Macro stock investor

There is a plethora of investment strategies and investment advice when it comes to stock trading. However, one element that is most often overlooked by all stock traders or investors & professional analysts and advisors is the impact of the country’s macro economic indicators, such as consumer price index, producer price index, retail sales, new home sales, construction spending, etc.

Let’s face it, stock markets don’t rise & fall due to investment activity of individual investors but do so due to trading activity of institutional investors (think mutual fund companies vs. you). These companies make decisions often using the latest movements in the macro economic indicators, since such movements do impact the business & profitability of the underlying companies they invest in! Let me give you an example, say the Consumer Price Index shows a change from same month previous year of 3% (i.e. current inflation is 3%), but the same reading last month was 1%, then you know that inflation is expanding in the country. Inflation is often looked upon as a malefic, i.e. increasing inflation is seen as having a negative impact on economic growth – growing inflation means consumers could afford less, resulting in drop in sales, causing a drop in revenues of businesses, causing decreasing earnings & profitability. Hence, if the current interest rates are below the 3% inflation as in this example, the Federal Reserve may be tempted to curtail this growth in inflation by raising its discount rate or federal funds rate. That is a bearish sign for the stock markets, since an increase in interest rates increases the cost of money leading to a cutback in spending money by businesses – in other words investors will have less money to invest in the stock markets. Thereby resulting in a decline in the stock market.

This is an example considering only two macro economic indicators, consumer price index & interest rates. In reality, you have to deal with the movements in many indicators to assess whether the impact on the stock markets would be bullish or bearish! In order to demonstrate how you can utilize the macro economic indicators to determine your stock trading needs, consider the scenario today, September 16, 2009. The latest movements in the indicators, as discussed in http://www.macrostockinvestor.com , show that that the U.S. economy appears to be approaching the end of the recession but has not quite crossed over into expansion phase of the economic cycle. Usually, the stock market cycle leads the economic cycle, i.e. the stock markets have started their ascent to the bullish ranges just as the economic cycle has bottomed out. This explains the gains noted in Dow & Nasdaq in the recent months. Consider the impact of each of the macro economic indicators below, individually –

1. Interest rates (Discount rate & Federal Funds rate) are at the bottom, making money cheap,
2. Retail sales in August 09 showed an increase from July 09 by 1.1%,
3. Inflation, as measured by change in the Consumer price index, is at -1.5% in August 09, but noting an increase of 0.4% compared to July 09. Mainly led by increase in gas prices,
4. Manufacturing sector appears to be expanding as reflected by an increase noted in the Purchasing Manager’s Index in August 09 by 4% from July 09,
5. Industrial production in August 09 increased by 0.8% from July 09 signaling that business activity is expanding hinting at a potential rise in employment in the near future,
6. Capacity utilization in August 09 is at 69.6% signaling that there is no over utilization of capacity currently hinting that inflation fears don’t currently exist in the economy,
7. Prices in the manufacturing sector as well as the producer price index in August 09 increased from July 09, mainly led by utilities & energy. Hints that such increases could soon be transferred to retail prices, i.e. we could soon expect the consumer price index (inflation) to start creeping up,
8. Unemployment measured by The Jobs Report increased to 9.7% in August 09, indicating that the U.S. economic cycle hasn’t yet reached the trough or the bottom,
9. Budget deficit in August 09 has decreased from July 09, indicating that government doesn’t need to borrow more money to finance such deficits & thereby doesn’t drive up the interest rates. Bullish sign,
10. Manufacturing export orders per NAPM report in August 09 is 55.5%, with an increase from July 09 by 5%. Increase in exports & decrease in imports indicates that trade deficit might narrow,
11. Manufacturing import orders per NAPM report in August 09 is 49.5%, with an increase from July by 5%. Increase in exports & decrease in imports indicates that trade deficit might narrow.

Individually, each of the above indicators have their own impact on the stock markets. However, if you look at the indicators & aggregate their impacts, you see a trend emerging – money is cheap, production is increasing and capacity utilization to produce at each business is rising. Prices have also started their ascent just as retail sales are increasing as well, mainly led by energy & utilities. Coupled with the fact that the export orders are increasing and budget deficits are decreasing is a sign that the government is unlikely to spend more money (bail outs, etc) in the near future. All these are indicative of the expansion phase of the economic or business cycle. This also is indicative of the fact that the unemployment rate might not get any worse, but might start decreasing in the next coming months. Expansion phase is stock market friendly, hence the recent surge in the stock market! Particularly energy sector is lucrative for investment right now. Stock markets hate inflation & surges in unemployment rates. Inflationary scenarios could mean interest rate increases by the Federal Reserve and that action is a bearish sign for the stock markets. But we currently are nowhere close to such a scenario given that inflation is still well below the danger mark of 2%. Rising unemployment rate is indicative that recession is nearing, however, based on above factors, it appears that we are nearing the end of further decreases in unemployment rates and we could expect business activity & hiring to pick up as we approach fourth quarter of this year.