Many news events have the power to drive one or two stocks higher or lower at a time, but only a few announcements — including major economic data and other announcements — have the ability to move the entire market.
You’ve seen economic announcements splash across the headlines of major newspapers and financial websites. Some seem to have an incredibly important effect on the market, and some tend to not make much of an impact.
The hard part is determining which data points and announcements are going to move the market and which aren’t.
The Most Important U.S. Economic Data
So what economic announcements should you pay the most attention to?
When you are first getting started in investing, this can seem like an overwhelming question. After all, there are so many different sets of economic data that get released each month. However, once you start to look at announcements through the filter of just one simple question, the task of identifying what you should be paying the most attention to becomes much easier. So what is that one simple question, you ask?
“What does this tell me about the strength or the weakness of the U.S. economy as a whole?”
That’s it. You want to pay the most attention to the announcements that are going to give you insight into the big picture. You will find many economic announcements that deal with small slices of the U.S. economy, but those don’t give you the 30,000-foot view. Sure, they are important and will give you some insight into specific sectors in the market, but, if you want to know which economic data has the ability to move the market, you have to think bigger.
With that filter in mind, we have sifted through the various economic announcements you will see each month. Here are our findings. The following are the five most important U.S. economic announcements you need to be paying attention to:
- Federal Open Market Committee (FOMC) monetary policy announcements
- Gross Domestic Product (GDP) announcements
- U.S. Employment Data announcements
- Retail Sales announcements
- ISM Manufacturing PMI announcements
We know that various analysts and traders could make strong arguments for a few other pieces of economic data they think you should consider, but we’re going to focus on these five announcements, and we’ll show you why.
The Federal Open Market Committee (FOMC)’s Monetary Policy Announcement
The Federal Open Market Committee (FOMC) is the group within the Federal Reserve that sets interest-rate policy and determines when to take monetary action to try to stimulate the economy. The Fed has a dual mandate. It is charged with ensuring price stability by keeping inflation in check and with maintaining a healthy employment rate in the United States.
To meet its objectives, the Fed raises and lowers interest rates. If it sees that inflation is starting to rise, it raises interest rates to discourage rapid economic expansion. If it sees unemployment starting to rise, it lowers interest rates to encourage economic growth.
The Fed also can try to stimulate the economy through a variety of monetary actions like quantitative easing, “Operation Twist” and others. These additional tools of the Fed were increasingly important during the past few years as the United States has struggled to fully recover from its last recession, but now the Fed is focused on raising interest rates to combat potential inflation.
The FOMC meets for a two-day meeting eight times per year and releases a statement, followed by a press conference with the Chairman of the Fed, after each meeting. You can read the latest release by clicking here.
The Gross Domestic Product (GDP) Announcement
The gross domestic product (GDP) reading is the best single indicator of overall economic health we have available to us. The GDP measures the value of all of the goods and services that have been produced in the U.S. The following equation gives a little more detail about what goes into the GDP calculation:
GDP = Consumption + Investment + Government Spending + Net Exports
When GDP is rising, it indicates that the economy is expanding, and that is typically good for the stock market. On the other hand, when GDP is falling, it indicates that the economy is contracting, and that is typically not good for the stock market.
The Bureau of Economic Analysis (BEA) releases GDP data on a quarterly basis. You can read the latest release by clicking here.
The U.S. Employment Data Announcement
The consumer is all-powerful in the U.S. economy. Nearly 70% of the U.S. economy is based on consumer spending, and consumers tend to spend more when they are employed.
U.S. employment data are broken up into two key numbers — the nonfarm payrolls number and the unemployment rate. The nonfarm payrolls number tells us how many jobs were created in the U.S. during the previous month. The unemployment rate tells us what percentage of the workforce that is actively looking for a job is unable to find one.
The nonfarm payrolls number is a direct driver of the unemployment rate. When the number of new jobs being created increases, the unemployment rate tends to go down. Conversely, when the number of new jobs being created decreases — or even turns negative — the unemployment rate tends to go up. Most analysts agree that the U.S. needs to create at least 200,000-250,000 new jobs each month just to keep up with population growth, let alone decrease the unemployment rate.
The U.S. Department of Labor releases this employment data on the first Friday of every month. You can read the latest release by clicking here.
The Retail Sales Announcement
As we mentioned, nearly 70% of U.S. GDP is driven by consumers. So, naturally, we would want to know how consumers are feeling. Are they confident enough in the economy to go out and spend money, or are they nervous about the future and unwilling to spend?
Retail sales numbers give us a good indication of just how confident consumers are by highlighting where the rubber hits the road. Yes, there is other economic data that tells us about consumer confidence and consumer sentiment. But while it is one thing to go out and survey consumers and ask them how confident they are, it is another thing entirely to see if consumers are confident enough to actually put their wallets where their mouths are.
