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Market Outlook

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Know how the economy works

    The market remains choppy as earning reports are definitely mixed so far this season. The volatility will probably continue until there are convincing signs of recovery in economic growth and earnings. However, most analysts feel the market will trend higher this year. Since the Great Depression, the market has never fallen for three consecutive years. During the first year of economic recovery, the jump in stock prices has averaged 38 percent. 

    There is a high probability that we will see another interest rate cut by the Fed at the end of this month. Until the meeting, we expect the market to focus on earnings reports from bellwether stocks. There doesn’t seem to be any sector providing definite leadership at this time, given the extent to which lower capital spending, consumer sentiment, foreign influences, etc. are affecting investor moods. If investors needed another reason to stay well diversified after the last two years, they have one in today’s markets.

    To be a wise investor, you need to know more than sound investment strategies. You must familiarize yourself with the economy and how it works. That said, here are several key economic terms that you should know:

Consumer Price Index (CPI): The CPI is a weighted "basket" of goods and services, such as housing, transportation and medical services. Issued monthly by the Bureau of Statistics, it measures inflation, the rise in the cost of living. Generally, a decline in the CPI is bullish for stocks and bonds when investors are worried that the economy is growing too rapidly.

Consumer Confidence Index: Published monthly by The Consumer Research Center of The Conference Board, the Consumer Confidence index measures how Americans generally feel about prevailing economic conditions, the outlook for employment and their personal finances.

Discount Rate: This is the rate charged by the Federal Reserve Board to banks for overnight loans. When the Fed increases the discount rate, other rates, such as the prime lending rate, usually rise as well.

Federal Funds Rate: This is the rate banks charge each other for overnight loans. This rate is also controlled by the Federal Reserve Board.

Gross Domestic Product: This is the broadest, most comprehensive measure of the economy. It measures the value of all goods and services produced in a given year, minus government spending and exports. Governments, businesses and central banks plan most of their financial operations based on annual GDP estimates.

Initial Unemployment Claims: The unemployment rate measures the percentage of the work force looking for jobs. When claims are down, more people are working and spending money, a positive for the economy and corporate profitability. When the rate is up, fewer people are working and, therefore, less money is pumped into the economy.

Index of Leading Economic Indicators (LEI): The LEI consists of 11 economic indicators, such as initial unemployment claims, new orders for consumer goods, money supply and business permits. Investment professionals use the LEI to help forecast if a business recovery -- or general economic downturn -- will occur within the next six to nine months.

New Orders for Consumer Goods: A pickup in new orders placed with the nation's manufacturers is bullish for the economy.   

    Many of the key economic terms can help you better understand the direction of the market. 

    Nancy Hadley is an investment representative with D.A. Davidson in Sandpoint.

 

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Nancy Hadley

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