Good morning!
Another voice note for your ears, and now a transcript for your eyes :)
Today, i am giving a quick overview of WHY the stock market appears so disjointed to the overall economy.
In short, the stock market is a ‘leading’ indicator and most macroeconomic data are ‘lagging’ indicators.
Here is my two cents,
Have an awesome day,
IT
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I have teamed up with Otter.ai to provide transcripts of each of my voicenotes. I was kindly notified by an annual subscriber to the newsletter that he was deaf and could not access the voicenotes true value. He even kindly told me it was not an issue and to continue issuing the voicenotes as i was previously doing so.
Thats not how we roll here at IT. After a little research, i have found a suitable AI program to transcribe my audio files into text!
- So, listeners and readers, for now bear with me for now, as this is the first time i have used the AI. THis voicenote originally had an audio backtrack (music) which i think decreased the quality of it’s ability to transcribe the file. So be patient in the short term whilst i iron out the kinks and get the transcripts working better!
I am going to remove the backing music from future voicenotes so that the AI software can pick up my voice better.
Transcript:
Hey everyone, there's been a lot of talk about the fact we have very high unemployment right now, GDP is sinking into the negative, historic lows of GDP growth, I want to kind of cover a few things about the macro economic element of that. So, these are what are known as economic indicators. And these are variables that provide some kind of information on the state of the overall economy. So economic indicators are quite often classified according to whether they lead or kind of coincide with the changes in the economy's growth. So leading economic indicators are going to have turning points that usually precede those of the overall economy.
Coinciding economic factors are turning points that are usually close to the overall economy. So happening somewhat simultaneously.
And then the lagging indicators are going to have turning points that take place after overall economy has moved on. So this is going to be behind the times, maybe a few months, maybe as much as one year. So you've probably heard of a few of them. So we're going to go over a few.
So a few leading ones, the s&p 500 index. So the stock market is actually a leading indicator because they are forward looking. And stock prices anticipate economic turning points both up and down. So their movements usually offer early signals on economic cycles. So where they're going.
There's a lot of other ones such as the manufacturers new orders for consumer goods and materials, because businesses cannot wait too long to meet the demand.
Have consumer goods or materials without ordering new products, these gauges tend to lead at the upturns and downturns. So when you see more manufacturing new orders for consumer goods, the economy is typically on the way up.
If you coinciding indicator there, if we look at aggregate real personal income. By measuring the income flow from non corporate profits and wages, this measure kind of captures the current state of the economy. Same with manufacturing and trade sales, in the same way as aggregate personal income and industrial production index. This aggregate offers a measure of the current state of business activity.
So ones that are cited very often are lagging indicators. So this can be something like GDP, GDP is collected from historic data, maybe three months.
Prior, if it's q1 GDP, it will come out maybe a month or so after the period that it's discussing. So this is historic data. So it's lagging. So it's not representative of where the economy is right now at this moment in time.
So we may have unemployment coming out, unemployment as a lagging indicator.
So unemployment comes out,
and the stock market is up. A lot of people get confused about this. But the stock market is looking forward and what it expects to happen is already discounted. The fact that unemployment is high, and then unemployment comes out based on historic information. And that's why you can have a booming stock market and a terrible GDP and unemployment rate. So the average duration of unemployment is a good lagging indicator, because businesses typically wait until downturns and then they look to
layoff staff. And they typically wait until recoveries
as an indicator of when they're going to start rehiring. So basing your investments on
the unemployment rates, not a very good policy there.
We also look at changes in consumer price indexes. So inflation, this is a lagging indicator, inflation generally adjust to the cycle quite late, especially the more stable services. So you don't want to really be making investment decisions based on lagging economic indicators, because that's not going to help you going forward in the long term. So I hope that kind of gives you a bit of insight as to why the stock market is booming, whilst unemployment and GDP is soaring. Have a great day, guys.
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