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Market Indicators and Optimism--Talking Points for Clients

How to reassure clients concerned about the economy.

Helen Modly and Tommie Monez, 04/12/2012

Financial advisors typically have a long-term view and are effective at explaining the advantages of staying the course and sticking to a plan. Still, that doesn't keep clients from calling and asking about the latest headlines from the nightly business report. They're afraid that things really are different this time, and they need to be reassured. Be prepared by keeping up with some basic market indicators.

Most custodians publish frequent market reports with recent results and predictions for the future. Get in the habit of reading these on a regular basis, or find an economist that you respect and get on their email list. Include global economics in your regular reading to get an informed perspective on international events. Jot down a few talking points relative to the questions and concerns that are being expressed by your clients, and remember that one week, month, or quarter alone is not predictive. Focus on trends and not just the latest flurry of numbers. Below I've offered some concise talking points on a handful of the key early indicators.

Current Employment Statistics (CES)
Jobs are on everyone's minds these days. Every month, CES provides data on employment, unemployment, and wages for non-agricultural workers, including non-military government workers. The numbers can provide some early indicators of economic well being. Typically an increase in hiring of temporary workers is the first sign that the job market is improving. Average hours worked per week and average earnings show the progress of the job market. Be forewarned that the unemployment rate tends to flatten out for a time during a recovery when the long-term unemployed become optimistic and begin to resume their job searches.

New Residential Building Permits
This is a leading indicator because new residential building permits are needed several months in advance of actual construction. Data is reported monthly; however, improvement in this statistic can occur more than a year before broader economic recovery, and the data is very volatile. It takes many months to establish a trend. Housing starts are also highly sensitive to changes in mortgage interest rates.

Stock Market Index--S&P 500
Stock prices indicate business and consumer confidence about economic conditions going forward. Although the Dow Jones Industrial Average gets the most attention in the media, it includes only 30 companies. The S&P 500 is a market value weighted index of 500 public stocks that are chosen based on size, liquidity, and industry group representation, and an upward trend in the index's performance is a better leading indicator of recovery. Changes in the S&P indicate growth or contraction of business investment and consumer spending.

Manufacturers' Orders
Increases in orders by manufacturers tend to be predictive of increases in consumer spending, which is a signal that a recovery is beginning. Consumer spending is an important part of the Gross Domestic Product (GDP), which is an aggregate measure of economic output. These figures are reported monthly.

Gross Domestic Product
This is the broadest measure of the state of the economy. It is the market value of all goods and services produced in a specific time period within the U.S., regardless of the producer's nationality. It is driven more by consumer consumption than business investment or government spending. Data is adjusted to account for changes in year-to-year prices to allow comparison between periods and is published three times quarterly. First an "advance" report is published, followed by a "preliminary" report, and then a "final" report.

A healthy economy usually grows at around 2.5%-3% per year. Growth above this level is considered unsustainable, causing inflation fears. Growth below this range indicates a sluggish economy with increased unemployment and decreased spending. Monetary policy will be adjusted based on GDP to help slow down or rev up the economy.

Consumer Price Index (CPI)
The CPI is the most widely used measure of changes in the cost of living (inflation) for urban consumers. The index is a sampling of goods and services across 200 categories such as food and beverages (including restaurant meals and alcohol), housing costs, clothing, transportation (including air fare and auto insurance), education (including tuition and computer software), medical care, utilities, recreation (including TV cable, sports equipment, and pet care). It does not include income, payroll taxes, or investments, but does include taxes paid on those items.

Data is released monthly, and there are also indexes for specific metropolitan areas, which are published every two months. Changes in the CPI will also influence changes in monetary policy.

Producer Price Index (PPI)
The PPI is another important measure of inflation and is the first inflation measure available each month. It tracks changes in prices paid at the wholesale level. It includes information for virtually all goods-producing sectors, including manufacturing, agriculture, mining, forestry, and fisheries. The index is broken down into crude, intermediate, and finished goods with finished goods being the best measure of what consumers will experience. Movements in crude prices have a strong correlation to corporate earnings.

Retail Sales
This index tracks monthly sales of goods in the retail industry from small local stores to huge chain stores. Sales of automobiles tend to be very volatile, so they are backed out to provide data that is smoother and more predictive of trends. Since services are not included, this represents less than half of monthly consumer consumption.

Consumer Confidence Survey
This monthly index is a reflection of the nation's mood. It is an excellent leading indicator since individuals are more likely to spend when they feel optimistic about their financial future and employment stability.

The List Goes On
As we also experience in the realm of investment analysis, there are seemingly endless criteria for measuring and forecasting performance and trends in economics. Familiarity with some of the basic leading indicators can provide the opportunity to ease clients' fears when they hear the pundits place their often exaggerated spin on the numbers as they are released. Following the indexes can help you make a more persuasive argument for your own predictions regarding the state of the economy. Just remember to minimize financial and economic jargon for an effective delivery.

The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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