Economic Indicators Tell When To Get Back In

 

“In my many years I have come to the conclusion that one useless man is a shame, two a law firm and three or more  is a congress” John Adams

Put More In?

Just about everyone I know is asking the question : Is now the right time to start putting more money into the market? And, some people I know have unique ways of trying to determine that. One person regularly checks sites such as Craigslist and StubHub to see what people are paying for scalped tickets. His rationale: The more those tickets sell for and the faster they’re snapped up, the more bullish people feel about the economy.

But what indicators do the pros watch? This article explains some of the more important ones.

Market Breadth

Market breadth refers to how the overall market is doing as opposed to just one or two sectors such as technology or health care. When rallies are broad – when they involve more than one sector of the economy- they’re more likely to forecast a more sustainable bull market and an overall turnaround.

This spring’s rally was encouragingly broad. According to Morningstar, 10 of the 12 main industry sectors saw their stocks rise during that three-month stretch.

P/E Ratios

A more traditional measure of the relative value of stocks is the Price/Earnings Ratio. This ratio compares a company’s stock price to its profits. For example a P/E ratio of 16 means that for every one dollar of earnings, you will pay $16 for a share of the stock. The lower the P/E ratio, the cheaper the stock.

Issuance

The bond market basically represents a huge chunk of the money that gets borrowed by government, businesses and consumers. For instance if General Electric needs to raise money, it could sell bonds. When the economy gets shaky, bond buyers get nervous; they demand higher interest rates, and some borrowers can’t raise money at all, in what we’ve painfully come to know as a credit crunch.

It’s a good sign if companies can sell new bonds – what bankers call “issuance’.

TED Spread

Lower interest rates are supposed to encourage borrowing. But low interest rates alone hardly guarantee a rebound . Instead, market watchers pay attention to “spreads,” the differences between the interest on super safe Treasury bills and the rates on other kinds of loans. The most closely watched ones include spreads based on corporate bonds and the “TED spread,” which compares Treasurys with the rates banks charge each other. The “TED spread” should be around 0.50 percentage points, down from 0.70 currently. You can get information on these spreads from Bloomberg.com and TEDspread.com.

Employment

There’s probably no sign of the economy’s health that’s more closely watched than employment. Most companies begin to rehire only once they are confident the worst economic news is behind them. That often doesn’t happen until months after the market has turned around (lagging indicator), so job numbers won’t help an investor catch the early edge of a rally. But for someone looking for signs of a sustainable recovery, they’re a useful gauge.

Economists and strategists pay particularly close attention to weekly unemployment-insurance claims – the number of people actually applying for employment benefits each week. Once that number stops growing or even declines over a couple months, it’ll be a signal that the negative economic cycle is winding down. You can find these figures at the Department of Labor site: www.ows.doleta.gov/unemploy/claims.asp.

Purchasing Managers

The pros also keep an eye on the monthly report from the Institute for Supply Management, which surveys purchasing managers in 20 industries who buy such varied items as cables, computers, packaging boxes and machinery. In the institute’s survey, a number over 50 suggests the economy is expanding; lately, it has hovered in the high 30’s.

Consumer Confidence

The drying up of consumer spending is one of the main reasons for today’s recession, and even 50-year-low mortgage rates and rock bottom prices at the mall haven’t been enough to open their wallets. That’s why any sign that Main Street’s pessimism about homes, jobs and futures has turned to optimism will be a major step in the recovery. The Survey of Consumer Confidence gives us this information. A score of more than 50 suggests that consumers are more upbeat. You can get this information at: www.conference-board.org.

Housing

Since there was a housing bubble at the epicenter of this financial crisis, it’s natural to look to the real estate market for signs the worst is over. After all, if people are willing to buy homes, it suggests they feel pretty good about their jobs and future prospects — all positive signals for a sustainable stock run.

Look for more stability in home sales and prices.

To try to spot the home-price bottom, keep your eyes on the trends in existing home sales. Many homeowners are currently opting to stay put rather than join the fire sale of foreclosed homes, but once they feel comfortable enough putting their homes on the market, it’ll be a sign the housing situation is on the mend. It’ll be another good sign when housing starts and building permits increase after a long decline — that will suggest developers finally feel they can make money on new building again.

So, watch for an increase in housing starts and building permits at the Census Bureau’s New Residential Construction index, at www.census.gov/const/www/newresconstindex.htm.

Invitation

If you’re not a client yet, and you’d like to explore the option of developing a professionally managed investment portfolio comprised of no-load mutual funds, please give me a call.

I’d be happy to sit down with you and explain how as a fee-only investment advisor I can assist you in meeting your financial goals.

Marshall Sitarik - CFP
Ph. 407-977-3800