In this article, we will be looking at the top US economic indicators every investor should know.
Why Invest in Stocks?
There are a variety of investing options available including stocks, bonds and real estate. However, investing in stocks is one of the most lucrative options. Based on estimates by Aswath Damodaran, NYU business professor, if a person had invested $100 in the US stock market in 1928 the amount would have increased to $1,000 by the mid-1950s, $10,000 by the mid-1980s, and almost $750,000 by the end of 2021. The data indicates that it would take almost 100 years to convert $100 to $1 million. The numbers are remarkable when compared to other asset classes. During the same period, $100 invested in US Treasury bonds would help reach about $8,500, and real estate would only reach $5,000.
The attractive opportunity for investment presented by stocks is availed by a large sum of the American population. According to the results of the Economy and Personal Finance survey conducted by Gallup, in 2023, 61% of Americans owned stocks. The number of people owning stocks experienced a slump post-2008. The numbers decreased from 61% of Americans holding stocks in 2008 to 59% in 2009 and 56% in 2010. Based on the survey results, the number of people who owned stocks has been recovering post-2016, from the number going from 52% in 2016 to 55% in 2018 to 58% in 2022. The numbers were restored to pre-2008 levels in 2023, 61%, implying the stability and regaining of local trust in the stock market.
Total and disposable household income along with education also impact the investing habits of a person. In 2023, American households with an income of $100,000 or above had 84% of adults investing in stocks. The number was as low as 29% for households earning less than $40,000. Education also impacts investing habits as 8 in 10 college graduates were investing in stocks. Better education and reasonable household income showed an increase in inclination towards investing in stocks.
Retail Investing Made Easy
Robinhood Markets Inc. (NASDAQ:HOOD) has made retail investing easier. The company pioneered commission-free trading, making trading and investing for beginners more accessible. On May 15, the company reported the operating data for April 2024. The number of funded customers at the end of April amounted to 24 million, showing an upsurge of 90,000 compared to March. Net deposits for April were $4.9 billion, indicating a 45% annualized growth rate from March. The net deposits have experienced a 35% annual growth rate from April 2023. The growing platform offers a great opportunity for retail investors to explore more options.
Top Beginner Friendly Stocks
Blue chip stocks refer to companies with mature businesses and stable financials. These companies offer a beginner-friendly way for prospective or amateur investors to get started. Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT) are among the most popular blue chip stocks.
Apple Inc. (NASDAQ:AAPL) has a strong track record of profitability and driving shareholder value. On May 2, Apple Inc (NASDAQ:AAPL) reported earnings for the fiscal second quarter of 2024. Apple Inc. (NASDAQ:AAPL) reported an EPS of $1.53, beating estimates by $0.02. The company’s revenue for the quarter grew by 8.32% and amounted to $90.75 billion, ahead of market consensus by $299.27 million. Here are some comments from the company’s earnings call:
“Today, Apple is reporting revenue of $90.8 billion and an EPS record of $1.53 for the March quarter. We set revenue records in more than a dozen countries and regions. These include, among others, March quarter records in Latin-America and the Middle East, as well as Canada, India, Spain and Turkey. We also achieved an all-time revenue record in Indonesia, one of the many markets where we continue to see so much potential. In services, we set an all-time revenue record, up 14% over the past year. Keep in mind, as we described on the last call, in the March quarter a year-ago, we were able to replenish iPhone channel inventory and fulfill significant pent-up demand from the December quarter COVID-related supply disruptions on the iPhone 14 Pro and 14 Pro Max.”
