Market Indicators -- What to Watch
Managing your finances should include being aware of financial market
conditions. While your portfolio of individual stocks or bonds will not
perform exactly like the overall market, knowing what the general market
is doing can help you put your investments' results in perspective. Three
key areas to monitor are stocks, interest rates and inflation rates.
Stock market indicators
The most often-quoted
stock market indicator is the Dow Jones Industrial Average (DJIA). In
1884, Charles Dow averaged the closing prices of 11 stocks considered
to be representative of the U.S. economy and the DJIA was christened.
Since then the average has been expanded to include 30 familiar "blue
chip" companies. Occasionally the components are changed to make it more
representative of the largest companies in the US. The calculation of
the average is also changed to reflect stock splits.
Another common indicator
that includes a larger number of companies is the S&P 500 index. This
index includes the largest 500 companies and is weighted to reflect the
market value of each company. It is more representative of the overall
market, but is still comprised of only the large companies.
The National Association
of Securities Dealers Automated Quotation system or NASDAQ lists over-the-counter
market trades. The NASDAQ composite index tracks this market and is more
representative of market conditions for smaller companies.
Interest rates have
an impact on many parts of the economy, including your business environment
and your finances. Mortgage rates, credit card interest rates, deposit
account earnings rates and corporate borrowing are all affected by changes
in interest rates. Within this category, it is advisable to follow changes
in both long-term rates and short-term rates.
The most common short-term
indicator is the interest rate on US Treasury bills. The rates often quoted
for this form of bond are usually based on a 13-week maturity. The indicator
for long-term interest rates is usually the current rate on 30-year US
Treasury bonds. The rates on these two securities are usually quite different
with the longer-term bond usually having a higher rate than the shorter-term
bill. Because of their different maturities, the values of 30 year Treasury
bonds will fluctuate more with changes in interest rates than the shorter
term Treasury bills' values.
The Consumer Price
Index (CPI) is the most widely watched measure of inflation. The government
computes this index monthly by measuring changes in the prices of over
90,000 items. The CPI is reported each month. The annual change is used
for determining adjustments in Social Security payments, income tax brackets
and many other payments and charges.
the changes and trends of these indicators is a way to gain a general
understanding of changes in the economy. Being aware of these indicators'
changes and trends can help put your finances into a broader perspective
and help you make better decisions about your saving, borrowing and investing.