SELF-DIRECTED INVESTORS
MANAGE YOUR MONEY. BEAT THE PROS.
LONG-TERM MINDSET INVESTORS
PATHWAY TO FINANCIAL WEALTH
SELF-EMPOWERED WEALTH EDUCATION
“If you don't find a way to make money while you sleep, you will work until you die”
Warren Buffet
NOTE TO A SELF-DIRECTED LONG-TERM MINDSET INVESTOR
Anyone Can Become Rich ~ Warren Buffett
FINANCIAL MARKETS: THE WEALTH CREATION MACHINE
Whether you're new or experienced investor in the financial markets, there is no doubt, investing in the financial markets and holistically managing the pillars of wealth are fundamental vehicles and pathways to wealth building and financial independence.
Evidently, with the magical power of compounding and the historical market returns, in the long-run, the gains from investing outpaced invested capital.
For your information, administrators of retirement plans, pension funds, mutual funds, index funds, banks, corporate funds, hedge funds and other professionals seek higher returns on their capital through participation in the financial markets and managing their money.
You are not excluded to seek these high returns and the wealth creation opportunities as self-directed long-term wealth mindset investor! According to Warren Buffett, 'Anyone Can Become Rich'. Clearly, the choice is yours to seek these high returns and become rich; it's proven.
Therefore, being financially independent and wealthy is not an exclusive privilege! It's a matter of choice. Your financial intelligence and, more importantly, your behavior matter!
Great that you've made the best decision to attain that financial freedom, and be in control of managing your money as you accumulate wealth.
On this platform, we provide resources to inform, educate and inspire you to navigate the complexities of investments, financials and the financial markets to reach your desired financial goals and aspirations with focus on the pillars of wealth: FINANCES, INVESTING, RETIREMENT AND TAXES.
As an investor, your life is in your hands! While you may have others manage your investments, the outcome or performance of your investments is directly proportional to your involvement in the investment and investing decision process, passively or actively.
Note, no one has your best interest than you! You must acquire skills, knowledge and understanding of the workings and dynamics of the financial markets. You don't have to be an expert, but you MUST be well-informed. Your money, your wellbeing and your life are at stake! Again, it's your choice!
On a final note, while investing in the financial markets and managing your finances can be rewarding and fulfilling, it comes with some risks as well. These risks can be mitigated to varying degrees, depending on your sophistication, confidence and, largely, your behavior.
To be a WINNER in the 'WEALTH GAME', you must be knowledgeable, disciplined, patient, confident, and must INVEST for the LONG HAUL!
Investing Is A Game of Preparation, Knowledge and Discipline. Remember, to be wealthy, you must have the ability to CREATE and MANAGE wealth, period.
The financial markets and the pillars of wealth, are essential vehicles and foundations to financial independence and abundant wealth!
GOOD LUCK!
Learn More: Key Takeaways
Being financially independent and wealthy is not exclusive! It's a matter of choice.
Your Investing Behavior Matters!
Steps On Your Way:
- Roadmap To Financial Wealth
- Jumpstart Your Knowledge
- Insights Of Great Investors
- The Wealth Journey - The Blog
- Help Along The Way
The Wealth Journey:
- Money Management
- Wealth Accumulation
- Wealth Preservation
- Wealth Distribution
Don't Go Alone! Get A:
The Pillars of Wealth:
Investing Approaches:
- Passively Active Investors
- Actively Active Investors
Strategic Investing:
- Value
- Growth
- Value-cum-Growth
- Income
Sustaining Qualities:
- Knowledge & Insights
- Discipline & Patience
- Long-term Mindset
Time In The Market:
Precious than time timing the market.
Timing The Market Is A Loser's Game!
IT'S TIME TO MANAGE YOUR MONEY!
THE WEALTHSCAPE
The wealth landscape is enormous and complex where great opportunities and risks abound. However, with discipline, and following a strategic roadmap with appreciable understanding of investing philosophies and insights of great investors, the desired financial independence and wealth can be achieved.
Thriving in the financial markets, as investor, requires knowledge, discipline, patience and the long-term wealth mindset. As a self-directed investor, the aforementioned qualities, when possessed, provide the skillsets to navigate the intricacies and complexities during the journey to financial independence and wealth.
INSIGHTS: BEATING THE PROS
BE WELL GROUNDED! LESSONS FROM GREAT INVESTORS
Benjamin Graham:
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”
Warren Buffett:
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
John Bogle:
“The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.”
