Investing Tips | Which Economic Indicator Is Most Useful?

At the heart of formulating an investment strategy is assessing the direction of the global economy and its market impact.

From these differences, we can see the bond market's prediction of the future direction of economic and monetary policy, and may act before the broader market prices.

For example, when there is an inverted yield curve like what we are seeing now, it often means that the end of the Fed's interest rate hikes will have a limited boost to global stock markets.

In contrast, labor market data are much less informative for investment because of the large lag. This may sound strange at first, given that both jobs and wages are very important to the economy. Why are labor market data not better predictors of cross-asset returns?

Let's take a deeper look at this type of data: At the start of a weak economy, most businesses are trying to keep workers on as long as possible because layoffs are costly and disruptive. As a result, when economic growth starts to slow, the labor market tends to lag behind. In turn, a recession can hit business confidence hard, and even when the economy improves, companies are still reluctant to hire new workers.

Second is wages. For example, the current wage growth rate in the United States is very high, and the market is worried that the rapid wage growth will lead to increased inflation, forcing the Federal Reserve to continue to raise interest rates sharply.

While it is possible for this to happen, historically the opposite has actually been the case. In 2001, 2007 and 2019, the Fed started cutting interest rates at the same time that U.S. wage growth was peaking.