When we trade in the financial markets we have an opportunity to make a huge profit and its size directly depends on whether we have correctly estimated the investment attractiveness. If we buy an unprofitable asset we can lose our money. The method helping us understand when to invest is fundamental analysis.
Like on a regular market, you buy something after examining it, checking the quality, and agreeing with its price. In financial markets, you can estimate a good investment opportunity after you evaluate the market situation and study its economic indicators. You can try to understand whether to buy the stock or not by using the accounting reports of the company that has issued these stocks. The attractiveness of the company is determined by its profitability, efficiency, stability, and dividend rates. All these factors are the indicators of the company’s climate determining its investment attractiveness. But besides the internal factors directly affecting the stock price, there are external factors affecting the whole industry. These factors have influence not only on the stock market but also on the trading and commodity markets. We are talking about the indicators of the country’s economy or the basic fundamental indexes.
A country’s economic growth actually affects the companies (national and foreign), prices of raw materials, and national currency rates, which in turn also has a consequent positive effect on the country’s whole economy. It's a sort of endless cycle: when the economy is short of money the companies start investing less in their development, the investors start taking their funds out of the companies, and the currency rate starts dropping due to capital outflows. All this makes the currency unattractive for investments and the economy loses money again. Understanding how the changes in basic economic indexes affect the market helps us to forecast the future behavior of major players, conform to it, and make a profit. Having seen the first signals of economic problems, investors can react and take out the money, which will lead to a reduction of the national currency rate. At this moment we join the big traders having bought a national currency. To see these signals we should understand them.
First, we should understand what indicators can tell us about the economic situation. There are several economic indicators we should know:
1) Production of goods and services. The more goods and services people produce, the richer they become, thus improving the country’s economic situation.
2) Job market. The more people are involved in the production of goods and services, the more money they have and the more they spend.
3) Home demand and consumption. The consumer’s confidence and willingness to spend money generates a demand for different goods, creating the manufacturer's and seller’s income.
4) State. The government's efficient tax and interstate payment management boosts businessmen's confidence in the future, encouraging investment and business progress.
5) Business activity. A subjective indicator gauges business sentiments, forecasting the country's future development. Low activity and optimism signal potential economic growth slowdown.
All these factors help us to understand the situation in any economic sector. Let's consider each group in detail.
The first indicator of the country’s economic situation is GDP, the gross domestic product. GDP is the total number of goods and services produced in the country for a definite period. If it grows, the economy and its attractiveness also grow. The other indicator is the Industrial Production Index. As a component of GDP, it helps us understand the situation in the main economic sector as economic growth will be slow without it. To clearly understand the situation in the production sector they use such indexes as Capacity Utilization and Productive Efficiency. A balance and growth of both indicators show the health of the production sector. The Industrial Orders Index will help us foresee the changes in industrial production — the growth of the Industrial Orders Index shows the production and GDP growth accordingly.
The Unemployment Index shows a market situation and if it grows the economy reduces. To remove seasonality impact on understanding the job market situation we have the Employment Index without agricultural data. There's also the indicator forecasting the Unemployment Index — the Unemployment Claims Index.
Home demand and consumption
The Retail Index and Durable Good Orders Index show the level of home demand and consumption. The Retail Index growth indicates people’s welfare. Its growth in durable goods (refrigerators, TVs, and others) indicates confidence in the future and economic progress of the country. The change in the consumer confidence index is a good indicator of the sentiments in society and their readiness to spend money in the future.
Surely the main indicator of the country’s economy is its budget because its deficit or proficit shows the tax management efficiency of the current government. Ineffective budget management causes distrust of the big investors and capital outflows from the economy and the country. Also, a good indicator of government efficiency is a balance of internal and interstate payments. The proficiency of the payment balance shows how much money comes into the economy and whether it's attractive for investors. There is also the Trading Balance Index showing a difference between export and import, depending on the economic orientation. The country-exporter’s balance deficit indicates the efficiency of institutions and the growth of money inflows.
The Business Activity Index is a subjective indicator based on interviews with senior managers of major companies that reflects their optimism regarding their companies. Its growth shows that businessmen are confident in their future and ready to invest funds to their businesses and this will cause future economic growth.
As you see, tracking the economic indexes (indicators) helps us to foresee the future economic situation and understand the reaction of major players in the market. When you know how the bigger participants react on any index changes we can use it to make a profit trading in the same direction.