Understanding what the markets are telling us
No financial firm of integrity will tell you to try to predict the markets from day to day, or make a big shift in your investments based on headlines. But that doesn’t mean that you should ignore market news. Each piece of information is a part of a puzzle, and when you know what to watch and how the pieces fit together, you can start to get a picture of what the economy is saying.
Of course, even the best reading of the data just offers insight into what is more or less probable, not an actual prediction. But in general, here are things to watch and why:
The Federal Reserve sets prime rates to speed or slow lending (and spending)
The prime rate set by the Fed is used to calculate how much interest is charged on many loans. Ironically, while the stock market often rises when the rate goes down (because a lower rate means it’s cheaper to borrow money and repay loans, possibly improving the profits of the companies on the stock market), when you see news of a rate cut, that means the Federal Reserve is worried that the economy is slowing or might slow if not given a boost.
Economic indicators tell us what happened recently
Reports of business activity, the unemployment rate, inflation, and average wages tell a story. They can’t tell you what is about to happen, but they can show which way things have been trending recently and may give an indication of what will happen next. The indicators are interrelated – low unemployment usually means wages rise since there is more competition for workers, but that also increases costs for businesses, which can slow investment.
Geopolitical news and trends give hints of the future
Splashy headlines may move the market, but investors should look for things with long-term impact. Worries about conflicts, trade wars, shortages of raw materials, and changing consumer habits come and go. Look for broad changes. Threats of a specific tariff shouldn’t make you dump investments, but knowing that tariffs are a tool likely to be used in coming years (after decades of low tariffs) is a structural change and can be factored into predictions.
Tip: Don’t wait for the other shoe to drop – talk to someone
Seem complicated? That’s because it is. People who are invested in the markets often aren’t sure what to do when they see news about world events, Federal Reserve moves or alarming stories about the state of the economy. This indecision leaves many people feeling worried but helpless. Getting perspective from people who have studied these trends will help you have greater confidence whether you choose to change investments or not.
Unraveling indicators is as much art as science, but the key is to look at the aggregate, not just one statistic. Alerus has a team of investment experts watching the markets, and more importantly, thinking about what they really mean for the individuals and businesses we serve.