Navigating U.S. Stocks with Macro Know-How!

What determines the rise and fall of stock markets? Some may argue that companies are the main players and their performance is the key factor. Others point to investor sentiment, supply and demand of financial products, and international events.

While all these factors are important, they all depend on an even more crucial element: the health of the economy. Think of companies as ships sailing in the vast ocean.🛳️ When the economy is healthy, the sea is calm, allowing ships to sail smoothly. The speed of each ship depends on its own ability to make money. But if the economy isn't healthy, it's like the sea is stormy, and few ships can avoid trouble. So, to profit consistently in financial markets, understanding the macro economy is essential.

However, as the economy grows and overheats, it inevitably leads to rising inflation. High inflation has several downsides. Domestically, it reduces purchasing power and raises living costs, especially for low-middle-income groups. Internationally, if a country's inflation rate surpasses that of its trading partners, its currency devalues, impacting export competitiveness.

Therefore, governments need to control inflation when it gets too high. The most common method is adjusting interest rates. By raising rates, they can reduce the amount of money circulating in the market. This creates the "economic cycle" often discussed in economics.

We won't discuss investment strategies based on the economic cycle here. Click on the image to watch the video and learn more.

The key takeaway from this article is “how you can get ahead by understanding macroeconomic trends and planning your investments accordingly.” There are many indicators to consider, and Cici'll break them down for you. The content is quite detailed, so it's recommended to set aside 15 mins to read through.

By the end of this content, you'll gain valuable skills: the ability to assess the current economic environment and know which economic indicators to watch for early investment planning.

Understanding GDP
> GDP is released both quarterly and annually.
> It comes in three stages: the advance estimate (based on partial data and model projections), the second estimate (includes more actual data), and the final estimate (the most accurate data). Called initial GDP, revised GDP, and final GDP, respectively.
> These are released in the first, second, and third months following the quarter's end. For example, the Q1 initial GDP was released in late April, the Q1 revised GDP in late May, and the Q1 final GDP in late June.

Impact of GDP on Markets
> GDP is a lagging indicator, so its impact on market expectations is limited.
> Of the three GDP figures, the market usually focuses on the Initial one. If it’s better than expected, it's generally positive for the market; if worse, it's negative. (Just a single data signal.)


2. PMI (Purchasing Managers' Index)
PMI measures the health of the manufacturing and service sectors. As production leads to consumption, a high PMI indicates economic activity. Unlike GDP, PMI is a relatively leading indicator, making it more closely watched by the market.

Understanding PMI
> PMI is divided into Manufacturing PMI and Non-Manufacturing PMI. In the U.S., Non-Manufacturing PMI is more significant due to the higher economic contribution of the services sector.
> Two main organizations release PMI data: ISM (Institute for Supply Management) and IHS Markit (a financial information and data services company). ISM's data is more closely followed.
> PMI is a monthly indicator, usually released in the first week of the following month.
> A PMI reading above 50 indicates expansion, while below 50 indicates contraction.

Impact of PMI on Markets
> PMI directly reflects the vibrancy of business activities. Sustained periods of expansion suggest more active business operations, which is positive for the overall economy.


3. Retail Sales
Consumer spending accounts for 70% of the U.S. GDP, and retail sales make up 40% of total consumption. Therefore, retail sales data is a key indicator of overall consumer activity in the U.S. While PMI measures the activity on the production side, retail sales data gauges the demand side.

Understanding Retail Sales
> Retail sales data indicates whether the economy is expanding or contracting.
> Month-over-month growth in retail sales suggests increased consumer spending, which is positive for the economy and vice versa.
> Retail sales can be volatile due to factors like holidays.

Impact of Retail Sales on Markets
> As a significant part of the U.S. economy, retail sales reflect the health of consumer spending.
> Strong retail sales signal a healthy economy, while weak sales indicate potential economic weakness.
> Along with PMI, retail sales serve as a leading indicator for the U.S. economy.


4. Other Economic Data
In addition to retail sales, other consumption-related data, such as durable goods, energy, and housing, should be considered. While these components are smaller parts of GDP, they can still provide valuable insights, especially if you're investing in specific sectors like real estate. Monitoring housing sales trends, for example, can help predict future market movements.


5. Interest Rates
After understanding these indicators, you'll have a general idea of the current state of the U.S. economy and whether the stock market has underlying support. However, should one sell all stocks postition during an economic downturn? Not necessarily. Governments often adjust interest rates to influence monetary policy, either to stimulate the economy or to cool it down.