Peter Lynch:
“Your investor's edge is not something you get from Wall Street experts. It's something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.”
Thomas 'T.' Rowe Price:
“The growth stock theory of investing requires patience, but is less stressful than trading, generally has less risk, and reduces brokerage commissions and income taxes.”
... More on Insights and thoughts of great investors.
THE PASSIVELY ACTIVE INVESTING
- The Passively Active Self-Directed Investor -
The passively active investing approach is ideal for self-directed investor who does not have the time or skills to research and pick individual stock or bond or other financial instruments.
However, you, as an investor, can engage in 'limited' time and research to select managed investment vehicles that provide the opportunities to achieve same returns as the market index or better. The market indexes could be S&P 500, DOW, NASDAQ, RUSSELL 2000, EMERGING MARKETS etc.
The logic and well-tested believe behind indexed investing is that 'no one can beat the market in the long run'.
William F. Sharpe, Professor of Finance, Emeritus, Stanford University in his article titled: Indexed Investing: A Prosaic Way to Beat the Average Investor, presented at the Spring President's Forum, Monterey Institute of International Studies,
May 1, 2002 stated that:
'Indexed investing is a strategy designed to match a market, not beat it. Done properly, it can be cheap and tax-efficient. After costs and taxes, an indexed investor in a market can beat the average active investor. Many investment vehicles, both mutual funds and the more recently introduced exchange-traded funds, make it possible for individuals to invest some or all of their assets in indexed strategies'.
Passive-Active Investment Vehicles:
INDEX FUND
MUTUAL FUND
EXCHANGE TRADED FUND (ETF).
Should you need help with these investment vehicles and strategies, contact us at: info@gofarwealthy.com
THE ACTIVELY ACTIVE INVESTING
- The Actively Active Self-Directed Investor -
An actively active investor believes in the act of stock selection, researching businesses, industries, sectors, and the current and future state of the domestic and global economy.
While the process of picking stock are time-consuming, the investor must have skills to analyze financial data to making an informed investing decision. Most actively active investors are convinced that they can beat the market returns.
Understanding the language of business is key: ACCOUNTING
According to William F. Sharpe of Stanford University, on active manager of investment portfolio, 'they do research on companies, try to untangle the web that corporate officers and accountants sometimes weave, try to predict acceptance of future products, and so on'.
Above submission applies to institutional and corporate active managers of portfolio; however, this can be replicated by self-directed investors with the benefits of saving on management costs, fees and taxes as a self-directed investors.
The actively active investor, aside picking individual stocks, bonds, REITs, etc. can also analyze and pick as part of his portfolio individual index fund, mutual fund and exchanged traded fund to complement the individual stock picking - as part of risk management and diversification.
Coaches at GoFar Wealthy are available to support you in acquiring the fundamental skills in areas of research, analysis and selection of investment.
Contact us: info@gofarwealthy.com
THE DUE PROCESS
Prepare
VISION
Empower self-directed long-term wealth mindset investors to financial independence and wealth.
MISSION
To provide platform to inform, educate and inspire individuals with financial knowledge, skills and tools on the journey through and to financial stability, flexibility, freedom, independence, abundance and wealth.
STRATEGY
Gradually build investors' discipline, patience, perseverance and confidence through timely and consistent financial markets intelligence gathering and reporting.
PHILOSOPHY
Fundamentals and Value-cum-Growth based long-term investing principles and mindset.
WRAPAROUND
Helping self-directed long-term investors manage finances, eliminate debts, invest for the long-run, fund retirement and manage taxes from advantaged 'helicopter' position.
FOCUS
Helping new and experienced investors with long-term financial wealth mindsets.
Way to your Financial Wealth
On the way to your financial independence and wealth are several stages, each with its own challenges and dependency on one another.
This wealth journey, though in many phases through the financial markets vehicles, can be safely categorized as:
- Money Management
- Wealth Accumulation
- Wealth Preservation and,
- Wealth Distribution
However, this wealth journey can be circular if proper financial goals, discipline, skills and commitment are not established to navigate the dynamics of the financial markets on which back the goal to be financially independent and or wealthy will be achieved.
A clear financial and wealth goals with necessary support systems in place will help alleviate any obstacle on the way to wealth and financial independence.
