Strategic wealth management – Leading economic indicators and importance

Strategic wealth management – While news articles often point to government bailouts and bank collapses as a sign of troubled times, Wall Street investors often know the importance of not just understanding today’s economy, but also tomorrow’s economy. To see where a nation’s economy is headed, however, requires the use of leading economic indicators. This article examines a few of the most common leading economic indicators and explains how they are used to make strategic wealth management, financial predictions and forecasts.

Strategic wealth management - Leading economic indicators and importance

New Orders for Consumer Goods

In 2006, the Hoover Institution reported that consumer spending accounts for nearly seventy percent of the United States’ Gross Domestic Product. Because the consumer is so critical to the economy, the amount businesses believe they can sell is an indication of what consumers will buy.

Companies that cater to consumers, whether they be Wal-Mart or the Gap, all must accurately predict what they will sell if they are to make a profit. This means that businesses have a much higher incentive to accurately predict consumer demand than government agencies do under strategic wealth management. If a government agency makes a poor prediction, it does not have to suffer monetarily, while businesses bet their profits on their expectations.

Economists have picked up on the fact that businesses tend to be fairly good at predicting how much they have to order, and have used the data on consumer goods orders as a leading economic indicator. Businesses which predict a decline in customer spending will order fewer goods, while businesses expecting a boom in customer traffic will increase the order on future consumer goods. As a result, with respect to strategic wealth management, a change in new orders for consumer goods is an indicator of future economic expectations.

Building Permits in Strategic Wealth Management

When a builder seeks to construct a new neighborhood, they cannot simply begin building houses anywhere they like. Instead, manufacturers must file for building permits- a process often undertaken a year or further in advance of the completion of a single home.

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Whenever a home builder sets out to build a new-construction neighborhood, they cannot simply start. lt can be expensive, and home manufacturers work hard to understand where the market for homes will be instead of where the market is in the present.

Businesses and other commercial sector groups also contract building permits for new sales locations or headquarters, and building permits are a sign of optimism in successful business. Because these locations do not actually open and generate revenue until sometime in the future, housing starts can predict an economic upswing before new profits are actually reported.

Stock Prices in Strategic Wealth Management

While stock prices are often an excellent means of evaluating a market’s present state, the value of stock can also indicate investors’ confidence in where a company is headed. While some people see the stock market as a game of “buy low, sell high” and others view the stock market as a means of investing money into a long-term prospect, any economist would agree that it is a bad idea to put money into a stock which will only decline in value. People prefer to put their money into businesses that have a bright future.

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The price of a stock should not be confused with the historical price changes of a stock. It is a fallacy to believe that a stock whose value has declined will necessarily continue to decline, and vice versa. If, for instance, investors believed that a stock’s value would decline, they would all sell it as quickly as possible, forcing the stock to hit bottom much more quickly than it may. More important is the actual value of a stock at a certain point in time- that is the fairer evaluation of the stock’s performance.

The entire stock market index (or a measured group such as the Dow Jones Industrial Average or the Standard and Poor 500) then, can be viewed as the confidence of investors both large and small in the performance of a broad range of companies in the economy. When the stock market declines, it reflects tough times today, but it also reflects fears by investors that tough times are also ahead tomorrow. A rise in stock value means the opposite- optimism in certain companies to perform well, a good sign that the economy is headed in a positive direction.