Understanding Interest Rates
>> The term "interest rates" generally refers to the overnight borrowing rate between banks, which affects the cost of lending and borrowing across the economy.
>> Since the U.S. is the world's largest economy, its interest rates have a global impact.
>> The Federal Reserve sets U.S. interest rates, holding eight rate-setting meetings each year. These meetings are not entirely fixed but usually occur twice per quarter (specifically in the last month of each quarter: March, June, September, and December).
>> During these meetings, the Fed not only sets the interest rate range but also releases the "dot plot," which shows all Fed officials' interest rate forecasts for the next three years and in the long term. This provides insights into potential rate hikes or cuts over time.

Impact of Interest Rates on the Market
> Interest rates are arguably the most crucial indicator affecting capital markets. They determine the pricing of risk-free products, such as bank deposits and bond yields. When returns on risk-free products rise, the attractiveness of riskier assets, like stocks, diminishes.
> Additionally, interest rates regulate the liquidity in the market. Higher interest rates lead consumers and businesses to borrow less, thereby cooling down economic activity. Many small and startup companies, which often lack substantial cash flow, are more reliant on a low-interest-rate environment. Therefore, higher interest rates can reduce the profitability of these smaller enterprises.

Given the importance of interest rates, how are they set? The Federal Reserve's dual mandate gives us insight into this process:
1) Maintaining Price Stability
2) Promoting Maximum Employment
These two objectives guide the decision-making process for setting interest rates. This brings us to three critical indicators: CPI (Consumer Price Index), PCE (Personal Consumption Expenditures), and non-farm payroll data.

Understanding CPI
> CPI is released on the second Wednesday of each month.
> Key metrics include YoY and MoM changes, observing whether they are rising or falling.
> Due to the volatility of food and energy prices, the market often focuses on the core CPI (which excludes these items) for a more stable inflation trend.
> PPI (Producer Price Index) is related to CPI as it tracks changes in production costs and is often seen as a leading indicator for CPI.

Impact of CPI on the Market
> CPI directly influences market perceptions of current monetary policy. If CPI is higher than expected and rising from previous values, it suggests increasing inflation. If it exceeds the long-term inflation target, it could lead to tighter monetary policy.

Understanding PCE
> PCE is released on the fourth Friday of each month, focusing on YoY and MoM data.
> Core PCE, which excludes food and energy prices, is considered a more accurate long-term inflation indicator.

Impact of PCE on the Market
> The Federal Reserve often uses core PCE as a reference for its inflation-control target, aiming for 2%.
> CPI and PCE typically point to similar inflation trends. When both indicators align, the trend is more likely to be confirmed.


8. Non-Farm Payroll Data
In addition to price stability, the Federal Reserve's other goal is maximum employment. Non-farm payroll data is the most influential employment indicator, including new jobs, unemployment rate, and wage growth. The unemployment rate shows if unemployment is rising or falling; employment change reflects labor demand, and wage growth indicates inflation to some extent.

Understanding Non-Farm Payroll Data
> Non-farm payroll data is released on the first Friday of each month. It focuses on whether new jobs meet expectations and their growth rate.
> The ADP report(Automatic Data Processing Inc), reflecting private-sector employment, is released two days before non-farm payroll data and can cause market volatility.
> Weekly jobless claims data, including initial and continuing claims, released every Thursday, serves as a leading employment indicator but can be affected by short-term fluctuations.

Impact of Non-Farm Payroll Data on the Market
> Non-farm payroll data is a lagging indicator, reflecting the capacity of the labor market and serving as a crucial signal of overall economic health.
> It significantly impacts monetary policy, interest rate expectations, and market sentiment.


Understanding these core indicators is essential for grasping the U.S. economy, which forms the foundation of the stock market. For example, if the U.S. economy is cooling (June ISM Non-Manufacturing PMI below the 50 threshold, retail sales showing a downward trend despite a MoM uptick), both inflation and employment indicators suggest easing. This boosts the likelihood of rate cuts, benefiting assets like gold and small-cap stocks in a low-interest-rate environment.

While economic health is a prerequisite for a healthy stock market, it doesn't always hold true in every scenario. For example, if the market is betting on rate cuts but economic indicators suggest a strong economy, the expectation of rate cuts may weaken. This could lead to a reassessment of the market rally driven by rate-cut expectations. This phenomenon is often referred to as "good data turning into bad signals" by analysts.

In the end, to stay updated with these economic indicators, just go to the "Market" tab, and you will find the "Economic Calendar." Clicking on it will show your important data releases for the week. You can add these events to your calendar to receive notifications when the data is released. Additionally, moomoo allows you to track key indicators and filter for important events to follow closely.

That's all. It's quite a long article, huh? However, after reading this content, I believe that you should have a better understanding of the U.S. macroeconomic environment. Here are two quiz questions to test your knowledge. Reply with your answers in the comment section, and the first 10 correct responses will receive 88 points.