What determines health of the stock market? - Part 1

S&P 500 Index level: The S&P 500 Index is a benchmark for the U.S. stock market, made up of the 500 largest publicly traded companies in the country. Its level indicates the market's overall direction and health. A rising S&P 500 Index level means the market is doing well, with investors optimistic about the index's companies. This can be due to positive economic news, corporate earnings or government policies. Conversely, a falling S&P 500 Index level means the market is facing challenges, with investors pessimistic about the index's companies. This can happen due to negative economic news, weak corporate earnings or geopolitical tensions.

Cumulative Growth Of Real GDP %: This measures a country's economic growth over time by taking into account the value of goods and services produced within the country and adjusting for inflation. A positive growth rate, calculated as the percentage difference between real GDP in a specific year and a base year, shows an expanding economy, while a negative rate signals contraction. A growth rate of 2-3% per year is considered healthy and sustainable. Factors like population growth, technological advancements, labor force, and government policies affect the change in GDP. A positive change in GDP is generally good, while a negative change is bad. For example, if the real GDP in the base year (e.g. 2010) is $10 trillion and in 2020 it's $15 trillion, the cumulative growth of real GDP would be 50%, indicating a 50% growth over the last 10 years.

Consumer Price Index (CPI):  The Consumer Price Index (CPI) measures inflation by tracking the average change in prices of goods and services consumed by households. It uses a basket of goods representing the average household's consumption, including food, housing, transportation, and entertainment. Low inflation, below 2%, supports purchasing power, boosts consumer confidence, and leads to a bullish stock market. High inflation erodes purchasing power, decreases consumer confidence, and leads to a bearish stock market.

Industrial Production: The Index of Industrial Production (IIP) is a monthly or quarterly report that provides insight into trends in manufacturing, mining, and utilities. It measures the real output of all facilities within a country, excluding U.S. territories, and is considered a leading indicator of overall economic activity. Durable goods, nondurable goods, and capital goods are sub-components of the index. A growth rate of 2-3% per year is considered healthy and sustainable for IIP. The current US IIP is 102.95 (Jan'23), up 0.03% from last month and 0.79% from a year ago.

Personal Consumption Expenditures (PCE): The Personal Consumption Expenditures (PCE) measures household spending on goods and services, which is important for economic growth. It is calculated by the US Bureau of Economic Analysis and is a comprehensive measure of inflation that factors in changes in consumption, new products, and taxes. A low PCE number, usually below 2%, is a sign of low inflation and supports consumer confidence and purchasing power, contributing to economic growth and a positive stock market. However, high inflation can have the opposite effect. The Federal Reserve aims for a 2% inflation rate as measured by the PCE.

Initial Unemployment Claims: Initial unemployment claims measure the number of individuals who apply for benefits for the first time. These figures are reported weekly by the Department of Labor and indicate the health of the job market. High numbers may suggest a recession or weakening market, while low claims suggest a strong market. They also reflect recent job losses and are used to forecast future job losses, making them important for government and private organizations.

The Housing Market Index: The Housing Market Index (HMI) measures the health of the U.S. housing market. It surveys builders on current/future home sales and buyer traffic. A value of 50 is neutral, above 50 is favorable, and below 50 is unfavorable. The HMI provides insight into the economy, predicting future activity and influencing monetary policy decisions. The current NAHB/Wells Fargo US Housing Market Index is at 42, down 48.15% from one year ago (Feb '23).

You can view the other parts of the series here:

Part 2

Part 3

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