Microsoft Corporation (NASDAQ:MSFT) is another noteworthy company that has exhibited consistent growth and profitability patterns. On April 25, the company reported earnings for the fiscal third quarter of 2024. The company reported an EPS of $2.94, beating estimates by $0.1. The company’s revenue for the quarter grew by 17.03% and amounted to $61.86 billion, ahead of market consensus by $977.92 million. As of May 30, Microsoft Corporation (NASDAQ:MSFT) has surged nearly 20% over the past 12 months. Here are some comments from the company’s earnings call:
“It was a record third quarter, powered by the continued strength of the Microsoft Cloud, which surpassed $35 billion in revenue, up 23%. Microsoft Copilot and Copilot stack, spanning everyday productivity, business process, and developer services, to models, data, and infrastructure, are orchestrating a new era of AI transformation, driving better business outcomes across every role and industry. Now, I’ll highlight examples, walking up the stack, starting with AI infrastructure. Azure again took share, as customers use our platforms and tools to build their own AI solutions. We offer the most diverse selection of AI accelerators, including the latest from NVIDIA, AMD, as well as our own first-party silicon.”
Learning about economic indicators and how they impact capital markets can help those just starting with investing in the long term. With that, let’s look at the top US economic indicators every investor should know.
A senior executive looking up at a large boardroom filled with the stocks their company manages.
Our Methodology
To make our list of the top US economic indicators every investor should know, we initially sifted through more than 10 sources comprising banks, financial research institutions, and financial media. We then separated the terms that appeared in at least 50% of these sources and ranked them in no definitive order.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Top 15 U.S. Economic Indicators Every Investor Should Know
15. Durable Goods Orders
Durable Goods Orders are a significant economic indicator used by investors to gauge the health of economies. Durable goods orders show the orders being placed for long-lasting manufactured goods lasting for three years or more. Durable goods could include machinery and equipment. Investors closely monitor Durable Goods Orders as they can indicate future trends in economic growth and stock prices.
14. Consumer Spending
Consumer spending plays a crucial role in investing as it is a significant driver of economic growth and a key indicator of market trends. It is the total money spent by individuals and households on final goods and services. It includes both goods and services for personal use and enjoyment. When consumer spending increases, it can boost economic growth, leading to higher stock prices and a more robust market.
13. Business Confidence Index
The business confidence index offers insights into future economic developments based on surveys about production, orders, and stock levels in various industries. These indicators help monitor output growth and anticipate shifts in economic activity. A BCI above 100 indicates optimism about future business performance, while a value below 100 suggests pessimism. Therefore, a BCI below 100 indicates a declining economy and a bad environment for investing. The BCI helps analyze the economic situation in the short term, with a rising trend indicating improving business conditions.
12. Stock Market Performance
Stock market performance plays a crucial role in making investment decisions. By understanding the stock market performance the returns on investment can be better estimated. Evaluating stock market performance involves considering various factors including government policies and interest rate changes. It is one of the top US economic indicators every investor should know. When market indices are up year over year or are gaining, it typically indicates that the overall market is performing well which is a positive sign for investors as it implies market trending upwards and investments increasing in value.
11. Retail Sales
Retail sales are an important economic indicator that provides insights into the health and direction of the overall economy. Retail sales help better understand consumer spending habits, state of the economic growth, and the performance of specific sectors. A profound understanding of retail sales can help investors make better decisions. Strong retail sales data typically leads to a positive correlation with stocks, as it indicates a healthy economy with increasing consumer spending. Retail sales are a significant component of the gross domestic product (GDP). Strong retail sales contribute to higher GDP.
10. The Housing Market
The housing market refers to the market for buying and selling residential properties. An understanding of the housing market can enable investors to make knowledgeable decisions about keeping, renting, or selling a given property. A strong housing market is characterized by high home sales, increasing home prices, and positive consumer sentiment. The housing market can have positive effects on the stock market by boosting GDP, consumer spending, job creation, and demand for related stocks.
9. Consumer Confidence Index (CCI)
The Conference Board publishes the CCI and surveys households to assess consumer confidence regarding business conditions, employment, and income expectations. It is one of the top US economic indicators every investor should know. When consumer confidence is high, it can lead to increased consumer spending, which in turn boosts economic growth and often results in higher stock prices. The CCI is benchmarked to a base year of 1985, with a value of 100. A reading above 100 indicates that consumers are more optimistic than they were in 1985, while a reading below 100 indicates they are more pessimistic.
