Investing money is very far from an exact science. Unfortunately, there is no approach that you can take that will give you the results you want 100% of the time. If there was an investment that guaranteed you a perfect result, then everyone in the world would be a millionaire. More often than not, investing money is a combination of carefully researched analysis along with calculated guesswork.
Luckily, when it comes to conducting research, there are plenty of tangible metrics that you can use to assist your investment decisions. Most specifically, investors will look at economic indicators.
Let’s take a look at a few economic indicators and how you can use them to improve your investment analysis.
The rate of inflation is the amount that the U.S. dollar is decreasing in purchasing power every year. This rate is usually around 2-3% each year and creates a strong incentive for people to invest their money. Without investing, people would just slowly lose their purchasing power over time.
The rate of inflation is constantly changing and usually goes hand-in-hand with the interest rate, which is set by the Federal Reserve. Assets that usually perform well in times of high inflation are real estate, precious metals, and stock indexes.
It’s always a good idea to check your local inflation rates.
Want to learn about finance but don’t know where to start?
The interest rate is the amount that a lender charges others to use their money and is usually expressed as a percentage of the principal borrowed. The Federal Reserve is frequently tweaking the national interest rate, which is the amount that banks are allowed to charge each other to borrow money.
One important thing to know is that the interest rate usually works inversely with bond prices. For example, if the interest rate is increased then bond prices will drop and vice versa.
Government activity, especially at a federal level, is another good economic indicator that you can use to improve your investment analysis. This is because different governments will have different initiatives, which will ultimately be good or bad for different companies.
For example, Joe Biden has made it clear that he is going to completely revamp the infrastructure in the United States. This will undoubtedly be good for construction companies like Caterpillar and could positively impact their stock price.
Even though it feels like the government has significant control over the state of the economy, their power is dwarfed by that of consumers. Consumers are ultimately the ones who create the entire economy and determine which assets will succeed or fail. Consumer activity is essentially just all of the buying and selling that goes on within the economy.
One of the best ways to base your investments on consumer activity is to try and predict how consumer spending will change in the next few months or years and buy stock in companies that are poised to benefit from this shift. For example, during the COVID-19 pandemic, stores were shut down and consumers were forced to do most of their shopping online. This ended up being very good for Amazon and other online retailers.
We hope that you’ve found this article valuable when it comes to learning a few of the most common economic indicators and using them to improve your investment analysis. If you are interested in reading more, please subscribe below to get alerted of new articles as we write them!