If you are wondering how to trade economic data and markets, I have you covered. In this article, a posting that is easily going to grow into an enormity of a post, I will break down what to look for so you can learn how to trade economic data and make money in the stock market. I look at the most important economic data such as: Personal Income, Personal Expenditures, Consumer Sentiment, Gross Domestic Product (GDP), Unemployment Rate, and Inflation.
First and foremost, I am an economist. I studied economics and I apply economics to my work, investing, and trading for my entire career within the markets. I apply economic data to the markets within my work all the time and almost exclusively. Incorporating and applying economic data into your investment decisions will help you yield far better results with your investing.
Learning to trade economic data is actually not that difficult. And, no: You will not need a degree in economics.
I will show you where to start with economic data and break down how everything works within the economy. I am also going to continually update this article and incorporate new information into the article. This will be a continuous evaluation of the economy. From these articles and videos, you can learn to trade economic data.
Let’s get started right away.
Important Economic Data And Markets Data Points
Here is a listing of economic indicators that I follow and will update throughout the months ahead:
How to Look At A Stock Chart
Here is the chart on the S&P 500; Daily as of 01/03/2022:
What we are trying to accomplish is to predict this chart. But, in order to do that we must do two things:
- We need to convert this chart into something more useful; and,
- We need to start at the beginning of the economic cycle: Personal Incomes & Personal Expenditures.
By doing the above things, we convert the S&P 500 chart from above into these two charts right here. The first is the S&P 500 Monthly chart and the second is the same chart on a Year-Over-Year change basis:
The two charts are essentially the same thing but, they show the same data in a different method. One shows the data as it is and the other shows the percentage change of the S&P 500 price versus the year prior.
Let’s now move to the very beginning of the economic cycle, personal incomes and personal expenditures.
The Most Important Economic Data And Markets variable:
Personal Income & Personal Expenditures
Here is Personal Incomes versus Personal Expenditures:
The single most important indicator I use is Personal Incomes; this establishes the foundation of my economic analysis. You and I will use this in figuring out how to trade economic data in the stock market.
There are many inputs into the economy and no one really drives the economy on its own. But, consumer incomes are the biggest; they are about 72% of the overall economy. The reason is simple: We are a consumer/service driven economy. Therefore, if you want to understand whether the economy is growing, contracting, or maintaining, looking at personal incomes would be the place to start.
Many individuals spend almost their entire income on living expenses. We know this simply because of the savings rate in the United States. For instance, some 75% of individuals & households have less than $1,000.00 in savings at any one time. Even worse, some 55% have almost zero savings at any time.
Given that, if there are changes to incomes, and these changes are widespread across the economy, because so many individuals spend so much of what they earn, this has ripple effects throughout the economy.
Looking at the above chart it is easy to see the ebbs and flows of personal income versus personal expenditures.
The difference between income and expenditures
Because of the continuous personal expenditures of any one individual in the economy, what they earn turns into what they spend. Via government data sources, we are given a breakdown of what Americans earn and spend. Then, we can compare this data and get a grasp of what is likely to play out in the economy from this.
Year Over Year Changes
One of the first things to understand, and probably the most important things to comprehend, is a term I use frequently: Rate of Change.
If the rate of change of personal incomes is increasing relative to the previous year, then the rate of change of personal expenditures is going to increase correlatively. And, this also tells us more and more about the overall direction and health of the economy. Finally, there is a transitive property that shows how increases (or, decreases) in personal incomes & personal expenditures will eventually translate into increases (or, decreases) in profits for companies, the thing that really drives the stock market.
When I look at economic data, the most important thing I am looking at is the rate of change that numbers are showing me. For instance, I always look at Year over Year rate of change for any one indicator.
If, for example, personal incomes were advancing higher and higher, if personal incomes throughout the United States were increasing relative to the rate of growth from the year before, then because of this, personal expenditures are very likely to expand. This will propel the economy because correlations between personal income growth, personal expenditure growth, and the transitory property of this pushing upward or downward, profits to companies.
Comparing Economic Data
Comparing one data set to another is crucial for interpreting the economy. And, comparing one data point to another within the same set is also equally important. I almost always show an economic data chart compared to another and this helps in interpreting the information.
Delays in Correlations of Economic Data
However, despite the correlation being very strong between income growth or contraction, it is not an absolute 1.00. There are some variations in the increase in personal incomes and personal expenditures and you can see this in the charts that I use.
For instance, the correlation between incomes and expenditures might be the closest indicator. However, if you think this through, if there is an increase in the rate of growth of personal incomes & personal expenditures, this may not push a business to hire new employees right away should that company see increased demand. Perhaps there is inventory to work through before the business needs to initiate new production levels. Given this, there are delays in employment numbers and the rate of growth of personal incomes and personal expenditures.
Correlations begin to break down with each step beyond personal income and personal expenditures. This makes analyzing a bit more difficult but, you can find the overall bigger picture playing out in the market.
What to look for in economic data and the stock market
The biggest things is to understand that there are ebbs and flows within the economy coming from billions of input factors. These inputs will push the economy up or down.
Ultimately, we will apply personal incomes to the rate of growth of the S&P 500. This will be a continuous story that plays out in the economy and then the stock market.
This is what personal incomes looks like versus the S&P 500 on a monthly basis, with year-over-year changes:
As I mentioned, there are many input variables with the economy. This chart is easier to put together when you start following along with the various economic data points in a month.
I will continually update the various economic charts throughout the month and do a weekly chart with the S&P 500 and economic data showing what is likely to happen next.
For now, my expectations are the same: the S&P 500 will continue to make big moves upwards over the course of the next few months. But, with the Federal Reserve shifting gears, this will change things considerably. This is what to look for.
Economic Data And Markets: Durable Goods & the stock market
Economic Data and Markets: Unemployment Rate & the stock Market
Join The Discussion
Look towards the Forum for continual discussion and more content on economic data and the stock market. I will continually update each individual economic piece as well as update this page with relevant content.