Making Different Predictions with the same Key Economic Indicators – A Story of our Market

The stock market goes up, down, and around

Sounds like an analyst on the news. So many advisors and influencers think they have the answers or the next hot technical analysis to predict the market. Then over the next 10 years you find out that you would have been in the same spot going the traditional safe route of dollar cost averaging into some ETFs.

I get it. I want the quick win too. The mighty windfall that will have you retiring the next day. The windfall that you’ll be living off of for years and will be able to set generations of your family up with lasting wealth.

The thing is no one can really predict the future of any market (if we could I would be a richer than Iron Man). All we have is historical patterns and other variables like rising interest rates, the job reports, and other economic factors to predict where the markets will go and make an educated bet. So instead of making bets like I do on my options trades let’s take a look at some historical indicators of good, bad, and everything in between on markets.

Key Economic Variables

1) Interest rates: We’ve covered how rising rates can affect you and what has happened in the past. Interest rates are an indicator of what the Fed is doing to combat inflation and control whether or not the economy drives into a recession.

2) Employment: There is a monthly report the Department of Labor puts out that includes number of jobs created by sector as well as the national unemployment rate. Low unemployment can signal a strong economy but can also predict high inflation – so that makes this one fun to ‘read into.’

3) Bell Weather Stocks: Obviously there are some stocks that are correlated to overall market health and that’s what this is. These are larger companies that are situated as market leaders. An example (and one I follow) is FedEx.

4) Inflation: We’ve also covered this a few times. Essentially the measure of how much the general price levels rise for specific goods and services. The most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).

5) Gross Domestic Product (GDP): This provides the overall value of the goods and services that the economy produces and indicates whether it is growing or slowing. This is evaluated quarterly with 3 different reports (initial prediction, actual reading, then final report). It’s also broken down into consumer spending (below), business investment, and government spending. 

6) Consumer Spending: This makes up 2/3 of the U.S. GDP – so consumers mean a lot. The release from the Department of Commerce provides data on consumer spending, personal income data, and pricing information on inflation impacting how much a consumer has to spend to buy an item.

7) Home Sales & Home Building: A report provided sharing information on median and average home prices all based on contracts to buy or sell homes. There is also a report that shares the number of houses a builder starts working on and number of permits obtained. These are both regional and national reports. With a home being one of the largest (if not THE largest) purchase in a consumers life this is an important one to track.

Opening that old Macroeconomics Book again

Using these indicators and all the knowledge we’ve gained from our past, these are still just indicators to predict where the economy can go. When advisors, market experts, Uncle John, or the influencer hits with a few really strong predictions remember that they’re looking at the same indicators the people making the OPPOSITE predictions are using. What does that mean? That really no one really knows where the market is going to go and what’s actually going to happen outside of forecasting based on historical data.

To prepare for the unknown I’ve done the below…

1) Reduce unneeded debt: I’ve paid off certain credit cards or loans or traded in cars before at certain points in my life. My thought here was getting rid of a monthly payment to prepare for the worst and keep a little more cash on hand.

2) Maintain an emergency fund: Ever since I could actually save money for a an emergency I had some cash in an FDIC insured High-Yield bank. I currently have mine spread through Wealthfront, Ally, and Yotta.

3) If capable diversify: I’m a believer that it’s not always smart to diversify if you’re limited in the capital you have to deploy. Example is I would have never been able to get into real estate if I didn’t liquidate my stock portfolio early in my investing career. The appreciation of my real estate allowed me to get back into the market and see further growth. With that said, I am diversified now and keep a certain percentage of my net worth in different types of investments.

4) Get control of your emotions: Whenever I’ve lost money it’s because I’ve listened to my whacky emotions and didn’t stay the course. I’ve lost money in options, real estate, the stock market by selling too early – all of these losses came when I should have just held strong. Figure out a way to get

There are plenty of other things you can do to prepare for the unknown markets but one thing is for sure – people can’t predict the future so don’t place your bets on those predictions. 

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