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The US stock market is the largest in the world. In 2024, it accounted for nearly 60% of the world’s market cap. This dominance makes it a powerful market and is closely followed worldwide.
This market is not just driven by earnings and charts. It involves watching key economic indicators, understanding business cycles and the state of the economy. These signals help investors predict how the market might move.
In this article, we will analyse some of the key economic indicators, also called macroeconomic indicators.
Key Indicators for Following the Stock Market and Economy
Macroeconomic indicators are statistics that show how well the economy is doing. The performance of the US index is much dependent on these macro indicators. Smart investors use these indicators to understand trends and make informed investment decisions. They are also a cycle indicator, meaning they show whether the market is entering a bull or bear cycle.
Apart from GDP, some of the key economic index include:
- Non-farm Payroll Data
- Consumer Price Index (Inflation Rate)
- Interest Rate (Fed Rate)
- Retail Sales
- Services and Manufacturing PMI
- Consumer Confidence Index
Each macro indicator holds a clue about whether the economy of the country is expanding or not.
How Do Economic Indicators Affect Stock Prices?
Macroeconomic indicators tell the state of the economy and broadly reflect consumer sentiment and actions. Any positive macro indicator news can boost investor confidence and push stock prices higher. On the other hand, bad news can cause stock prices to drop.
For example, if the inflation stays within the targeted range, it’s a positive development. It can result in the Federal Reserve cutting interest rates, which can boost stock prices.
Similarly, a weak job report month after month indicates that the economy is struggling. Because of fewer job openings, consumers may spend less, which could reduce company profits.
Top 5 Macroeconomic Indicators That Influence the Stock Market
Here are the top five macroeconomic indicators you should follow closely:
Consumer Price Index (CPI)
It is referred to as inflation, and every investor keeps a hawk eye on inflation numbers. It shows how fast the average prices of household goods and services change. A moderate inflation is normal, but a high inflation is detrimental to the growth of the economy. It hurts consumption growth, reduces buying power, and hurts stock prices.
Generally, the CPI or inflation should be within the target range of the Federal Reserve. For example, the Federal Reserve has set a target of a 2% inflation rate for the economy to perform at an optimal level.
Non-farm Payrolls
Non-farm payroll is a closely followed macroeconomic indicator in the US. It shows the changes in paid workers in non-farm industries on a monthly basis. The data excludes business owners, private household employees, unpaid volunteers, farm employees, and unregistered self-employed.
A low non-farm payroll number from the previous month indicates more people are earning and spending, which is good for business and the economy.
The non-farm payroll data gives a break up of which sector has added how many jobs and average hourly earnings. Analysing the monthly trends can help to understand the performance of each sector.
Federal Interest Rate
It is also referred to as Federal Reserve Policy and sets the stance of monetary policy based on prevailing economic conditions. For instance, if the country is experiencing inflationary conditions, the Federal Reserve will raise interest rates to slow down spending and vice versa.
However, a higher interest rate is not good for business, as it makes access to funds/capital expensive and reduces profits.
The Federal Open Market Committee is responsible for making decisions on interest rates and also gives out its outlook on future course of actions.
Retail Sales
Retail sales data is the primary indicator of consumer spending. It measures the total value of sales at the retail level. A higher-than-expected number should be taken as a positive for the economy.
Along with retail sales, investors combine the readings of the Consumer Confidence Index, which shows how optimistic people feel about the economy. It helps them to accurately gauge the mood of the economy in the short term.
A higher confidence often leads to more spending, which helps the market.
Services and Manufacturing PMI
PMI stands for Purchasing Manager Index. It measures the economic health of the services and manufacturing sectors.
The PMI surveys are based on new orders, production levels, supplier deliveries, employment, and inventories.
PMI reading of above 50 indicates expansion in services or manufacturing activities. A strong PMI often boosts investors’ confidence and indicates steady consumer demand and economic growth. Weak PMI numbers can lead to sell-off in the market.
Is the S&P 500 a Reflection of the Economy?
Like all the stock indexes in the world, the performance of the S&P 500 is a reflection of the economy. The S&P 500 index tracks the 500 largest public companies in the US. The index represents approximately 80% of the total market capitalization of the US companies.
However, it’s not always the perfect reflection of the economy. Because the performance of the index is based on the earnings of the companies, not their economic health.
In 2019 and 2020, the US GDP contracted by -0.5% and -4.68%, respectively. However, the S&P 500 index jumped 31.49% and 18.4% in those two years.
What Are the Two Biggest Stock Market Indicators in the US?
Stock market indicators are quantitative tools that help to forecast future stock market movements. The two biggest stock market indicators in the US are:
Gross Domestic Product (GDP): It measures the total value of goods and services produced within the country. It is a comprehensive indicator of economic activity.
Expansion in GDP typically indicates rising corporate earnings, which can push stock prices higher. While contraction in GDP may lead to market declines.
Consumer Price Index (CPI): Inflation plays a big role in the growth of the economy. Moderate inflation is considered normal and good for the market. High inflation erodes purchasing power and often leads to higher interest rates, affecting stock market returns.
These two indicators are closely tied to corporate profitability, investor confidence, and monetary policy.
Top 3 US Stock Market Indices & What They Indicate
The top 3 US stock market indices are:
Dow Jones Industrial Averages (DJIA): This index is the oldest and most recognized. It tracks 30 major US companies. It is more impacted by GDP numbers.
S&P 500: It covers a broad range of industries and is more representative of the overall market. It is more sensitive to interest rate changes.
Nasdaq 100: This is a technology sector index and includes all the big technology companies, including Nvidia, Microsoft, Alphabet, Apple, and Amazon. It is the most tracked index worldwide and gives insight into the most profitable and innovative trends in technology.
Which Macroeconomic Indicator is Most Influential for Stock Markets?
While all indicators help to forecast the stock market movement, interest rates have the biggest impact on stock prices. Because it can tilt the demand and supply dynamics in the market, impacting corporate profits and stock returns.
For example, when the Federal Reserve increases interest rates, it makes the bond market more attractive to investors. Higher rates mean better returns on bonds, with lower risk compared to equities. This results in investors shifting their money from stocks to bonds. This movement is referred to as “flight to safety” and results in a sell-off in the equity market.
Conclusion: Importance of Tracking Macroeconomic Indicators
Tracking macroeconomic indicators, as they reflect macroeconomic conditions, is a very important part of the investment journey. These signals help to determine the short-term market move and where it might be headed. So, whether you are a new investor or a seasoned trader, keeping an eye on them is the key to making informed and smarter investment choices.