On this platform, the thoughts, philosophies, principles and the mindsets of the greatest investors are provided to help shape and positively influence your self-suited investing strategies and approaches.
These greatest investors' insights will guide against colossal investing mistakes.
Walking Together with You
If you want to go fast, go alone. If you want to go far, go together ~ African Proverb
The Journey to financial independence is long and challenging! For the most time, It's long-term goal of 7, 10, 20, 30, 40, 50 years perspective.
This journey projects social-political-economic-financial environments, turbulences and risks in conjunction with your desired lifestyle and time horizon.
While your goal is to be financially independent and wealthy, on this platform, you will not go alone!
We will walk with you, provide and equip you with all necessary hands-on practical financial and investing tools to manage every stage of your wealth journey with confidence and great expectation.
To support you, all the financial knowledge, skill sets and tools are strategically anchored on: FINANCE, INVESTING, RETIREMENT and TAXES that will form the pillars to your desired financial independence and wealth.
To make sure you are on the right track and at exact starting point, we have provided, for your use, Knowledge Base (FAQ), Roadmap , BlogPosts, and 'road-side' assistance (Coaching and Consulting Support Services).
FINANACIAL MARKETS INDEXES FUNDAMENTALS AT A GLANCE
Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA), also know as the DOW 30, is most popular of the market indexes, made up of 30 United states large publicly owned companies, and measures their performances and the general health of the equity market. The companies listed are commonly referred to as Blue-Chips companies.
As a long-term mindset investor, knowing the trajectory, patterns and historical performance of this index in conjunction with your investing decision is necessary as the stock market is a leading indicator of the direction of the economy.
Reference:
- Wikipedia
- Google Finance
Chart Source:
- Google Finance
S&P 500
The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. The S&P 500 index is a free-float weighted/capitalization-weighted index.
The index is one of the factors in computation of the Conference Board Leading Economic Index, used to forecast the direction of the economy.
A long-term mindset investor should note that: the average annualized return since its inception in 1928 through Dec. 31, 2021, is 11.82%. The average annualized return since adopting 500 stocks into the index in 1957 through Dec. 31, 2021, is 11.88%.
Reference:
- Wikipedia
- Google Finance
Chart Source:
- Google Finance
Nasdaq Composite
The Nasdaq Composite is a stock market index that includes almost all stocks listed on the Nasdaq stock exchange. Along with the Dow Jones Industrial Average and S&P 500, it is one of the three most-followed stock market indices in the United States.
The composition of the NASDAQ Composite is heavily weighted towards companies in the information technology sector. The Nasdaq-100, which includes 100 of the largest non-financial companies in the Nasdaq Composite, accounts for over 90% of the movement of the Nasdaq Composite.
The Nasdaq Composite is a capitalization-weighted index; its price is calculated by taking the sum of the products of closing price and index share of all of the securities in the index. The sum is then divided by a divisor which reduces the order of magnitude of the result.
Reference:
- Wikipedia & Google Finance
Chart Source:
- Google Finance
Russell 2000 Index
The Russell 2000 Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index. It was started by the Frank Russell Company in 1984. The index is maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group.
The Russell 2000 is by far the most common benchmark for mutual funds that identify themselves as "small-cap", while the S&P 500 index is used primarily for large capitalization stocks. It is the most widely quoted measure of the overall performance of small-cap to mid-cap company shares.
It is commonly considered an indicator of the U.S. economy due to its focus on small-cap companies in the U.S. market. The index represents approximately 10% of the total market capitalization of the Russell 3000 Index.
Reference:
- Wikipedia
- Google Finance
Chart Source:
- Google Finance
All The Major Indexes Combined
This chart shows the chats of all the major indexes: The Dow Jones Industrial Average, S&P 500, Nasdaq Composite and the Russell 2000 Index.
The indexes tend to move in the same direction but with varying degrees.
As a long-term mindset investor, understanding the trajectory, patterns and historical performance of each index and in relation to each other needed to make informed decision on sectoral, industry and market investing and direction of the economy.
Reference:
- Wikipedia
- Google Finance
Chart Source:
- Google Finance
ECONOMIC INDEXES FUNDAMENTALS AT A GLANCE
Level of Actual and Potential GDP
As self-directed investor, understanding the implications of the level of actual and potential Gross Domestic Product (GDP) provides understanding of the direction of the economy in the light of output capacity (productivity) level.