The Census Bureau releases its retail sales data on a monthly basis. You can read the latest release by clicking here.
The ISM Manufacturing PMI Announcement
The Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) gives us a pulse on the state of the manufacturing sector within America.
Yes, there are various manufacturing indicators — such as the Chicago PMI and the Philly Fed Manufacturing Index — that provide important information about how manufacturing is performing in various regions of the country. But no other manufacturing indicator gives as broad a view as the ISM number does.
Manufacturing performance helps you project what type of corporate and consumer demand there is for manufactured goods. The more demand, the stronger the outlook for the economy is in general. The less demand, the weaker the outlook for the economy is in general.
The Institute of Supply Management (ISM) releases its Manufacturing PMI on a monthly basis. You can read the latest release by clicking here.
Trading Economic Data
Now that we’ve had a chance to talk about the five big economic announcements to watch, let’s talk about how you can actually trade those announcements.
It’s pretty simple. When trading economic data, you have two choices. You can trade before the announcement or you can trade after the announcement. Trading beforehand is typically going to be a little bit less volatile than trading afterward, but both trades are going to be based on one similarity: expectations.
Trading Before the Announcement: Expectations drive the market. If traders on Wall Street expect that a company is going to do well in the future, they drive the price of that company’s stock higher. If they expect a company is going to perform poorly in the future, they drive the price of that company’s stock lower. The same concept holds true for economic data. Except, as we discussed earlier, the expectations for economic announcements can drive the entire market higher or lower, not just one stock.
Here’s how it breaks down. If traders expect a positive announcement, prices on Wall Street tend to climb into the announcement. If you see news stories or consensus estimates that point toward the following, you can typically assume that traders will have positive expectations for the economic announcement:
- Increased nonfarm payroll numbers and a lower unemployment rate
- Rising GDP
- Lower interest rates or increased quantitative easing from the FOMC
- Strong manufacturing data
- Growing retail sales numbers
If traders expect a neutral economic announcement, prices on Wall Street tend to remain flat heading into the statement.
If you see news stories or consensus estimates that point toward the following, you can typically assume that traders will have neutral expectations:
- Flat nonfarm payroll numbers and an unchanged unemployment rate
- Stagnant GDP
- No change in interest rates or levels of quantitative easing from the FOMC
- Neutral manufacturing data
- Flat retail sales numbers
If traders expect negative economic data, prices on Wall Street tend to fade into the announcement.
If you see news stories or consensus estimates that point toward the following, you can typically assume that traders will have positive expectations for the economic announcement:
- Falling nonfarm payroll numbers and a higher unemployment rate
- Contracting GDP
- Higher interest rates or decreased quantitative easing from the FOMC
- Weak manufacturing data
- Slacking retail sales numbers
Once you have identified what the chatter on Wall Street is — either by reading/watching news stories or by watching the general trend in the market leading up to an important economic announcement — you can place your trades accordingly.
Just remember that most U.S. economic data is released before the U.S. stock market opens for trading. Many of the most important announcements are released at 8:30 a.m. ET. Knowing this, if you want to exit your trade before the announcement is released, you will need to close out of your position on the day before the scheduled release.
One important exception to this rule of thumb is the FOMC announcement. Typically, the FOMC makes its announcement at 2:15 p.m. ET.
Now let’s take a look at how you can trade after an economic announcement.
Trading After the Announcement: The direction in which the stock market takes off after an economic announcement depends on two things: the result of the announcement and the expectations of the market leading into the announcement.
For instance, if the market was expecting a strong GDP announcement of 2.8% growth and, sure enough, the BEA reports that GDP has grown by an annualized rate of 2.8%, the market probably isn’t going to move very much because the expected growth rate of 2.8% was already priced in to the market.
Priced in is a phrase you will often hear commentators use to describe the process traders go through of analyzing what they think the result of an announcement is going to be and then positioning their portfolio to take advantage of that anticipated result. If traders thought GDP was going to come in at 2.8%, they would have started to adjust their portfolio to take advantage of the bullish move that will most likely materialize in the market once the announcement is released. It is this “pricing in” that causes the market to rise, fall or remain flat heading into an economic announcement.
Here’s how you could approach the following situations:
- If the announcement comes in higher than expected, be prepared for a bullish jump in stock prices
- If the announcement comes in right in line with expectations, be prepared for a continuation of the previous trend — whether it was bullish or bearish
- If the announcement comes in lower than expected, be prepared for a bearish drop in stock prices
Trading around economic announcements is far from an exact science. However, you can put yourself in a position where the odds are in your favor as you place your trades if you watch the most important market-moving economic data and understand what Wall Street’s expectations are heading into those announcements.
InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.
