The recent decline in the stock market attributed to the coronavirus has investors nervous, and federal employees and retirees are no exception.
During a recent Federal Retirement Readiness Review (FRRR), I spoke with a federal employee who was eager to establish his financial health before heading off into retirement, and he shared his concerns with me about the recent stock market volatility.
During the conversation, I explained that his trepidations were natural and understandable, but that he should also remember that many fundamentals of the US economy are still strong. I made clear how the potency and depth of these measurable fundamentals could indicate at least some rationale for having a positive outlook about his retirement savings.
He then candidly stated, “Ok, thank you, that does alleviate my concerns a little. But I could probably be even more at ease if you could tell me…what are market fundamentals?”
When the markets react erratically, many in the financial industry (including those on TV and radio) often pivot the conversation to the “Fundamentals.” Even when the markets aren’t behaving in a spastic manner, “experts” may fall back on the fitness of fundamentals to make a rationalization about what just happened or a prediction about what they believe will happen.
These are some questions to ask to take some of the ambiguity out of the financial lingo:
What information are these influential authorities expecting laypeople will take from their informed and clever dialogue? For that matter, what are these fundamentals to which many financial authorities often refer? And are those fundamentals important to the average federal employee’s understanding and management of his or her portfolio (TSP, IRA’s, etc…)?
Today we hear a lot about the coronavirus and its impact on the markets, but we also hear that the negative movement is likely temporary because the economic “Fundamentals” in the US are strong. Are they right? Is this drop temporary, and are the US fundamentals still strong?
First, is this market downturn just temporary?
Well, the honest answer is, no one genuinely knows…but, probably. Since no one knows, why does it seem there is so much apparent confidence from financial pros?
The answer is all about History and Fundamentals!
The US stock markets have been around for a long time. They have experienced a devastating depression, fast-hitting “bear” markets, wars, market corrections, toxic politics, a cold war, terrorist attacks, and a housing market plunge. In each instance, the markets have recovered…each and every time.
I have no exclusive insights, but concerning an impending market turnaround, in my opinion it isn’t a question of “If” it’s a question of “When.” A strong Bull market could be just around the corner, or the bull may decide to graze for a bit before bucking its way back into a fast-moving growth stampede.
Think of fundamentals as indicators of how well the overall US economy is running. But what are they?
We view them in the light of reports, indicators, and statistics. They provide measurements that may be used to evaluate the overall (or specific segments) of the general health of the US economy.
Below is a list of some of the most utilized and arguably the most important fundamentals to be conscious of. I am going to hit some of the high points of each. Due to length restrictions, we won’t dig too deep into the finer details.
Nine of the most important fundamentals
Gross Domestic Product (GDP)
GDP is the measurement of the overall market value of all of the goods and services produced and sold by a country. GDP is measured annually. One of the things we hope to see from GDP reports is data that indicates a high probability of growth in the US economy, not a decline.
GDP is a measure of how fast profits may grow and the expected return on investment. A healthy GDP is generally required for a country to maintain a sustained and robust economy.
Quick fact – According to Trading Economics, the US portion of the global economy was 33.14% in 2018.
This single economic pillar has had a huge impact on the vigor of US fundamentals. In the US, we have an abundant store of natural resources like oil, natural gas, coal, silver, copper, lead, uranium, zinc, phosphates, and more. These resources play a crucial role in creating a strong base for the US economy.
This is the total amount of money a country has in circulation. This calculation will include physical cash, savings accounts, checking accounts, and so on. There are some caveats such as: the reserves banks are required to keep is not counted in money supply, but personal certificates of deposits (CDs) are.
Consumer Price Index (CPI)
The CPI is essentially a measurement for the price of goods and services within a given time frame. Think of it as an inflation indicator. It measures the changes in prices for hundreds of items and services across the country to determine cost increases or decreases. The results are generally released monthly.
Producer Price Index (PPI)
PPI is composed of several indexes that measure changes in prices of goods and services at the wholesale level. It is much like the CPI but on the business level instead of the consumer level. Again, it is generally released monthly.
Manufacturing and Trade Inventories and Sales
These reports combine the value of sales and shipments by manufacturers and the value of the inventories for both retail and wholesale producers. This fundamental is a great indicator of either the growth or contraction of the US economy.
Current Employment Statistics (CES)
The CES does not include agriculture industries. However, its data are designed to look at things such as US employment, unemployment, wages, and earnings.
There is a great deal of drill-down available here. Age, sex, race, and individual industries are examples of some of the various points of interest that can be closely examined. These data positions can be good indicators of the state of the US workforce.
S&P 500 Stock Index (the S&P 500)
The S&P 500 has become the standard-bearer for equities in determining the overall performance of the markets. It is an inclusive index of 500 publicly traded stocks.
Note: It’s generally considered wise to look at the overall long-term performance (rather than short-term) when assessing overall market conditions.
Housing Starts (Formally Known as “New Residential Construction”)
This fundamental is an assessment of how many new homes had at least some work performed on them. This estimate can include permits for individual and multi-family units. It also includes both projects that were started and projects completed for a specified period of time (usually monthly).
There are, of course, many other fundamentals that economists, advisors, analysts, and the like review when determining the strength of the US economy. Many of them could be equally valuable data points. But this set is a pretty good start in understanding what fundamentals are and why they are valuable tools.
Even if you don’t follow these reports yourself, it is helpful to know where the “experts” are drawing their opinions from.
Infinity Financial Services is a Registered Investment Advisor and a member of both the Financial Industry Regulatory Authority (FINRA®) and the Securities Investor Protection Corporation (SIPC).
Any opinions expressed in the article are those of the author alone. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risks, including the loss of principal. No strategy assures success or protects against loss. Silverlight Financial, Infinity Financial Services and its affiliates do not provide tax, legal or accounting advice. This material is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. For a list of states in which I am registered to do business, please visit www.silverlightfinancial.com.