What determines health of the stock market? - Part 2

In this segment, we will discuss additional factors that play a crucial role. You can check out the other parts here:

Part 1

Part 3

ISM Manufacturing Index: The ISM Manufacturing Index is a key indicator of the US economy that measures the health of the manufacturing industry, a significant contributor to economic growth. It is released on the first business day of each month and can impact markets depending on the deviation from expected numbers. For example, a reading above 50 in January would suggest a growing manufacturing sector and expanding economy, while a reading below 50 in June would suggest a contracting sector and slowing economy. This index is a leading indicator, signaling economic changes before they are reflected in official GDP figures. The most recent US ISM Manufacturing PMI is 47.7 (Feb'23), down from 58.6 one year ago, a change of -18.60%.

ISM Services Index: The ISM Services Index is a monthly survey that measures the health of the service sector in the United States. It produces a composite index based on responses from purchasing managers in the industry. A reading above 50 indicates an expanding sector, while below indicates contraction. The index is a leading indicator, meaning it can signal changes in the economy before they are reflected in official GDP figures. In December 2022, the ISM Services PMI for the US fell to 49.6, compared to 56.5 in November which was below market forecasts of 55.

WTI Crude: WTI, or West Texas Intermediate, is a benchmark for US oil prices. Brent crude, which is used as a benchmark for oil prices in Europe and other parts of the world, is priced based on WTI. The price of WTI crude oil is affected by supply and demand, geopolitical events, natural disasters, and speculation. A stable or growing WTI index suggests a healthy market with growing demand and a stable supply. However, high oil prices can cause inflation and harm economic growth. Conversely, a rapidly declining WTI index can signal a weak market with declining demand and a potential surplus.

Employment-to-Population Ratio: The employment-to-population ratio (EPR) measures the proportion of a country's working-age population that is employed. A high EPR indicates a strong labor market, while a low EPR signals a weak labor market. Factors that impact the EPR include demographic changes, education levels, and women's participation. However, it does not factor in job quality or underemployment. A high EPR generally indicates a strong economy, boosting consumer spending and investor confidence, leading to a bullish stock market. Conversely, a low EPR may suggest a weaker economy and a bearish stock market, decreasing investor confidence. In summary, a high EPR is positive for the economy, and a low EPR may suggest a slowing economy and decrease investor confidence.

Average Weekly Hours Worked: The average weekly hours metric calculates the average number of hours worked per employee each week. The metric evaluates labor input and productivity, and can be used for comparison across industries and countries. However, the metric can be affected by factors such as overtime, part-time work, and vacation days, and does not account for work quality or work-life balance. If 100 employees work a total of 80,000 hours in a month, the average weekly hours would be 40. An increase in average weekly hours suggests strong demand for labor and a growing economy, possibly boosting investor confidence and leading to a bullish stock market. Conversely, a decrease in average weekly hours may indicate a weaker demand for labor and a slowing economy, possibly decreasing investor confidence and leading to a bearish stock market.

Non-Farm Payrolls: Non-farm payrolls, which exclude farm workers, government employees, private household employees, and employees of non-profit organizations, account for around 80% of the workers who contribute to the GDP. It covers employees in sectors such as manufacturing, retail, healthcare, and financial services. A higher number of non-farm payrolls means more people were employed in non-farm industries as compared to the previous month. A consistently increasing trend of non-farm payroll numbers is seen as a positive indicator of a growing economy and a healthy labor market. A strong labor market can lead to increased consumer spending and economic growth, which can positively impact the stock market.

The Retail Sales Index (RSI): The Retail Sales Index (RSI) is a measure of changes in retail sales that can serve as an important indicator of consumer spending, which is a key driver of economic growth and stock market performance. Higher retail sales typically lead to increased revenues and profits for businesses, leading to higher stock prices, while lower retail sales can cause stock prices to decline. A strong RSI can indicate a healthy economy and a positive outlook for the stock market, while a weak RSI can suggest economic weakness and potentially lower stock market returns.

Rather than worrying about monitoring these factors on a daily basis, you can automate your investments through Saay Finance. Saay Finance uses data and algorithms to continually monitor various market factors, and based on changing market conditions, adjusts your portfolio to not only protect your downside, but also capture the upside. Sign up for our waitlist here.