In Brookings Institute article, titled: What is potential GDP, and why is it so controversial right now? By Tyler Powell, Louise Sheiner, and David Wessel, stated that 'the difference between the level of real GDP and potential GDP is known as the output gap.
When the output gap is positive—when GDP is higher than potential—the economy is operating above its sustainable capacity and is likely to generate inflation.
When GDP falls short of potential, the output gap is negative'.
The gray area on the chart depict the periods of slowdown in the economy in relation to the indexes.
The outlook or projection of these indexes can be useful to you, as self-directed investor, into formulating your investing decisions and strategies.
Reference:
- Federal Reserve Bank, Dallas - U.S. Economic Activity
Chart Source:
- Bureau of Economic Analysis
- National Bureau of Economic Research
- Congressional Budget Office
Weekly Economic Index
The Weekly Economic Index (WEI) provides a signal of the state of the U.S. economy based on data available at a daily or weekly frequency.
It represents the common component of 10 different daily and weekly series covering consumer behavior, the labor market and production. The index is routinely updated on Thursdays.
Note: The WEI is not an official forecast of the Federal Reserve Bank of New York or its president, the Federal Reserve Bank of Dallas or its president, the Federal Reserve System, or the Federal Open Market Committee.
As self-directed long-term investor, the weekly economic index chart (2008 - 2022) provides general understanding of the underlying forces of the economy and effects on the direction of the economy and this, will help in the quality of investment decisions.
Reference:
- Federal Reserve Bank of New York
- Federal Reserve Bank of Dallas
- Wikipedia
- Investopedia
Chart Source:
- Lewis, Mertens and stock
- Bureau of Economic Analysis
Retail Sales
A long-term mindset self-directed investors must be in tune and able to decipher retail sales figures as a measure of the health of the economy, and the probable direction.
In an Investopedia's publication, titled: Retail Sales: Definition, Measurement, as an Economic Indicator, written by the Will Kenton, the following are the instructive understanding of the retail sales as an macroeconomic metrics:
'Retail sales represent a key macroeconomic metric that tracks consumer demand for finished goods. Consumer purchases of durable and non-durable goods are compiled in a report.
The retail sales report helps analysts and investors gauge the health of the economy and any inflationary pressures that may exist.
Data is gathered by the U.S. Census Bureau and includes sales from 13 types of foodservice and retail stores.
An accurate measure of retail sales is vital for gauging the economic health of the U.S. because consumer spending accounts for two-thirds of gross domestic product'.
Reference:
- Federal Reserve Bank of New York
- Federal Reserve Bank of Dallas
- U.S. Census Bureau
- Investopedia
Chart Source:
- Census Bureau
- Haver Analytics
Consumer Confidence
How confident are you about the state of the economy or investment environment as an investor? And, how confident are the consumers? This is key basic element to decide and to psych your general outlook of the direction of the economy and investments.
'The Consumer Confidence Survey® reflects prevailing business conditions and likely developments for the months ahead. This monthly report details consumer attitudes, buying intentions, vacation plans, and consumer expectations for inflation, stock prices, and interest rates'.
'Consumer confidence is an economic indicator that measures the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation.
If the consumer has confidence in the immediate and near future economy and his/her personal finance, then the consumer will spend more than save'.
'When consumer confidence is high, consumers make more purchases. When confidence is low, consumers tend to save more and spend less'.
A month-to-month trend in consumer confidence reflects the outlook of consumers with respect to their ability to find and retain good jobs according to their perception of the current state of the economy and their personal financial situation.
Consumer confidence typically increases when the economy expands, and decreases when the economy contracts.
In the United States, there is evidence that the measure is a lagging indicator of stock market performance'.
Reference:
- Wikipedia
- Investopedia
- Federal Reserve Bank of New York
- Federal Reserve Bank of Dallas
Chart Source:
- University of Michigan: Conference Board
New Residential Construction
Construction spending, no doubt, constitute substantial part of aggregate spending in the U.S.
The majority of the construction spending comes from the housing sector. Thus, the housing sector or market i.e. the residential construction contributes significantly to the U.S. gross domestic product (GDP) and can be a leading indicator of the health of the housing market and the direction of the economy.
Why is this residential construction important to you as an investor? As self-directed investor, knowing that the construction spending is a key leading indicator can provide you an idea of the health of the housing market, predictive state of the broader economy, and basis of making investing decision based on facts and figure presented.
