Fundamental analysis is a great method used to evaluate the intrinsic value of a stock’s price. Fundamental analysis uses the financial data of the company in question as the basis for stock and investing decisions. But, this research cannot exactly predict how a company will perform in the stock market. Other things get in the way such as investor behavior and emotion. The scope of fundamental analysis is very vast. There is so much information available to the researcher.
Economic, political, and industry factors affect how the price of a company reacts to news and events. There are other ways that an investor can cover country and industry related factors. Vigilant investors are well tuned in with the latest investments in the market because they keep abreast with the economic news daily. Fundamental analysis often begins with analyzing the various indicators in the market. An indicator is used to predict financial or economic trends.
Some of the most popular indicators are:
- Unemployment rates
- Housing Starts
- Inflationary indexes
- Consumer confidence such as the VIX Index
Then there are “Leading Indicators” which indicate future events. For example, bond yields are a leading indicator of the stock market as bond traders anticipate and speculate trends in the economy. Then, there are “Lagging Indicators” that follow and react to an event. Thus, it confirms that a certain inevsting pattern is probably going to occur or is occurring. For instance, unemployment is a lagging indicator because a rise in the unemployment rate indicates very clearly that the country is economically doing very poorly.
Then, there are indicators which occur at almost the same time as the conditions they point to. These indicators change at the same time as the economy or the stock market. For example, an increasing income rate ensures a strengthening economy.
Some strong indicators of the US economy are:
- GDP- Gross Domestic Product
- Consumer Confidence Index
- Consumer Credit Report
- Consumer Production Index
- Durable Goods Report
- Employee Cost Index
- Employee Situation Report
We cannot predict the future perfectly, but economic indicators can help us understand where the economy is and where it is going. Knowing these factors in conjunction with funamental analysis when picking stocks to invest in will enable us to make better investing decisions.