Understanding the role of Economic Indicators in Investing

published on 01 February 2023

Foreign Economic Indicators can give us insight into the state and potential direction of markets and the economy, and while that doesn't mean the stock market and the economy are the same, there are economic events that can impact both. For this reason, some investors may pay close attention to these trends. 


Economic indicators represent economic data and report on matters like general business activity, employment trends, household and private sector incomes, loans, and much more. They can also be considered leading or lagging. A Leading Economic Indicator can give us some hints about the direction of the economy moving forward, while a Lagging Economic Indicator can show what happened within a certain time frame in the past. 

What are some common Economic Indicators?

For starters, there's Gross Domestic Product or GDP and this is a lagging indicator. When GDP numbers are reported, they tell us how the economy performed in a past period and when economies are performing well. This tends to be reflected by the performance of the companies in the stock market.


We can see that both Japan's main stock indexes the Decay and their GDP haven't yet recovered from the respective peaks in the early 1990s, which resulted in low and underperforming stock market returns relative to other parts of the world during the same time, that's GDP.

Another common lagging indicator is the Unemployment Rate. This is the percentage of the labor force without jobs. Generally speaking, investors may closely watch unemployment trends because of the impact they can have on markets. 


Leading Indicators

First, we have Interest Rates. When interest rates are adjusted by central banks, this is actually an indicator of possible market conditions to come. Central Banks are public institutions backed by governments to keep the state of markets healthy through economic factors like interest rates and the money supply.

Altogether, these actions are known as monetary policy, and central banks are often referred to as the bank for banks in part due to the loans they provide. Moreover, the impacts the regulations and decisions have on everyday banks when a central bank cuts interest rates. There are investors who may see this as a bullish signal for stocks because they can stimulate the economy and lead to growth. On the other hand, interest rate cuts may also coincide with lower yields on bonds.


Consumer Confidence

The last leading indicator we'll cover is Consumer Confidence. It is a monthly survey assessing consumers' attitudes, expectations, and spending plans.


 It's usually seen as a gauge for consumer spending and economic conditions over the long run. History has shown that the stock market tends to follow consumer confidence.


Ultimately, economic indicators can be helpful in two ways: They can play a key role in markets as businesses tend to thrive in strong economic environments, and they can help us assess the state of the economy. However, keep in mind that no one economic indicator can predict the market by itself. Think of indicators generally as different factors to include in the overall investment research process.

Key Takeaways:

  • Economic indicators can provide insight into the state and potential direction of markets and the economy. 
  • Leading economic indicators can give hints about the direction of the economy moving forward while lagging economic indicators can show what happened in the past. 
  • Common economic indicators include Gross Domestic Product (GDP), Unemployment Rate, Interest Rates, and Consumer Confidence. 
  • No one economic indicator can predict the market by itself, but it can be helpful in the overall investment research process.

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