Economic Snapshot

In Asset Allocation, Investments, Market Review, Retirement Planning, The Economy by Chip Hymiller

The Economic Snapshot is a sampling of a number of widely followed economic and financial market statistics.  Beacon Financial Strategies utilizes these and other economic indicators as a gauge of the general financial health of the economy when making investment decisions.

The purpose of the information contained in this post is to provide you with a general gauge of domestic economic activity.  While there are literally hundreds of variables that can be used to measure economic strength, or weakness, the following charts, graphs and tables are the more commonly referenced indicators.

Understanding the Dow Jones Industrial Average

Below is a chart that shows the price movement of the Dow Jones Industrial Average.  While this is a commonly referenced benchmark, it is important to understand the following:

  1. The Dow Jones Average consists of only 30 large capitalization, US domiciled stocks – hardly a diversified portfolio.
  2. Each stock’s weighting in the Dow is based on it’s stock price.  For example, if Apple’s share price is about $90 and Coca Cola’s share price is $45, Apple’s relative weighting in the index is two times higher than Coke’s.
  3. The chart below does not include dividends (reinvested or even paid).

For more information regarding various indexes, please see our article “What’s In an Index?

Treasury Yield Curve

Compiled directly from the US Treasury, the “Treasury Yield Curve” compares the yearly change in short, intermediate, and long-term interest rates.  The yield curve is generally considered a “leading economic indicator.”  In fact, since 1960 an inverted yield curve (when short term interest rates are higher than longer term rates) has preceded every recession. Here is the current yield curve:

 

Asset Class Performance

Academic research has shown that portfolio performance is directly attributable to an investor’s asset class weightings.

From a big-picture standpoint, the most important decision an investor can make is how much stock versus how much bond exposure is appropriate.  This decision is ultimately based on return requirements, risk profiles, short-term cash flow needs and other investor-specific items.

These portfolios illustrate the performance of different global stock/bond mixes. Mixes with larger allocations to stocks are considered riskier but have higher expected returns over time.

Diversification does not eliminate the risk of market loss.  Asset allocations and the hypothetical index portfolio returns are for illustrative purposes only and do not represent actual performance. Global Stocks represented by MSCI All Country World Index (gross div.) and Treasury Bills represented by US One-Month Treasury Bills. Globally diversified allocations rebalanced monthly, no withdrawals. Data © MSCI 2017, all rights reserved. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

 

More Information About the Economy

For those of you who enjoy economic statistics, here are a few resources that you may find interesting: