In the ever-evolving world of investments, staying ahead of the game needs a comprehensive knowledge of economic indicators, as they are crucial for an investor to make sound decisions and maximise their portfolio's potential. This blog will explain some economic indicators and how they affect your portfolio.
An economic indicator is data released by the government or other agencies to help provide a clear picture of how a country's economy is performing. If the predictions align with the results, it is concluded that the economy is growing and vice versa.
There are many indicators to track the economy. However, tracking each of them is impossible, so here are some critical indicators you can follow to get an idea about the economy.
GDP: Gross Domestic Product or GDP is the market value of a country's goods and services produced during a given period. GDP rates can be compared with the previous quarter’s or year’s GDP. A rising GDP indicates the country’s growth, while a falling GDP shows a contraction in the economy. The amount of GDP will portray how much money companies have been making in the mentioned period.
Interest Rates: It is the percent charged on loans or paid to the saving account holders. The interest rate is set by the Central bank, which the commercial banks and consumers follow. Typically, interest rates are increased to control inflation and lowered to promote growth. It is an essential factor for the forex markets because a high-interest rate indicates a strong economy and makes the investors buy the currency.
Stock Markets: The stock market is where individuals and institutions come to a common place to trade shares of companies and Exchange Traded Funds (ETFs). However, the high amount of trading in the financial market may be an unstable indicator.
Consumer Price Index (CPI): It measures the changes in the price of goods and services paid by the end customers in a specific month. Typically, it compares the cost of living over time and can be used to measure inflation levels. Participants in the market pay great attention to CPI for signs of inflation because high inflation can lead to high-interest rates and reduce borrowing; on the other hand, deflation can lower interest rates and promote lending. It is a good indicator for gauging inflation, but it should be noted that it is a lagging indicator and may be unstable for the current inflation levels.
Currency Markets: National currencies are a benchmark for gauging a country's economy because they reflect how much buyers and sellers think it is worth. It is an excellent economic indicator but a lagging one because it depends on historical events.
Unemployment And Wages: Unemployment data and wages focus on the number of jobs available in an economy and how much every job holder is paid. This kind of data is released a few times a year. But, it should be used only as a part of the analysis because this is also a lagging indicator.
Balance Of Trade: It is the difference between the amount of export and import in a specific period. A country with a higher level of imports than export in terms of value faces a trade deficit, while a country with a higher level of exports than imports has a trade surplus.
Housing Market: The housing market shows essential information about the economy. If there is a decline in the new housing projects, fewer people are looking to buy properties, reducing the wealth of homeowners. It is a popular indicator for economic activities since companies must apply for building projects six months before starting construction activities. The stats show if the demand for homes is rising or falling.
Industrial Production: Industrial production data also plays a crucial role in measuring economic health as it measures the change in the overall inflation-adjusted worth of production produced by the industries.
These indicators can be used in measuring the health of a company’s economy in the long run. It gets even more resourceful for financial analysts, economists, and investors to understand the economy better and make better investing decisions.
Fluctuations in the country's economic condition may affect your portfolio, but investing in Alternative Investment Options can be lucrative as they are not market linked. Grip Invest helps you diversify your investments to non-traditional investment opportunities such as corporate bonds, leases, inventory financing, startup equity, and commercial real estate.
Is the stock market an excellent economic indicator?
Stock markets are an economic indicator because they tell about the investors' sentiments. Since foreign investors also invest in the stock markets, their fund inflows in the economy show faith that they have a reasonable belief about the country’s economy. However, the stock market has high speculation activities; hence, it should be carefully used.
How can an economy be measured?
GDP is a popular indicator used to measure an economy. It gauges the monetary value of the goods and services produced in a country in a specific period.
Which economic indicator measures if the prices are declining or rising?
When prices rise, it is called inflation; when the prices fall, it is known as deflation. The indicators include the Consumer Price Index (CPI), Producer Price Index (PPI), and employment costs.
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