Looking at the chart (produced by the U.S Census Bureau), the gray areas: 2008-2009 Housing Market Meltdown and 2020 COVID 19, clearly depict the relationship between the new residential construction with the significant events in the economy.
As self-directed investor, you must keep track or be cognizance of this economic index knowing that almost 50% of the U.S. construction comes from the residential housing market.
Reference:
- Federal Reserve Bank of New York
- Federal Reserve Bank of Dallas
- Investopedia
Chart Source:
- Census Bureau
ISM Purchasing Manager Indices
When the economy appears to be healthy with significant brighter future, businesses tend to inject more capital into their operations, purchasing of necessary materials, tools, inventory, hiring etc., to meeting present and future demands for products and services.
The Institute for Supply Management (ISM) Manufacturing index, known as the ISM Purchasing Manager Indices (PMI) indicate the demands or orders made by purchasing managers of selected manufacturing firms.
When the general economy outlook is great and promising, both the ISM manufacturing and non-manufacturing indexes tend to rise vice-versa as shown by the chart by the Institute for Supply Management.
As self-directed investor, just as business managers, the index number and direction can significantly influence your level of confidence on the direction of the economic activities and investing environment.
The ISM/PMI is regarded as a leading indicator of the state of the economy - this chart showed the predictive or directional trends of both ISM manufacturing and non-manufacturing indexes at various stages of the U.S. economy between 2007-2022.
Reference:
- Federal Reserve Bank of New York
- Federal Reserve Bank of Dallas
- Investopedia
Chart Source:
- Institute for Supply Management
Level of Employment
With full employment, it is believed that the entire U.S. labor force and resources are fully employed (employees and self-employed) and deployed (engaged in productive activities).
Full employment level or high level of employment is positive signals to investors that the labor productive capacity of the economy is being maximized as this is also reflected on the country's gross domestic product (GDP).
The higher the level of employment, the healthier the broad economy. Investors' confidence are high when employment rate is high as this shows optimism about the state of the economy.
As self-directed long-term minded investor, understanding the economy sectoral employment level is necessary to predict or determine sector or industry with high and consistent employment rate and future trend of the each interested sector or industry.
It is instructive as self-directed investor to know the effects of economy downturn on the employment rate and, in turn, on your investments.
The level of employment chart shows the employment trend in U.S. economy from 2001 -2022. Note the gray areas - during significant negative events in the U.S economy and impacts on the employment level: 2000-2001, 2008-2009 and 2020 [Tech Bubble Burst, Housing Market Meltdown and COVID 19], the highs and the lows.
Reference:
- Federal Reserve Bank of New York
- Federal Reserve Bank of Dallas
- Investopedia
Chart Source:
- Bureau of Labor Statistics
Unemployment Rate
There is no doubt that the level of unemployment is vital to the general health of the overall economy and the productivity of the economy considering the number of workers in the labor force measure or represented by the of number of people actively looking for employment but unable to find one.
Accordingly, the unemployment rate is defined as the percentage of the total labor force that is unemployed but actively seeking employment and willing to work if available.
As a self-directed long-term investor, understanding the unemployment rate will help indicate the current and future directions of the economy and how it will affect investing decisions and strategies.
The chart depicts the unemployment rate from 2000 - 2022. The gray areas show periods of significant high unemployment rate: 2000-2002 (Tech Bubble Burst); 2008-2009 (Housing Market Meltdown), and 2020 (COVID-19 Pandemic).
Reference:
- Federal Reserve Bank of New York
- Federal Reserve Bank of Dallas
- Investopedia
Chart Source:
- Bureau of Labor Statistics
Labor Force Participation
In addition to the unemployment rate and for more clearer perspective on the state of the general economy, it is important to evaluate the labor force participation rate for the people mainly working age population (16-64) who are actually working or actively seeking for job.
This economic indicator also considered those people that are not actively seeking employment.
The Labor Force Participation chart, the gray areas, shows the effects of major economic events on workforce participation.
As an investor, understanding this chart will help indicate the quality, the participation rate of the workforce and the status of the economy.
Reference:
- Federal Reserve Bank of New York
- Federal Reserve Bank of Dallas
- Investopedia
Chart Source:
- Bureau of Labor Statistics
Combined Unemployment and Participation Gaps
While the health of the job market is part of the determinants of the general economy well-being, the combination of the unemployment rate and the labor force participation are crucial economic metric to determine the job market itself.
