Stock Market and Investor Sentiment
Economic indicators also summarize activity in the stock market, showing New York Stock Exchange volume in the number of stock shares and bond dollar volume traded; number of securities sold; and the total value of listed stocks.
Sentiment of investors is an intangible. You are trying to measure how investors feel about the market, the economy, or a specific company. However, a trend watcher can judge the mood of the market by surveying sentiment in a number of ways. Barron's weekly report' estimates investor sentiment by showing percentage of bulls versus bears as measured by several different sources.
Putting Indicators to Work
Economic indicators, to many investors, are not as interesting as the financial results of one company. Those results have an obvious and direct affect on the stock's market price. Thus, it is easy to see the cause and effect, whereas national economic indicators and their affect are not as readily apparent.
As one of many tests you can apply in your program for fundamental analysis, a study of key indicators can provide you with a good forecasting tool. If the industry in which your stocks are active is par-ticularly sensitive to interest rates, employment, and the money supply, then national trends will have a very serious impact on those stocks.
As a starting point, your analysis of a company as an investment candidate should include the gaining of a thorough understanding of the) industry as a whole and that company's place in the industry. Consider the four following questions:
1. What is the primary activity in the industry? Be sure you know exactly what industry your company is in, and what takes place within that industry. This requires research. For example, a soup company is not necessarily involved only in selling soup. They might own many subsidiary companies and have diversified into more than one line of business. If the company you are watch-ing and thinking of investing in has a primary activity representing the majority of its sales, you should be sure you know exactly what that industry involves, and what types of sales are included. The same information is important if you already own stock and want to monitor for changes that threaten potential future growth.
What outside economic factors influence profits and operations? Each industry can be defined and distinguished not only by what it sells and produces, but also by the types of risks to which its members are sensitive. In a labor-intensive manufacturing business, employment trends will have a lot to do with future profits. A company competing with international companies will be vulnerable to fluctuating currency exchange rates, inflation here and abroad, and political as well as economic indicators.
What forms of diversification by the company mitigate outside influences? Does a company become involved in several dissimilar industries, or does it stay with one primary product or service line? Diversification helps a company overcome the potential problems in single economic indicators. Obviously risks can never be eliminated completely, but they can be mitigated through diversification. This could be used as a test for determining whether to place a company's stock on your list of likely investments.
How can you diversify your portfolio to protect against economic risk? As a stock market investor, you probably will not want to invest exclusively in one industry, any more than you would invest all of your capital in one company's stock. Diversification is a sound investment management decision and—like the corporations you consider for investment—sound management over your portfolio is essential. Be aware of a company's exposure to economic risk and seek ways to invest in different industries whose economic risks are not identical.