Economic Indicators or Gauging the Economy
3ome forms of financial information are more public than others. Everyone has heard about economic indicators—changes in national trends relating to growth, the value of money, investments, employment, and inflation.
What affect do these various indicators have on your investment portfolio? With great emphasis on market prices of stocks and related technical trends, it is easy to overlook the fact that stocks represent equity in corporations. Those corporations and their future profits and losses depend largely on how they ride out the business cycles that all business enterprises face. So you cannot consider the market value of stock without also considering how that company will be affected by economic indicators. Some industries, for example, tend to be sensitive to interest rates. So, if interest rates rise, the public utilities industry is likely to experience lower profits, because they tend to use long-term debt capitalization to fund many capital proj-ects. Other industries tend to have volatile cycles tied to inflation, money supply, and employment statistics. If you invest in a particular industry, you should want to become familiar with that industry's particular sensitivity. For example, consider the relationship between money supply and the financial services or real estate industries, between inflation and technology, and between employment trends and manufacturing.

The Business Cycle
The study of business activity in a free enterprise system invariably includes discussions of cycles. At some points in a cycle, business is robust and demand is high; at others, business is very slow and demand is low. Cycles are of great interest to forecasters because they are highly predictable. And because forecasting requires some idea of what is to come in the future, the ability to anticipate cyclical change is extremely important.
A business cycle is not a simple thing. It consists of many compo-ent parts and many variables. Just as you may use fundamental analysis to spot gradually changing trends in key company-specific financial data, so a study of national economic indicators is also a study of trends. Overall trends in the economy will have an effect on specific industries, and thus on the companies in those industries.                   
The challenge for the economic indicator forecaster is predicting not whether a cycle will occur, because it will, but identifying the point at which specific changes will occur. In other words, it is all a matter of timing. Analogies to the management of an investment portfolio continue to apply. If you know that a particular stock is likely to increase in value, it matters if you buy that stock at the beginning of its growth potential, or at a momentary price peak. Like individual companies, the economy is also cyclical.
i KEY POINT
Business cycles are predictable in their patterns, but not in the timing of events. No one can say how long a cycle will last.
In simplistic terms, the stock market reflects a sort of economy. For those familiar with the definitions of markets, the following review is unnecessary; for others, the purpose is to demonstrate the importance of economic indicators to the stock market and to individual stock investments. A bull market describes a positive, upward-trending market, in which investors can expect higher profits from buying and holding stocks; and in which the Dow Jones Industrial Average (DJIA), Standard & Poor's (S&P) 500, and other popular indexes are going up. In a bull market, companies are turning in earnings reports that meet and surpass forecast levels, usually because the overall economy is strong; inflation is low; unemployment is low; and the demand for the goods and services being produced is at a healthy level. Increasingly, bull markets also indicate healthy international trade levels and monetary exchange rates. When a pessimistic mood prevails over a period of time, that is called a bear market, characterized by falling stock prices and short-term losses.


One of the never-ending questions among investors, market-watchers, and analysts is: What causes economic changes, bull or bear mar-kets, and other cyclical changes? In the free enterprise system, one of the interesting aspects of investing is the uncertainty of business cycles. The truth is, no one really understands the reasons that cycles occur, their timing, or why capital markets react as they do. Many theories abound, but no one really knows. The problem is perhaps best summed up by George Bernard Shaw's observation: "If all economists were laid end to end, they would not reach a conclusion."