A self-directed investors with long-term perspective should note that high level of labor force participation rate couped with low unemployment rate is strong indication of an healthy and robust job market which further translate to potential investible environment with opportunities.
Reference:
- Federal Reserve Bank of New York
- Federal Reserve Bank of Dallas
- Investopedia
Chart Source:
- Bureau of Labor Statistics
- National Bureau of Economic Research
- Congressional Budget Office
Jobless Claims
Why do you, as a long-term mindset investor, need to know about the Jobless Claims statistical report? The jobless claims are of economic importance as well known leading indicator of the state of the labor market vis-à-vis the status of general employment and the health of the economy.
This statistical data or report provides signal of people out of jobs claiming unemployment insurance benefits pending when they find another jobs.
When the number of people filing for unemployment benefits are high, it signifies that that ably qualified and ready-to-work people cannot find jobs vice-versa.
As an investor, be aware that the financial markets may react to the report of the actual or anticipated figure of the jobless claims if significant or highly volatile - thus influencing investing decision for the short and the long run.
From the chart, the jobless claims before March 2020 (pre-COVID-19 Declaration), the jobless claims were constant until shape significant increase in early 2020 shown in the gray area due to the effects of the COVID-19 Pandemic that resulted in high unemployment rate and exponential total unemployed people which translated to high jobless claims.
Reference:
- Investopedia
Chart Source:
- Department of Labor
MORE OF ECONOMIC FUNDAMENTALS INDEXES AT A GLANCE
Wage Growth
No doubt, the labor workforce want to see their wages rise to meet up with both their discretionary and non-discretionary expenses. The increase of the wages, described as wage growth is also known as the real wage growth when adjusted for inflations.
This wage growth enhances the consumers purchasing power and standard of living thus help measure the long-term perspective of the general economic growth. Also, the wage growth increase or decrease implies price inflation or deflation respectively.
What to know as an investor, the effects of the rise/decline in wages on the prices of goods and services, corporate profits, productivity and the general health of the economy considering wage-push inflation tendency.
The chart depicts, the wage growth, the average hourly earnings and wages and salaries with the period of significant changes triggered by periods of major events (both economy and non-economy) such as tech bubble burst of 2000 and the COVID-19 of 2020.
Reference:
- Federal Reserve Bank of New York
- Federal Reserve Bank of Dallas
- Wikipedia
- Investopedia
Chart Source:
- Bureau of Labor Statistics
- Federal Reserve Bank of Dallas
PCE Inflation
The Personal Consumption Expenditures (PCE) is a measure of the general consumer spending using the prices consumers inside the economy pay for goods and services.
The PCE is a major driver of gross domestic product (GDP) and integral part of the PCE Index tracking inflation and deflation of consumer prices over a period of time.
As shown on the chart, the Bureau of Economic Analysis produces, monthly the PCE report.
What is the importance of the PCE to investors? The PCE measurements allow investors to have clear understanding how the health of the economy and consumers behavior toward consumptions of goods and services.
The chart shows that consumer spending down in 2008-2009 and in 2020 during the Tech bubble burst and COVID-19 Pandemic.
Reference:
- Federal Reserve Bank of New York
- Federal Reserve Bank of Dallas
- Wikipedia
- Investopedia
Chart Source:
- Bureau of Economic Analysis (BEA)
- Federal Reserve Bank of Dallas
Core Inflation
To the economy policymakers, businesses, investors and the general public, inflation and related matters are sensitive issues that affect both micro and macro decisions.
While inflation is regarded as the persistent increase in general prices of goods and services, measured by the consumer price index (CPI), the core inflation, which is the change in the costs of goods and services excluding the the food and energy sectors.
As an investor, it's important to understand the impact of the general increase in price of goods and services on consumers especially when there is no corresponding in increase consumers' incomes.
The core inflation is thus measured by both the consumer price index (CPI) and the personal consumption expenditures (CPE) index. Note that the PCE represents the prices of goods and services purchased by entire consumers in an economy, the CPI measure is used to measure the trend or changes in the general price level (Inflation).
The chart shows core inflation in action and the relationship between the core CPI and core CPE indexes highlighted in gray, major events (Tech Bubble Burst & COVID-19 Pandemic) in the economy and the effect on inflation.
