):   This measures the change in wholesale prices.  It is closely watched because an increase in the PPI will eventually alter consumer prices.  The Bureau of Labor Statistics produces the PPI which is released at 8:30am EST during the second full week of each month. http://www.bls.gov/ppi
  • Retail Sales Index:  These measure goods sold in the U.S. These are advanced numbers and can change significantly.  They are produced by the U.S. Census Bureau, another great source for statistics on the economy, and are released at 8:30 am EST around the 12th of the month.  Figures are published with and without auto. http://www.census.gov/cgi-bin/briefroom/BriefRm
  • Tax Changes:   Any increase in taxes or tax cuts can affect consumer and business outlooks and their pocketbooks.  For changes listen to the news, ask your accountant or go to the IRS website: http://www.irs.gov/index.html.
  • University of Michigan Consumer Sentiment Index (MCS):   This measures consumers’ confidence in their own personal finances, business conditions and purchasing power.  How confident is the consumer in the direction of the economy? Consumers will spend freely if they have little or no financial worries, but spend less if they think they might lose their jobs.  This index should be viewed along with the Consumer Confidence Index.  This index is published monthly and released around the 10th of each month http://www.sca.isr.umich.edu.

 

Stock Market's General Direction

If investors continually hear positive news about the stock market or particularly about a segment, such as technology, they will probably rush to invest in it, even if they don’t necessarily take the time to research the company or sector.  This is called "herd mentality".  On the other hand, a few bad days in the market might cause a panic as people want to get rid of their stocks even though the companies in their portfolio might be strong, solid and profitable.


  • Bull Market:  is an extended rise in the price of stocks, bonds and commodities.  It last for at least a few months.  Everyone wants to get in on the action so generally it causes trading volume to rise.  
  • Bear Market:   is just the opposite of a Bull Market.  This is a prolonged period of declining prices.  Fear of a slowdown in the economy can cause a bear market.  Rising interest rates can cause a bear market in bonds.

Value Of Money

Value of Money helps measure the relative worth of the U.S. dollar and how much it can buy. 


  • Inflation:  Inflation is an increase in the price level of goods and services which causes the value of money to decline.  Inflation has a direct impact on people, companies and your investments.  For example, if you had a bond with a 5% interest rate, and because of inflation, interest rates are now 7%, your bond is worth less than when you purchased it.  If interest rates rise 2% and you only get a 1% increase in your pay check, you won’t be able to afford to buy as much as you used to.  Because of rising prices, consumers reduce their purchases.  Too much inflation can hurt the economy.  The Federal Reserve Board periodically adjusts interest rates in hopes of slowing down inflation.

     
  • Deflation Deflation is the exact opposite.  It is the reduction of consumer and wholesale prices.  Generally this term is used to indicate a temporary decline.  During deflation your purchasing power goes up because the cost of goods goes down.  This occurs when there is excess competition or lack of demand.  Just as companies can be hurt by inflation, they can also be badly hurt by deflation.
  • Disinflation:  Disinflation is a slowdown of the rate of inflation.  For example, maybe the rate of inflation was 4% one year and 3% the next.  Generally this is viewed as a positive investment environment.  However, some companies which have borrowed money or made other business decisions expecting interest rates to rise might be hurt during a disinflation period.

 

Industry Trends & Competitors

No company survives in a bubble.  Companies are part of an industry sector and usually have competitors.  And if they do not have them now, once they become successful, they soon will!  If you are interested in a company, you need to research not only the company but understand what is happening in that industry.  Who are their competitors?  How does the company stack up?  What is happening to the sector as a whole (see Stocks: Buying, Selling & Researching)?

 

Politics

Government always changes the playing field.  Congress will add new programs and delete others.  Some groups will get tax benefits while others will see their taxes rise.  Investments in energy will be popular during one President’s administration while another President will favor increasing defense expenditures.  It is not only the impact of Congress and the President but that of the various executive departments and agency rules on everything from drugs to housing materials.

 

Current Events

In this time of instant communications, anything occurring in one part of the world will immediately be transmitted around the globe.  How people react to an event can certainly cause short term unrest in the marketplace.  For example, the Gulf War in the Middle East had a direct impact on the price of oil in the U.S., and in most other countries around the world.

 

International Indicators

Today businesses are global and interconnected.  Businesses cross borders when they manufacture goods, purchase supplies and raw materials, and sell their merchandise.  They can also be affected by currency exchanges which might make purchasing the same product cheaper from another country.  Also political unrest can affect businesses not just locally but globally.

 

Demographic Changes

Changes in a population’s age, location and affluence, to name just a few factors, can dramatically impact many different sectors and companies.  For example, as a population ages there are more senior citizens.  These senior citizens demand health care, prescription drugs, medical supplies, housing that caters to their specific needs and travel and education programs designed especially for them.  This provides a tremendous opportunity for companies capable of meeting their needs.

 

Weather

Changes in weather can immediately impact agriculture prices, and eventually those of processed foods.  A bad winter not only increases demand for snow blowers and salt, but can affect local governments which might have to pay overtime to workers to keep the roads clear and possibly add days to the school calendar.

 

Trends & Styles

When fashion trends or lifestyle trends change, that can either help or hurt a company or industry.  For example, if men dress casually to go to work, then those companies and retailers selling suits will be negatively impacted.  Companies that cater to young people are extremely vulnerable to changes in trends and styles.  This also applies to everything from: car sizes to house design (larger kitchens); from tourism (eco tourism and adventure travel) to food (healthy/natural foods).