8. Trade Balance
The trade balance measures the difference between a country’s exports and imports of goods and services over a given period. The positive value of trade balance indicates a trade surplus implying that exports were greater than imports. Similarly, a negative value indicated a trade deficit showing that exports were less than imports. It is important to note that a trade deficit is not necessarily bad for an economy and can indicate high domestic demand. It is one of the top US economic indicators every investor should know. When considering investing in markets with negative trade balances, investors should assess the broader economic conditions to better understand the factors involved.
7. Producer Price Index (PPI)
The Producer Price Index (PPI) measures the change in the selling price of goods and services sold by producers in the United States. It is one of the top US economic indicators every investor should know. PPI helps gauge the extent of consumer price inflation. It is also an early indicator of future consumer price trends. The PPI serves as a leading indicator of inflation, as it measures the costs to produce consumer goods. When costs rise for manufacturers and producers, retail prices tend to go up as well. This means that the PPI can predict future CPI movements.
6. Consumer Sentiment Index (CSI)
The Consumer Sentiment Index (CSI) is a crucial indicator in investing, providing insights into consumer confidence and spending patterns. The CSI is calculated by subtracting the percentage of unfavorable consumer replies from the percentage of favorable ones. A rise in the CSI often indicates increased consumer spending and economic growth, benefiting sectors including retail and housing. Furthermore, a strong retail sector reflects consumer confidence and spending power, which can lead to increased economic activity and job creation.
5. Unemployment Rate
The unemployment rate measures the percentage of the total workforce that is unemployed and actively seeking employment during a specific period. The Bureau of Labor Statistics (BLS) releases this rate monthly. The unemployment rate reflects changing economic conditions including the dollar’s stability and key inflation data. It is a fundamental US economic indicator. A low unemployment rate, typically below 5%, signals a growing and strong economy and increased investor confidence. It is associated with strong stock market returns, since in a healthy economy corporate profits and stock valuations boom.
4. Interest Rates
Interest rates play a crucial role in investing and play a vital role in influencing various financial markets and economic indicators. Interest rates can significantly impact stock market prices. Higher interest rates can negatively affect earnings and stock prices. However, the impact can be the opposite when it comes to the financial sector. An understanding of interest rates can help investors make smart decisions about their investments including if to invest in stocks or bonds.
3. The Consumer Price Index (CPI)
The Consumer Price Index (CPI) is a key economic indicator that measures the change in the prices of goods and services from the perspective of the consumer. This significant economic indicator helps gauge inflation rates and purchasing power in an economy. CPI is widely used by central banks and governments to monitor inflation and make informed decisions. A CPI within a target range of 2 to 3% is generally considered good for the economy, as it indicates stable inflation and economic growth, therefore, indicating a good time for investing. Investing during periods of high inflation can be risky due to reduced purchasing power and potential economic instability.
2. Purchasing Managers’ Index (PMI)
Purchasing Managers Index (PMI) provides insights into business conditions. It is a survey-based measure that tracks the health of a country’s manufacturing or services sector. The data is then weighted based on the category’s contribution to the gross domestic product (GDP). A PMI reading above 50 indicates sectoral expansion, while a reading below 50 indicates contraction. It provides a quick understanding of the economic conditions and identifies patterns.
1. Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is one of the top US economic indicators every investor should know. A large GDP corresponds to a bigger economy and a bigger market. By understanding and comparing GDP growth rates among different economies, investors can better understand where to allocate their investments for maximum returns. The comparison of GDP growth rates allows investors to narrow down on fast-growing economies and identify emerging markets for investments. Furthermore, corporate profits and inventory data in the GDP report are valuable for equity investors, as both categories show total growth during the period.
At Insider Monkey, we delve into a variety of topics; however, our expertise lies in identifying the top-performing stocks. Currently, Artificial Intelligence (AI) technology stands out as one of the most promising fields. If you are looking for an AI stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 24 Fastest Growing Economies in the World in 2024 and 15 Fastest Declining Economies in the World in 2024.
Disclosure: None. Insider Monkey focuses on uncovering the best investment ideas of hedge funds and insiders. Please subscribe to our free daily e-newsletter to get the latest investment ideas from hedge funds’ investor letters by entering your email address below.