Both indexes are important to investors in determining the degree of inflation in the economy and in predicting the immediate and future performances of the economy in general and, whether economic slowdown, downturn or recession in the economy is looming or not.
Reference:
- Federal Reserve Bank of New York
- Federal Reserve Bank of Dallas
- Wikipedia
- Investopedia
Chart Source:
- Bureau of Labor Statistics
- Bureau of Economic Analysis (BEA)
- Federal Reserve Bank of Dallas
- Federal Reserve Bank of Cleveland
Treasury Yield Curve
First, what is yield curve, the treasury yield curve, how does it works and how is it important to investors?
The yield curve shows the yield on bonds over different terms to maturity. The yield curve thus expresses the yield curve for government bonds which slope provides an indication of future interest changes and economy activity.
'A yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates, and it is used to predict changes in economic output and growth. The most frequently reported yield curve compares the three-month, two-year, five-year, 10-year, and 30-year U.S. Treasury debt'.
The yield curve does have three main shapes of yield curve shapes: normal (upward sloping curve), inverted (downward sloping curve), and flat with critical economic implications to the current and future directions of the economy.
As an investor, in the financial markets, the slope of the yield curve (e.g. normal, inverted, flat) provides an important signal of investors' expectations for future interest rates, and by extension their expectations for future economic growth and inflation. The slope of the yield curve is considered to be a ‘leading indicator’ of future economic growth and inflation because financial market data is more forward-looking than many other sources of information.
'If the bond yield curve indicates an economic slowdown might be on the horizon, investors might move their money into defensive assets that traditionally do well during recessionary times, such as consumer staples. If the yield curve becomes steep, this might be a sign of future inflation. In this scenario, investors might avoid long-term bonds with a yield that will erode against increased prices'.
'The yield curve for government bonds is also called the ‘risk free yield curve’. The expression ‘risk free’ is used because governments are not expected to fail to pay back the borrowing they have done by issuing bonds in their own currency'.
For the investors, 'a yield curve is a way to measure bond investors' feelings about risk, and can have a tremendous impact on the returns you receive on your investments. And if you understand how it works and how to interpret it, a yield curve can even be used to help gauge the direction of the economy.
The Treasury yield curve is often referred to as a proxy for investor sentiment on the direction of the economy'.
Reference:
- Reserve Bank of Australia
- Federal Reserve Bank
- Wikipedia
- Investopedia
Chart Source:
- Federal Reserve Bank
Why Economic Indicators Matter
Economic indicators provide information about an economy and whether it is expanding or contracting. According to the World Bank, the indicators within the Economy section allow us to analyze various aspects of both national and global economic activity.
As countries produce goods and services, and consume these domestically or trade internationally, economic indicators measure levels and changes in the size and structure of different economies, and identify growth and contractions.
Economic indicators include measures of macroeconomic performance (gross domestic product [GDP], consumption, investment, and international trade) and stability (central government budgets, prices, the money supply, and the balance of payments). It also includes broader measures of income and savings adjusted for pollution, depreciation, and depletion of resources.
No one key indicator paints a complete picture of the state of the economy. However, a combination of indicators such as gross domestic products, employment figures, inflation, consumer spending, industrial production, home sales, home building, retail sale are part of the top key economic indicators that can be used to inform a variety of economic and investment decisions as they provide insight into overall economic health.
The economic indicators, also know as the macroeconomic indicators are group into three distinct predictive capabilities: leading, lagging, or coincident.
To investors, both the coincident and lagging indicators provide investors with some confirmation of where the market is and where it has been, and are a good place to start because they help indicate where the economy might be heading.
Investors and the economic indicators:
'As per Investopedia, leading indicators such as the yield curve, consumer durables, net business formations, and share prices, are used to predict the future movements of an economy, and this makes the stock market a leading indicator though there are limitations using the stock market as a leading indicator; coincident indicators include such things as GDP, employment levels, and retail sales, are seen with the occurrence of specific economic activities; and the lagging indicators are gross national product (GNP), CPI, unemployment rates, and interest rates, are only seen after a specific economic activity occurs.
Note: An economic indicator is only useful if one interprets it correctly by investors'.
In summary, to be well informed investor, one needs to be aware of the changes, as observed or reported, in the vital economic indicators to determine the direction of the economy both in the short, medium and long-term before making investment or investing decision.
Reference:
- World Bank
- Wikipedia
- Investopedia
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