Eight market indicators you should understand

No-one knows for sure what will happen to stock markets and it’s never wise trying to time your entry (or exit). The sheer number of economic and political variables makes it virtually impossible to make the right calls. Even seasoned investors get it wrong! That’s why regular monthly saving can be a sensible approach as it takes the emotion out of decision-making and helps smooth returns.

However, there are a number of indicators that influence markets on a daily basis – in both positive and negative ways – that are worth understanding.

Here, we highlight some measures to monitor as part of your research, explaining how they work and what you can learn from each.

Nonfarm payrolls

This rather odd sounding term relates to the number of paid US workers in businesses, excluding those on farms, serving in the military or volunteering for non-profit organisations. The data is released every month by the US Bureau of Labor Statistics and gives a clear indication as to the number of people that are currently employed. Rising unemployment can be a problem as it means people will have less money to spend on goods and services. This will obviously be negative for businesses. While this tracks US employment it can be a worry for other countries as the US is the world’s largest economy and can therefore have an impact on other areas.

Purchasing Managers’ Indices

These indices – known as PMIs – are monthly indicators that chart the conditions within specific sectors, such as manufacturing and services, in different countries.  These surveys are carried out in conjunction with a number of companies and illustrate how confident they are about market conditions. They are used to identify developing trends and are relied upon as a gauge of broader economic performance.

As a result, they are often quoted in the media. Scores above 50 indicate that businesses expect growth in the near term, while scores under 50 suggests contraction.

Corporate earnings

The performance of a stock market will be determined by a number of things including whether the companies listed are actually making money and if they will in the future. Quoted companies are required to report revenue and profit to the stock market at set times of the year, along with news that can affect the stock price. This includes trading updates and press releases associated with new launches, as well as statements issued when executives are hired or departing. If earnings are expected to go down or are worse than the market expected, the perceived wisdom is that the share price will go down, and vice versa. There is an earnings calendar for the UK stock market that you can track here.

Confidence

Confidence is an important determining factor when it comes to stock markets as businesses can be affected if people are upbeat or pessimistic. Regular surveys from various business organisations monitor such feelings. For example, surveys are published to chart the confidence of consumers in different countries. The Bank of America global fund manager survey, meanwhile, highlights the views of international portfolio managers on issues such as inflation and asset allocation.

Interest rate announcements

Interest rates have a direct effect on businesses. When rates are rising, people are generally more inclined to save money than they are to spend it, and the cost of borrowing for both individuals and companies rises too. The main central banks regularly announce interest rate decisions and the factors they’ve considered. In the UK, the Bank of England’s Monetary Policy Committee sets the rate. The MPC consists of the Governor, three Deputy Governors for Monetary Policy, Financial Stability, and Markets and Banking, the chief economist and four external members appointed by the Chancellor of the Exchequer.

Long term bond yields

The yield is the anticipated return on an investment, expressed as an annual percentage. A 5% yield, therefore, would suggest the investment averages a return of 5% every year. Buying government issued bonds – ‘treasuries’ in the US and ‘gilts’ in the UK – means you’re lending them money for an agreed period in exchange for interest and the principal returned on a set date. Usually, the longer you lend the money, the higher yield you receive to compensate you for the risk you are taking. Historically, when the yields on longer-dated government bonds fall below shorter-dated, it’s been an indicator that a recession is on its way. This is known as the ‘inverted yield curve’.

CPI

The Consumer Price Index (CPI) measures the average percentage change in prices paid by a country’s consumers for a ‘basket’ of goods. This popular illustration of inflation reveals whether households are spending more – or less – on the same types of items. However, economists will often use different indices of consumer prices in order to draw conclusions about inflation in particular economies.

VIX

VIX stands for the Chicago Board Options Exchange Volatility Index. It measures the expected future volatility of the S&P 500 and is sometimes referred to as the ‘fear index’. The aim of the VIX is to illustrate the amount by which the market expects the index to fluctuate over the coming 30 days. It’s a useful tool as market volatility influences the amount by which share prices can rise or fall. If these price swings are significant, it means volatility is higher.

Other surveys

We live in the information age. This means there’s no shortage of surveys and publications providing insights into the performance of companies and sectors. For example, the Confederation of British Industry, a UK business organisation, publishes a variety of economic surveys. These include sector studies, as well as industrial trends. Their purpose is to give people an insight into key trends and challenges affecting businesses.

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