The keys to building personal wealth and financial independence are embodied in the country/western song, “Know When to Hold ’em, Know When to Fold ’em,” which has an old-timer giving instructions to a traveler on a train on the finer points of winning at poker. Whether your personal investment plan involves stock, mutual funds, municipal bonds, or even plain old-fashioned bank deposits; knowing when to put in and when to pull out is important to the long-term viability of your assets, and is key to building your net worth.
Developing a good long-term investment strategy can be helped if you know what factors to take into consideration. A good menu of factors to keep an eye on as you navigate the investment waters is the Key Economic Indicators. The ebb and flow of the economy can be about as easy to understand as a whirling kaleidoscope if you don’t know what to look for and what to ignore. The following seven key economic indicators, however, provide a relatively comprehensive picture of the economic trends that are useful in the making of investment decisions.
Gross Domestic Product (GDP): GDP is the measure of the country’s total output of goods and services. This is the broadest of economic measurements, taking into account overall economic performance. It must, however, be evaluated in conjunction with the other indicators in order to be a truly useful guide for investment decisions.
Job Growth: When the country’s job market is expanding, consumer confidence is increased. This in turn leads to increases in other positive economic indicators, such as retail sales and housing construction and sale. If job growth is positive, and the trend line appears to be positive, the early stages of the trend are a good time to invest.
Monthly Retail Sales: Trends in the monthly retail sales of the economy are also a reflection of consumer confidence, and can be a barometer for which direction the economy, and as a consequence, the market, is going. If retail sales are trending in an upward direction, equity values will also tend to trend upward.
New Residential Construction: Housing starts are a good indicator of the mood of the manufacturing sector and its confidence in consumers’ willingness to part with income. Increases in this indicator also trigger upward moves in other industrial sectors.
New Residential Sales: While housing starts show a healthy attitude in industry, it’s when people actually take out mortgages on new residences that consumer confidence is concretely demonstrated. When both construction and sales trend upward, the overall market tends to rebound and generate good returns to investors. When they dip, look out.
Consumer Confidence: This indicator is based on monthly interviews with 5,000 households to determine their confidence in the economy. While not an absolutely infallible indicator of economic performance, when consumer confidence is low it has a negative impact on companies, and can lead to a cascade effect; companies produce less causing consumers to have less to buy, etc.
Institute for Supply Management: This index is a concrete measurement of whether or not the manufacturing sector is expanding or contracting. It surveys production, sales, export, and other data of more than 400 U.S. companies. The compilation of this data gives a fairly accurate summary of the national economy, and over time can show broad economic trends.
The most often touted strategy of investing is “buy low, sell high.” Using these seven economic indicators, making the crucial decision of when “low” is low enough, and when “high” is about at a plateau, will be a less complicated task, and will help mitigate some of the anxiety of investment decisions.