Economic data might not seem exciting in and of itself, but there’s nothing boring about making money. And if you’ve traded recently without incorporating the potential impact of the monthly jobs, housing, and other economic data reports, you might not be maximizing your profit potential.
Imagine yourself considering a short-term stock trade. You do all your fundamental research on the company. You look at the technicals. You do everything you think you are supposed to do, and, finally, you buy the stock. Then, two days later, an important market-moving piece of economic information comes out that sideswipes you and your stock.
You may be able to prevent this from happening. See which key economic indicators you may want to consider watching, along with a few strategies that may be worth exploring.
The big ones
Currently, employment statistics are the most powerful market-moving stats around. Keep a sharp eye on the unemployment rate—which is released within the most important report of them all: the monthly jobs report. Depending on what happens with the number of jobs added or lost in a given month—and, perhaps more important, how the actual number compares to consensus expectations—stocks can move dramatically in either direction.
On December 8, 2013, for example, the Dow soared 200 points after the U.S. Bureau of Labor Statistics announced that the economy added 203,000 jobs in November, topping the consensus estimate of 180,000. If you had a long position in place prior to the report, it was probably buoyed by the report. If you had a short position, you may have felt some pain.
Also on the labor front, the weekly jobless claims report—this details the number of people who filed for unemployment benefits—is another key indicator to watch. Jobless claims were mostly unchanged during the last week in December 2013. The report was a little better than forecast and was a positive for stocks, likely giving a modest boost to the pre-market trade. (Note that a number of economic reports are released before the opening bell on the NYSE, and their impact can be measured by the effect they have on futures prices.)
In addition to the labor market, housing is a key focus point because of the wide-ranging impact of real estate on employment and the economy. U.S. stocks climbed more than 1.6% on December 18, 2013, the same day when the Commerce Department announced that housing starts soared well past consensus expectations during November 2013, climbing to their highest level in five years. Pending home sales and new home sales are among other housing-related economic indicators that merit watching.
Gross domestic product
The quarterly gross domestic product (GDP) number, as well as subsequent revisions, is important because it gauges the overall health of the economy. On December 20, 2013, the U.S. GDP was revised up to a very healthy 4.1% for the third quarter, and the S&P gained 0.6% in the next several minutes after the report.
Definitely worth watching
Industrial production indicators
Several barometers of industrial production bear close attention because they measure the level of an economy’s productivity. Among the most watched are the Fed’s industrial production report, factory orders, and the Manufacturing Report On Business from the Institute for Supply Management (ISM).
Industrial production surged 1.1% in November, helping stocks close more than half a percent higher on December 17, 2013. Factory orders jumped 1.8% in November, beating expectations and helping to lift stocks on the day of its release. And the ISM Index rose solidly to 57.3 in November, showing strength in the particularly important new orders component of the index. Yet stocks fell on the day of the ISM report in December 2013, showing how even an apparently positive economic data point might not dictate how trading goes on a particular day.
Inflation and oil production indicators
The consumer price index (CPI), which measures the rate of inflation in the economy, and the weekly Energy Information Administration (EIA) Petroleum Status reports have the power to move markets. Inflation was flat and in line with estimates during November, and oil futures pared earlier losses on January 3 after the EIA report showed high refinery output continues to draw down oil stockpiles.
Indicators that influence sectors
Several economic indicators have a particularly strong impact on specific sectors. The aforementioned EIA Petroleum Status Report, for instance, can heavily influence stocks in the energy sector—depending on how the price of oil reacts.
Another example is the motor vehicle sales report, which can significantly affect car producers and auto component stocks. This report came in slightly below expectations for December, following a scorching November pace. In fact, 2013 turned out to be the best sales year for the U.S. auto industry since 2007. Almost every monthly motor vehicle sales report during the year was strong, helping rev up this group of stocks on each day the reports became available.
Rubber meets the road
Strategies involving economic indicators
Of course, this list is by no means exhaustive of all the economic data reports that can change the momentum of your trades. Items like the Federal Open Market Committee minutes, retail sales (a strong influencer for the consumer discretionary sector), and consumer sentiment are worth reviewing. You may also want to also consider similar reports from China, Europe, and other important players in the global economy.
Knowing which reports can affect your trades is the first step. The next is knowing what to do with this information.
There are several ways you can incorporate economic reports into your trading strategy. For example, one thing you can do is to plan specific strategies around market moving indicators. Suppose you have a short-term trade in mind that you do not want to be affected by a market mover as powerful as the jobs report. You might consider planning your trades to take place between the monthly reports (assuming your strategy involves having trades open for less than a month).
If you have a sector-specific strategy, it may benefit you to develop a greater understanding of how these various economic reports influence a particular segment of the market. It would mostly likely help a trader who has positions in the auto industry, for instance, to get a feel for how the monthly auto sales report could affect that part of the market.
You might also consider options strategies, such as a strangle, that are purposely designed to capture the impact of expected changes in volatility. Suppose you anticipate that the monthly jobs report will come in well below expectations. You might consider a strangle that is constructed to profit from a volatile move to the downside.
So, if you want to boost your trading proficiency, don’t forget to assess the power of these key economic indicators.
Views expressed are as of the date indicated and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author, as applicable, and not necessarily those of Fidelity Investments.
There are additional costs associated with option strategies that call for multiple purchases and sales of options, such as spreads, straddles, and collars, as compared to a single option trade.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.
Because of their narrow focus, sector funds tend to be more volatile than funds that diversify across many sectors and companies.
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