Hi! Welcome back to another exciting episode of the Winning Investor’s Quick and Dirty Tips for Beating the Market. I'm your host, Andrew Horowitz and in this episode I'll break down some of the most important economic announcements and describe why they're so important to watch.
Let's get right down to it!
The Jobs Report
The first Friday of every month, the government releases what's called the "Jobs Report" or the "Non-Farm Payroll" number. It gives us a sense of whether we're gaining or losing jobs in the economy and what’s happening overall with employment. We can also look at the rate of job growth or loss by comparing this month's numbers to previous months. Sometimes the rate of job losses or growth can be more important than the actual number itself and knowing that can help make sense of why the market might rise when we get a “bad” jobs report in which tens of thousands, or hundreds of thousands, of people lost their jobs from the previous month. The fact is if fewer people lost their jobs than last month, or if it was reported that fewer people lost their jobs than the analysts forecast, then the market can rise. This is a really important report. On the flipside of the coin, the market can take a bath and fall for the same exact reason, but opposite. If the economy added fewer people this month than last month or if the report shows fewer people than expected were hired that can be a real downer to investors.
Why Does the Jobs Report Matter?
Now let me tell you why this matters so much because it can be a market mover because the importance of what’s what's reported and how the market responds to the report is quite amazing. This is often the first major report the market gets for the month, and it can help really forecast other reports that come out during the month. It's a big one! You don't have to know all about it , but it's helpful to learn as much as you can so you can arm yourself with more knowledge when making investment decisions, like we always talk about.
Beyond telling you how many people gained or lost employment last month, it also tells you about the hourly work week as well as average hourly earnings. These numbers can help you forecast other reports if you're savvy. A rising average work week is generally a good thing, as is rising average wages per week. These rising numbers show you the health of the economy and clue you in that other reports during the month are likely to be good for the economy as well. After all, if lots of people are employed and the economy is expanding, they're going to spend more money, which gives a boost to the economy!
The Gross Domestic Product Report
The second report you should watch closely is GDP -- or the gross domestic product report. This is released on a quarterly basis, so that means it's released roughly four times per year. The Department of Commerce releases this report and it can be a market mover, but it's not “the big kahuna” because all of the other smaller monthly reports help analysts predict with good accuracy what the GDP number is likely to be. Therefore, unless there's a major surprise, the market has already braced itself for this report.
The GDP is the broadest measure of the economic activity of a country. It is the sum of total goods and services produced by the United States. Without getting too technical, the GDP number is a combination of consumer consumption (buying/spending), investment (stocks, bonds, etc), government purchases, and total exports (what other countries buy from us). To calculate GDP, we also subtract the imports we took in, or things we bought from other countries.
Everyone is trying to make sense of where the economy is heading and how healthy it is, and so the GDP number is the most comprehensive statistic we have to assess this. That's why it's so important!
Inflation-Related Reports: the Consumer Purchasing Index and the Producer Price Index
The other reports you should watch closely are those tied to inflation -- namely the Consumer Purchasing Index and the Producer Price Index, affectionately called the CPI and the PPI respectively. The quickest way to see if inflation might be creeping up on us is to look at production costs, which is done by surveying businesses that buy products from other businesses. That makes up the Producer Price Index. If producers are having to spend more to buy goods and raw materials that they turn into products like cars, sofas, and televisions, then they will eventually pass that higher cost on to the consumer in the form of higher prices, which will later be known as inflation.
The Consumer Price Index is a survey of various goods and services done to see the month to month change in prices of goods—again things like televisions, cars, games, and other things we buy (not including groceries or the cost of gas or energy). If the price of goods and services we buy is rising, then that's a sign of inflation, which generally isn't good for an economy.
Why Pay Attention to the PPI and CPI?
Both the PPI and CPI are often relased by the Department of Commerce either on the same day or very close to each other, usually in the middle of the month around the 11th to the 15th. Both of these give us clues as to how fast the economy is heating up or cooling down, and unexpected or large changes from month to month can move the market, so it pays to watch these reports. Knowing whether or not prices are rising or falling can help give us clues about other economic reports, or whether or not the Federal Reserve might be more or less likely to raise or lower interest rates. The Federal Reserve will often raise interest rates to combat inflation, so if you see a big spike in inflation, then expect an interest rate rise to come around the corner.
We'll end this episode here to give you time to digest these three major market-moving reports, but know that there are many more that economists and analysts study in order to figure out the health of the economy and note trends that are developing. These have a direct effect on the stock market and investments; when things are good, generally the stock market rises. When the economy is contracting, GDP is shrinking, and people are losing their jobs -- thus spending less money -- the stock market falls. There's no reason to be fully invested in the stock market when the economy is in a recession or falling. But we'll talk about that in a later episode!
And remember, if there a question you’d really like to ask just email me at winninginvestor@quickanddirtytips.com or call 206-338-0836. That’s 206-338-0836 and maybe your question will appear on the show. And if you like the show, tell a friend and leave a review on iTunes. For now, this is Andrew Horowitz with The Winning Investor’s Quick and Dirty Tips for Beating the Market.
